? ?? The managing director of Parser Ltd, a small business, is considering undertaking a once-off contract
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The managing director of Parser Ltd, a small business, is considering undertaking a once-off contract and has asked her inexperienced accountant to advise on what costs are likely to be incurred so that she can price at a profit. The following schedule has been prepared: Costs for special order Direct wages Supervisor costs General overheads Machine depreciation Machine overheads Materials Notes 12345 6 R 28 500 11 500 4 000 2 300 18 000 34 000 98 300 Notes 1. Direct wages comprise the wages of two employees, particularly skilled in the labour process for this job, who could be transferred from another department to undertake work on the special order. They are fully occupied in their usual department and sub-contracting staff would have to be brought in to undertake the work left behind. Subcontracting costs would be R32 000 for the period of the work. Different subcontractors who are skilled in the special order techniques are available to work on the special order and their costs would amount to R31 300. 2. A supervisor would have to work on the special order. The cost of R11 500 is comprised of R8 000 normal payments plus R3 500 additional bonus for working on the special order. Normal payments refer to the fixed salary of the supervisor. In addition, the supervisor would lose incentive payments in his normal work to R2 500. It is not anticipated that any replacement costs relating to the supervisor's work on other jobs would arise. 3. General overheads comprise an apportionment of R3 000 plus an estimate of R1 000 incremental overheads. 4. Machine depreciation represents the normal period cost based on the duration of the contract. It is anticipated that R500 will be incurred in additional machine maintenance costs. 5. Machine overheads (for running costs such as electricity) are charged at R3 per hour. It is estimated that 6 000 hours will be needed for the special order. The machine has 4 000 hours available capacity. The further 2 000 hours required will mean an existing job is taken off the machine resulting in a lost contribution of R2 per hour. 6. Materials represent the purchase costs of 7 5000 kg bought some time ago. The materials are no longer used and are unlikely to be wanted in the future except on the special order. The complete stock of materials (amounting to 10 000 kg), or part thereof, could be sold for R4.20 per kg. The replacement cost material used would be R33 375. 7. Costs will be incurred evenly over the project duration of three months. The prospective client is willing to make an upfront payment of R40 000. The outstanding balance will be paid one month after completion. Because the business does not have adequate funds to finance the special order, a bank overdraft shortfall will be required. The overdraft will be repaid on the settlement of the outstanding debt. The company uses a cost of capital of 15% to appraise projects. The bank's overdraft rate is 12% for Parser Ltd. The managing director has heard that, for special orders such as this, relevant costing should be used that also incorporates opportunity costs. She has approached you to create a revised costing schedule based on relevant costing principles. Required: 1.1 1.2 Briefly explain what is meant by opportunity cost. (3) Determine the minimum price to be quoted by Parser on the once-off contract. Explain why you included or excluded amounts from your calculation. (22) The managing director of Parser Ltd, a small business, is considering undertaking a once-off contract and has asked her inexperienced accountant to advise on what costs are likely to be incurred so that she can price at a profit. The following schedule has been prepared: Costs for special order Direct wages Supervisor costs General overheads Machine depreciation Machine overheads Materials Notes 12345 6 R 28 500 11 500 4 000 2 300 18 000 34 000 98 300 Notes 1. Direct wages comprise the wages of two employees, particularly skilled in the labour process for this job, who could be transferred from another department to undertake work on the special order. They are fully occupied in their usual department and sub-contracting staff would have to be brought in to undertake the work left behind. Subcontracting costs would be R32 000 for the period of the work. Different subcontractors who are skilled in the special order techniques are available to work on the special order and their costs would amount to R31 300. 2. A supervisor would have to work on the special order. The cost of R11 500 is comprised of R8 000 normal payments plus R3 500 additional bonus for working on the special order. Normal payments refer to the fixed salary of the supervisor. In addition, the supervisor would lose incentive payments in his normal work to R2 500. It is not anticipated that any replacement costs relating to the supervisor's work on other jobs would arise. 3. General overheads comprise an apportionment of R3 000 plus an estimate of R1 000 incremental overheads. 4. Machine depreciation represents the normal period cost based on the duration of the contract. It is anticipated that R500 will be incurred in additional machine maintenance costs. 5. Machine overheads (for running costs such as electricity) are charged at R3 per hour. It is estimated that 6 000 hours will be needed for the special order. The machine has 4 000 hours available capacity. The further 2 000 hours required will mean an existing job is taken off the machine resulting in a lost contribution of R2 per hour. 6. Materials represent the purchase costs of 7 5000 kg bought some time ago. The materials are no longer used and are unlikely to be wanted in the future except on the special order. The complete stock of materials (amounting to 10 000 kg), or part thereof, could be sold for R4.20 per kg. The replacement cost material used would be R33 375. 7. Costs will be incurred evenly over the project duration of three months. The prospective client is willing to make an upfront payment of R40 000. The outstanding balance will be paid one month after completion. Because the business does not have adequate funds to finance the special order, a bank overdraft shortfall will be required. The overdraft will be repaid on the settlement of the outstanding debt. The company uses a cost of capital of 15% to appraise projects. The bank's overdraft rate is 12% for Parser Ltd. The managing director has heard that, for special orders such as this, relevant costing should be used that also incorporates opportunity costs. She has approached you to create a revised costing schedule based on relevant costing principles. Required: 1.1 1.2 Briefly explain what is meant by opportunity cost. (3) Determine the minimum price to be quoted by Parser on the once-off contract. Explain why you included or excluded amounts from your calculation. (22)
Expert Answer:
Answer rating: 100% (QA)
11 Opportunity Cost is the value of an alternative not opted over a chosen alternative In this case ... View the full answer
Related Book For
Statistics Data Analysis and Decision Modeling
ISBN: 978-0132744287
5th edition
Authors: James R. Evans
Posted Date:
Students also viewed these accounting questions
-
The managing director of Parser Ltd, a small business, is considering undertaking a once-off contract and has asked her inexperienced accountant to advise on what costs are likely to be incurred so...
-
The owner of a small business is considering purchasing production equipment having a total cost of $470,000. The new equipment will allow the owner to reduce labor and material cost; measured in...
-
The owner of an unincorporated small business is considering whether to establish a simplified employee pension (SEP) plan for its employees. a. What nontax factors might make an SEP attractive as an...
-
Consider a two-stage compression refrigeration system operating between the pressure limits of 0.8 and 0.14 MPa. The working fluid is refrigerant-134a. The refrigerant leaves the condenser as a...
-
(a) Use trigonometric substitution to show that dx/(x2+a2) = ln(x+(x2+a2) + C (b) Use the hyperbolic substitution to show that dx/(x2 + a2) = sinh-1(x/a) + C These formulas are connected by formula...
-
The information below has been extracted from the books of the Shelley Company. Which of the following represents Shelley's current ratio? a. 0.76 b. 1.48 c. 2.05 d. 2.51 Current Assets Cash Current...
-
Figure 3.15 shows an RVE for an elementary mechanics of materials model of the same type as shown in Figure 3.7, but with transverse deformation along the 2 direction prevented by rigid supports...
-
A company buys a machine for $12,000, which it agrees to pay for in five equal annual payments, beginning one year after the date of purchase, at an interest rate of 4% per annum. Immediately after...
-
C&C Sports' decision to remain a domestic producer is a strength as it allows the company to have better control over product quality and quick delivery to the local market. Product Range: The...
-
Roman Systems Inc. (RSI) is a Canadian private company. It was incorporated in Year 1 by its sole common shareholder, Marge Roman. RSI manufactures, installs, and provides product support for its...
-
- Consider the following 8 8 image x(n, n) corresponding to the (t 1) frame of a video sequence, where (n, n) = (0,0) corresponds to the top left pixel: x(m, n) = { [ 3, 1n, N 3 2, otherwise...
-
A company starts in business on 1 January 2010, the financial year end being 31 December. You are to show: (a) The equipment account. (b) The provision for depreciation account. (c) The statement of...
-
What is meant by marginal analysis? Provide an example in which marginal analysis is useful in looking at policy questions.
-
The Electric Wiring Company employs staff to repair electrical equipment in customers homes under maintenance contracts. Each job of work is the cost unit for which costs are recorded and monitored....
-
The following trial balance was extracted from the books of F. Sorley on 30 April 2013. From it, and the note about inventory, prepare his income statement for the year ending 30 April 2013, and a...
-
A car costs 12,000. It will be kept for three years, and then sold for 3,000. Calculate the depreciation for each year using (a) the reducing balance method, using a depreciation rate of 35 per cent,...
-
You manage a software company that requires internet bandwidth to produce output. Currently your company is using 79% of its capacity, but is considering an expansion to utilize the additional...
-
A company has the following incomplete production budget data for the first quarter: In the previous December, ending inventory was 200 units, which was the minimum required, at 10% of projected...
-
Find the best moving average and exponential smoothing models for each of the stocks in the Excel file Baseball Attendance using CB Predictor. Compare your results to your answers to Problem 2.
-
A forest fire is burning down a narrow valley three miles wide at a speed of 40 feet per minute. The fire can be contained by cutting a firebreak through the forest across the valley. It takes 30...
-
Explain the concept of independent events.
-
The materials which exhibit the same elastic properties in all directions are known as: (a) Homogeneous (b) Isotropic (c) Isentropic (d) Inelastic
-
In a reaction steam turbine, steam expands: (a) In nozzle only (b) In moving blades only (c) Partly in nozzle partly in blades (d) None of the above
-
In impulse turbines, pressure on the two sides of the moving blades: (a) Increases (b) Decreases (c) Remains same (d) None of the above
Study smarter with the SolutionInn App