Pieman Products Ltd makes road trailers to the precise specifications of individual customers.

The following are predicted to occur during the forthcoming year, which is about to start:

Direct materials cost £50,000 Direct labour cost £320,000 Direct labour time 16,000 hours Indirect labour cost £25,000 Depreciation of machine £8,000 Rent £10,000 Heating, lighting and power £5,000 Indirect materials £2,000 Other indirect cost (overhead) elements £1,000 Machine time 3,000 hours All direct labour is paid at the same hourly rate.

A customer has asked the business to build a trailer for transporting a racing motorcycle to race meetings. It is estimated that this will require materials and components that will cost £1,150. It will take 250 direct labour hours to do the job, of which 50 will involve the use of machinery.

Required:

Deduce a logical cost for the job and explain the basis of dealing with overheads that you propose.

Intermediate-level exercises AppendixLO1