The managing director of Parser Ltd, a small business, is considering undertaking a once-off contract and...
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 Notes R Direct wages 1 28 500 Supervisor costs 2 11 500 General overheads 4 000 Machine depreciation 4 2 300 Machine overheads 18 000 34 000 98 300 Materials 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 Briefly explain what is meant by opportunity cost. (3) 1.2 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 Notes R Direct wages 1 28 500 Supervisor costs 2 11 500 General overheads 4 000 Machine depreciation 4 2 300 Machine overheads 18 000 34 000 98 300 Materials 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 Briefly explain what is meant by opportunity cost. (3) 1.2 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
Transportation A Global Supply Chain Perspective
ISBN: 978-1133592969
8th edition
Authors: John J. Coyle, Robert A. Novak, Brian Gibson, Edward J. Bard
Posted Date:
Students also viewed these accounting questions
-
A process involves moving speed, load weight, and rate of loading in a conveyor system. The variables are provided as high (1) and low (0) levels for digital control. An alarm should be initiated...
-
The Managing Director of Premier Ovens Pty Ltd, Mr. Scott Rose, has always admired the manner in which Wesfarmers Limited has been operated as a Public Listed Company and very impressed by the...
-
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...
-
11. What is the Specific Gravity of Zinc ? 12. The barometric pressure for the day is 14.7 psi. The hangar shop air tank gage reads 120 psi. What is the absolute pressure inside the shop air tank? =...
-
A system has a transfer function Determine a real value of a so that the system is either uncontrollable or unobservable. Y(s) s a =s. + 15' + 6852 +
-
Light a matchstick by striking at the edge of the match box. If the event takes place in a room that can be considered a closed system, what are the consequences? If the same event occurs inside an...
-
This case is a continuation of the Burburr Resorts & Hotels Corporation serial case that began in Chapter. The components of the Burburr serial case can be completed in any order. Burburr Resorts &...
-
The sales department of C. Howland Manufacturing Co. has forecast sales in March to be 20,000 units. Additional information follows: Finished goods inventory, March 1 . . . . . . . . . . . . . . . ....
-
16. A signal containing multiple frequencies is shown in figure A. It is passed through 2 different filters and then outputs are shown in figure B & C. M (A) S (B) sha (C) (a) B corresponds to low...
-
Employee ID First name Last name Job classification Jan Sales 1001 Mary Stevens Senior Sales Rep $ 85,000 1002 Larry Anderson Senior Sales Rep $ 72,000 1003 Sunil Gupta Junior Sales Rep $ 35,000 1004...
-
Due to lack of food after the flood devastation in Pakistan, Khan, a Secondary School teacher decided to start a milk and bread business in July 2022. Assume Khan's business expenditure and income is...
-
When people think of project management, they often think of construction projects. However, there are many other types of "projects" out there. Excluding what you have done in school, what are some...
-
When managers have referent power over coworkers and subordinates, what does that mean? Multiple choice question. Managers are able to reward their subordinates as they deem appropriate. Managers...
-
Imagine are an office manager. You have been tasked with creating a new policy by merging and updating two office financial and collection policies. Policy 6.9, Managing Incoming Cash & Policy 13.19,...
-
Vistaril is available in strength of 20 mg/5mL. Express this strength as A) A ratio (lowest set of whole numbers) B) A percent %
-
On January 1, 2021, Eagle Company borrows $19,000 cash by signing a four-year, 8% installment note. The note requires four equal payments of $5,737, consisting of accrued interest and principal on...
-
Using Hofstede's 6 dimensions (refer to the 6D model in the textbook), describe the cultural and organizational effects of Starbucks (a US organization), opening cafes in China. According to...
-
Find the reduced echelon form of each of the matrices given in Problems 120. c 1 26 + 4
-
What is the nature of intramodal and intermodal competition in the motor carrier industry? How have the motor carriers fared in terms of intermodal competition since 1980?
-
Technology often offers the potential of improving efficiency and effectiveness of transportation companies, but water carriers do not appear to have applied much new technology to improve their...
-
You have recently been hired by HOG, Inc. and Mr. Edwards has asked you to develop a set of discussion points that would point out the economic and perhaps, social benefits from a new highway link in...
-
Which of the three job classifications has the greatest difference in mean salaries for minority and nonminority classification?
-
In general, what might be said about the percentages for all job categories when comparing males and females?
-
Which of the age groups (married or unmarried) has the lowest number of individuals aged 15.5 to 16.5 years and how many individuals of this age does each group contain?
Study smarter with the SolutionInn App