HELP! ACCA F5 Relevant Cost Question in Make OR Buy Dicision
Discussion
I am not quite sure the definition of the relevant cost of labour, which states equivalent to opportunity cost (lost contribution diverted from the previous job AND addition labour cost), when the labour is at full capacity and they cannot be recruited or work overtime.
What does this additional labour cost mean? Is it the labour cost to do the new job or the one from the old job?
Initially, I thought it is the former case. However after reading an example in ACCA's text book, I am not sure.
Alright, here is the example (I will omit other costs and jump to this labour cost directly):
ABC company is making a decision whether to continue a research project. If continued, the research project will take a year to go and then be sold to a government agency for 300K.
To finish the project, labour is needed. But it is in full capacity and have been transferred from other departments. Production manager says these labours would be generating a sales revenue of 150K production.
The prime cost of sales will be 100K, including 40K direct labour cost.
Now the answer of the relevant cost of labour is 50K lost contribution (150K-100K) plus the 40K direct labour cost, which will be 90K.
Why? What does this 40K of direct labour cost stand for? Is it referring to the new job or the diverted job?
Based on the answer, I thought it should be the new job. But according to the question, the direct labour cost is INCLUDED in the 100K of prime cost of sales. So the 40K is already deducted when we calculate the lost contribution,right?
Please help!
What does this additional labour cost mean? Is it the labour cost to do the new job or the one from the old job?
Initially, I thought it is the former case. However after reading an example in ACCA's text book, I am not sure.
Alright, here is the example (I will omit other costs and jump to this labour cost directly):
ABC company is making a decision whether to continue a research project. If continued, the research project will take a year to go and then be sold to a government agency for 300K.
To finish the project, labour is needed. But it is in full capacity and have been transferred from other departments. Production manager says these labours would be generating a sales revenue of 150K production.
The prime cost of sales will be 100K, including 40K direct labour cost.
Now the answer of the relevant cost of labour is 50K lost contribution (150K-100K) plus the 40K direct labour cost, which will be 90K.
Why? What does this 40K of direct labour cost stand for? Is it referring to the new job or the diverted job?
Based on the answer, I thought it should be the new job. But according to the question, the direct labour cost is INCLUDED in the 100K of prime cost of sales. So the 40K is already deducted when we calculate the lost contribution,right?
Please help!
Just the way it is written. So staff are at full capacity if you take them off the day job then its £50k lost contribution. You still need the labour to fulfil the government contract. But if revenue is greater than lost contribution and direct labour then its worth doing.
No doubt you'll get as many marks for the discussion on not pissing off your regular customers for one off bit of business !
No doubt you'll get as many marks for the discussion on not pissing off your regular customers for one off bit of business !
Lawrence5 said:
Just the way it is written. So staff are at full capacity if you take them off the day job then its £50k lost contribution. You still need the labour to fulfil the government contract. But if revenue is greater than lost contribution and direct labour then its worth doing.
No doubt you'll get as many marks for the discussion on not pissing off your regular customers for one off bit of business !
No doubt you'll get as many marks for the discussion on not pissing off your regular customers for one off bit of business !
Vee said:
40k direct labour is constant in both scenarios. Excluding this cost the 'current' scenario makes 90k.
So you mean even if this 40K labour cost was part of the prime cost of sales of the day job, it would still be happening because 40K labour cost would be consumed on finishing the research project? Right?Thanks!
Lawrence5 said:
Yep - can perform the calf in many ways but they like to talk opportunity cost and lost contribution.
As I say I bet there's a 2nd part asking to explain other factors so keep good business sense in mind
LOL! Massive Massive thanks! I hope the discussion about not pissing off regular clients will only be in P papers as I am still grasping the foundamentals. As I say I bet there's a 2nd part asking to explain other factors so keep good business sense in mind
In the real world, the other questions that should be asked are whether the company is a small company and the nature of the R&D. If it qualifies for R&D tax credits at small company rates, then 225% of the labour cost would attract tax relief, ie a further saving of £25 corporation tax for every £100 of labour cost.
I have just filed the accounts of a technology company where a £135,000 profit generated a small loss for corporation tax. A not insignificant saving.
I have just filed the accounts of a technology company where a £135,000 profit generated a small loss for corporation tax. A not insignificant saving.
QBee said:
In the real world, the other questions that should be asked are whether the company is a small company and the nature of the R&D. If it qualifies for R&D tax credits at small company rates, then 225% of the labour cost would attract tax relief, ie a further saving of £25 corporation tax for every £100 of labour cost.
I have just filed the accounts of a technology company where a £135,000 profit generated a small loss for corporation tax. A not insignificant saving.
Wow! Quite interesting. I am looking forward to the tax paper. Is the tax difficult? Thanks!I have just filed the accounts of a technology company where a £135,000 profit generated a small loss for corporation tax. A not insignificant saving.
lukayl said:
Wow! Quite interesting. I am looking forward to the tax paper. Is the tax difficult? Thanks!
Nice to know I qualify for QI - one of my favourite TV programmes. 
I haven't a clue about the tax exams - to me, as an FCA who qualified in 1978, tax is a daily subject, and an opportunity both to make a real difference to my clients and to cock up monumentally!!! Especially VAT, where everything is magnified by the fact that it is 20% of everything. Last accounts I completed I found VAT errors that saved my client more than my fee.....always a good feeling!
I am a sole practitioner.
Biggest tax question to date? An intellectual property rights question that was worth $250 million.
Normal tax questions - a few hundreds to a few thousands, but all worth getting right.
WHEN (there's no such thing as IF) you qualify as an accountant, Tax will become a major part of your working life (unless you decide to specialise in audit, when it will still matter, but not to such an extent).
Good luck with the exams - it may seem tough going, but its worth it. In 37 years in accountancy I have never been without a job.
QBee said:
Nice to know I qualify for QI - one of my favourite TV programmes.
I haven't a clue about the tax exams - to me, as an FCA who qualified in 1978, tax is a daily subject, and an opportunity both to make a real difference to my clients and to cock up monumentally!!! Especially VAT, where everything is magnified by the fact that it is 20% of everything. Last accounts I completed I found VAT errors that saved my client more than my fee.....always a good feeling!
I am a sole practitioner.
Biggest tax question to date? An intellectual property rights question that was worth $250 million.
Normal tax questions - a few hundreds to a few thousands, but all worth getting right.
WHEN (there's no such thing as IF) you qualify as an accountant, Tax will become a major part of your working life (unless you decide to specialise in audit, when it will still matter, but not to such an extent).
Good luck with the exams - it may seem tough going, but its worth it. In 37 years in accountancy I have never been without a job.
Thanks! It's quite encouraging. That's exactly why I plunged in accountancy after 10 years of employment. It's a fall back.I haven't a clue about the tax exams - to me, as an FCA who qualified in 1978, tax is a daily subject, and an opportunity both to make a real difference to my clients and to cock up monumentally!!! Especially VAT, where everything is magnified by the fact that it is 20% of everything. Last accounts I completed I found VAT errors that saved my client more than my fee.....always a good feeling!
I am a sole practitioner.
Biggest tax question to date? An intellectual property rights question that was worth $250 million.
Normal tax questions - a few hundreds to a few thousands, but all worth getting right.
WHEN (there's no such thing as IF) you qualify as an accountant, Tax will become a major part of your working life (unless you decide to specialise in audit, when it will still matter, but not to such an extent).
Good luck with the exams - it may seem tough going, but its worth it. In 37 years in accountancy I have never been without a job.
QBee said:
Nice to know I qualify for QI - one of my favourite TV programmes.
I haven't a clue about the tax exams - to me, as an FCA who qualified in 1978, tax is a daily subject, and an opportunity both to make a real difference to my clients and to cock up monumentally!!! Especially VAT, where everything is magnified by the fact that it is 20% of everything. Last accounts I completed I found VAT errors that saved my client more than my fee.....always a good feeling!
I am a sole practitioner.
Biggest tax question to date? An intellectual property rights question that was worth $250 million.
Normal tax questions - a few hundreds to a few thousands, but all worth getting right.
WHEN (there's no such thing as IF) you qualify as an accountant, Tax will become a major part of your working life (unless you decide to specialise in audit, when it will still matter, but not to such an extent).
Good luck with the exams - it may seem tough going, but its worth it. In 37 years in accountancy I have never been without a job.
I'm just about to start my CA training with ICAS but believe they do a qualification in tax now. May be something you are interested in?I haven't a clue about the tax exams - to me, as an FCA who qualified in 1978, tax is a daily subject, and an opportunity both to make a real difference to my clients and to cock up monumentally!!! Especially VAT, where everything is magnified by the fact that it is 20% of everything. Last accounts I completed I found VAT errors that saved my client more than my fee.....always a good feeling!
I am a sole practitioner.
Biggest tax question to date? An intellectual property rights question that was worth $250 million.
Normal tax questions - a few hundreds to a few thousands, but all worth getting right.
WHEN (there's no such thing as IF) you qualify as an accountant, Tax will become a major part of your working life (unless you decide to specialise in audit, when it will still matter, but not to such an extent).
Good luck with the exams - it may seem tough going, but its worth it. In 37 years in accountancy I have never been without a job.
P.S sorry for interrupting thread OP!
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