Assignment
Ennerdale has been asked to quote a price for a one-off contract. The company's management accountant has asked for your advice on the relevant costs for the contract. The following information is available:
Materials
The contract requires 3,000 kg of material K, which is a material used regularly by the company in other production. The company has 2,000 kg of material K currently in inventory which had been purchased last month for a total cost of $19,600. Since then, the price per kilogram for material K has increased by 5%.
The contract also requires 200 kg of material L. There are 250 kg of material L in inventory which are not required for normal production. This material originally cost a total of $3,125. If not used on this contract, the inventory of material L would be sold for $11 per kg.
Labour
The contract requires 800 hours of skilled labour. Skilled labour is paid $9.50 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product P. The following information relates to product P:
$ per unit $ per unit
Selling price 100
Less:
Skilled labour 38
Other variable costs 22 (60)
40
Finance Costs
In order to complete the contract, a member of the finance team will be required to work eight hours overtime. The individual's annual salary is $25,000, and they work a 37.5-hour week. Overtime is paid at a rate of $15 per hour. Alternatively, an experienced contract accountant can be hired to administer the project in 75% of the time it would take the internal finance department member to complete. The contractor's rate is $25 per hour. It took the member of the finance team three hours to put together the information for this quote and no overtime was required.
Task
1. What is the relevant cost of material K which should be included in the contract?
2. What is the relevant cost of material L which should be included in the contract?
3. What is the relevant cost of skilled labour which should be included in the contract?
4. What is the relevant cost of finance which should be included in the contract?
5. Are the following statements about Ennerdale's relevant costing system true or false?
6. Sunk costs can never be a relevant cost for the purpose of decision-making.
7. Fixed overhead costs can never be a relevant cost for the purpose of decision-making.