Ayigbe Toffee has been asked to tender for a contract larger than it would normally consider. The contractor would like to tender for the contract as it has spare capacity. In advance the cost accountant has prepared the following cost estimate:
Direct Materials:
3,000 units of X @ GHS10 per unit (original cost)
100 units of Y (charged under FIFO basis):
50 @ GHS100 = 5,000
50 @ GHS125 = 6,250
Other Materials to be bought in
Direct Labour:
Skilled Staff
Unskilled Staff (Trainees)
Production overheads
Depreciation of plant
Subcontract work
Supervisory staff
Estimating and design department
Administration overhead
Total cost estimate
Notes
1
2
3
4
5
6
7
8
9
10
11
GHS
30,000
11,250
12,000
16,800
1,250
8,050
1,000
20,000
6,150
2,500
4,950
113,950
Note 1: A sufficient stock of material X is held in store. It is the residue of a quantity bought 10
years ago. If this stock is not used on this contract, it is unlikely to be used in the
foreseeable future. However, a customer has offered to buy the stock for GHS20,000.
Note 2: Material Y is in regular use within the company on a variety of jobs. The current
replacement cost of this material is GHS130 per unit.
Note 3: This is the estimated cost of the material required.
Note 4: Skilled staff are paid and retained on a full-time basis. One extra worker will be taken
on and will work on the contract for its 6 weeks duration at a weekly wage of GHS500.
Note 5: No additional trainees will be taken on and they are also paid on a time basis rather than
based on productivity.
Note 6: 80% are considered variable and the remainder are fixed.
Note 7: One month’s depreciation of the plant has been charged to the contract. This machine,
if not used on this contract, can be hired out to other users at a rate of GHS500 per week
Note 8: This is the estimated cost of the required work.
Note 9: No additional supervisors will be employed, however, it is estimated that overtime of
GHS1,000 will have to be paid. This is already included in the estimate of GHS6,150.
Note 10: This was the cost of getting the original plans and estimates (as set out above) together.
Note 11: This is a fixed cost, and is absorbed to contracts at the rate of 5% of other cost.
The customer has advised that any quotation over GHS100,000 is unlikely to be successful. Having
given the matter some thought, a small contractor may be prepared to complete the contract,
regardless of the financial outcome, in the hopes of gaining future extremely profitable contract
work from the same customer.
Required
a) Prepare a revised cost estimate using a relevant costing approach. Clearly explain the basis of inclusion/exclusion for each item and show supporting calculations where necessary.
b) Based on your calculations in (a) above, calculate the profit or loss if the contract is accepted by both parties at a quotation of GHS100,000.

Answer rating: 100% (QA)

Question a 1 Relevant costs ... View the full answer