Description
Harris Constructions Ltd has been asked to tender for a job to build and install a large customised shed. Harris’ estimator has calculated the following costs associated with satisfying the tender:
Direct labour to build the shed in the factory: 25 hours. The cost of staff is £30 per hour including all payroll-related costs; however Harris has insufficient work at the moment to keep its employees busy.
Delivery/installation: 4 hours. This will have to be subcontracted at £50 per hour.
Supervision: Harris always charges 20% of the direct labour in the factory as the cost of supervision. This is an allocation of the costs of the factory manager, storeman and administration staff.
Materials:
– The timber needed for the shed is regularly used in the factory. Sufficient timber is held in stock to make the shed. The cost of the timber from the stock records is £1,000 but it will cost £1,100 to replace at current prices.
– The shed also needs a metal frame. A suitable frame was purchased 2 years ago for £750 but has never been used. A supplier who saw the frame last week offered us £500 for it.
– Indirect materials (paint, fixings, etc.) will cost about £100.
Overhead: Harris uses a simple method of fixed overhead allocation, charging £250 to every job produced by the factory.
Other costs: Because the customer requires quality certificates for everything it buys, Harris will need to have the completed shed inspected by a registered inspector at a cost of £175.
a. Calculate both the product cost (using standard accounting practices) and the relevant cost for this custom job.
b. What is the lowest price at which the tender should be submitted assuming we want to make a profit of £200? What will be the impact of such a price on profits reported in the management profits report? What are the opportunity costs of not undertaking this job?
c. Compare and contrast historical accounting information for the calculation of product costs with the notion of relevant costs. What are the limitations of both methods?
Direct labour to build the shed in the factory: 25 hours. The cost of staff is £30 per hour including all payroll-related costs; however Harris has insufficient work at the moment to keep its employees busy.
Delivery/installation: 4 hours. This will have to be subcontracted at £50 per hour.
Supervision: Harris always charges 20% of the direct labour in the factory as the cost of supervision. This is an allocation of the costs of the factory manager, storeman and administration staff.
Materials:
– The timber needed for the shed is regularly used in the factory. Sufficient timber is held in stock to make the shed. The cost of the timber from the stock records is £1,000 but it will cost £1,100 to replace at current prices.
– The shed also needs a metal frame. A suitable frame was purchased 2 years ago for £750 but has never been used. A supplier who saw the frame last week offered us £500 for it.
– Indirect materials (paint, fixings, etc.) will cost about £100.
Overhead: Harris uses a simple method of fixed overhead allocation, charging £250 to every job produced by the factory.
Other costs: Because the customer requires quality certificates for everything it buys, Harris will need to have the completed shed inspected by a registered inspector at a cost of £175.
a. Calculate both the product cost (using standard accounting practices) and the relevant cost for this custom job.
b. What is the lowest price at which the tender should be submitted assuming we want to make a profit of £200? What will be the impact of such a price on profits reported in the management profits report? What are the opportunity costs of not undertaking this job?
c. Compare and contrast historical accounting information for the calculation of product costs with the notion of relevant costs. What are the limitations of both methods?
Reviews
There are no reviews yet.