05 April 2012
S. Ltd., is engaged in manufacturing activities. It has received a request from one of its important customers to supply a product which will require conversion of Material M, which is a non–moving item. The following details are available: Book value of Material M Realizable value of Material M Replacement Cost of Material M Rs. Rs. Rs. 60 80 100 It is estimated that conversion of one unit of M into one unit of finished product will require one unit of labour hour. At present labour is paid @ Rs. 20 per hour. Other costs are as follows: Out of Poket Expenses Allocated Overheads Rs. Rs. 30 per unit 10 per unit The labour will be re–deployed from other activities. It is estimated that the temporary redeployment will not result in loss of contribution. The employees to be redeployed are permanent employees of the Co. Estimate the minimum price to be charged from the customer so that the company is not worse–off by executing the order
Answer:
Cost of material - 80 (realisable value)
Labour (being sunk - 0 cost)
out of pocket exp - 30
110
110 - charged to customer allocated exp ignored for decision.
Can anyone pls explain why labour & allocated overhead not considered in computation of amt to be charged to customer ???????
05 April 2012
HI Priya, As has been mentioned clearly in question, Labour has been engaged by company on peemenent basis, hence it should not to be included while calculating cost as per Marginal Costing, being Sunk Cost. And also note here that overheads are Absorbed, hence they can be included in total cost in while following Absorption Costing, but here we are following Marginal Costinng.
06 April 2012
Yes the expert has given the correct answer. If you do not take up the new assignment even then you have to make the payment of to your permanent labour so this need not be taken as additional cost. but you should add for labour on the basis of hours spent by them in the cost.
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