Preparation of a cost estimate involving the identification of relevant costs You are the management accountant of a publishing and printing company which has been asked to quote for the production of a programme for the local village fair. The work would be carried out in addition to the normal work of the company.

Because of existing commitments, some weekend working would be required to complete the printing of the programme. A trainee accountant has produced the following cost estimate based upon the resources as specified by the production manager:

You are aware that considerable publicity could be obtained for the company if you are able to win this order and the price quoted must be very competitive.
The following are relevant to the cost estimate above:
1. The paper to be used is currently in stock at a value of £5000. It is of an unusual colour which has not been used for some time. The replacement price of the paper is £8000, while the scrap value of that in stock is £2500. The production manager does not foresee any alternative use for the paper if it is not used for the village fair programmes.
2. The inks required are not held in stock. They would have to be purchased in bulk at a cost of £3000. 80% of the ink purchased would be used in printing the programme. No other use is foreseen for the remainder.
3. Skilled direct labour is in short supply, and to accommodate the printing of the programmes, 50% of the time required would be worked at weekends, for which a premium of 25% above the normal hourly rate is paid. The normal hourly rate is £4.00 per hour.
4. Unskilled labour is presently under-utilized, and at present 200 hours per week are recorded as idle time. If the printing work is carried out at a weekend, 25 unskilled hours would have to occur at this time, but the employees concerned would be given two hours’ time off (for which they would be paid) in lieu of each hour worked.
5. Variable overhead represents the cost of operating the printing press and binding machines.
6. When not being used by the company, the printing press is hired to outside companies for £6.00 per hour. This earns a contribution of £3.00 per hour. There is unlimited demand for this facility 7. Fixed production costs are those incurred by and absorbed into production, using an hourly rate based on budgeted activity.
8. The cost of the estimating department represents time spent in discussion with the village fair committee concerning the printing of its programme, Required:

(a) Prepare a revised cost estimate using the opportunity cost approach, showing clearly the minimum price that the company should accept for the order. Give reasons for each resource valuation in your cost estimate.
(16 marks)

(b) Explain why contribution theory is used as a basis for providing information relevant to decision-making. (4 marks)

(c) Explain the relevance of opportunity costs in decision-making.
(5 marks)
(Total 25 marks)
CIMA Stage 2 Operational Costs Accounting

Transcribed Image Text:

() Direct materials: paper (book value) 5.000 inks (purchase price) 2400 Direct labour: skilled 250 hours at 4.00 1000 unskilled 100 hours at 3.50 350 Variable overhead 350 hours at 4.00 1400 Printing press depreciation 200 hours at 2.50 Fixed production costs 350 hours at 6.00 Estimating department costs 13 150 500 2100 400