Batosa Ltd, a car repair company, has been invited to tender for a big job which is outside its regular activities, and since there is surplus capacity, the executives are keen to quote as low price as possible. A low price will not have any negative impact on Batosa Ltd's regular work. The underlisted cost estimate has been prepared on the basis of a study made by the Estimating Department. Direct material and components: 4000 units of Alfa at GH25 per unit 400 units of Beta at GH10 per unit Other material and components to be bought Direct labour: 1400 hours of skilled labour at GH 3.50 per hour 1700 hours of unskilled labour at GH 2 per hour Overhead: Department A (250 hours at GH25 per hour) Department B (450 hours at GH20 per hour) 100,000 4,000 25,000 129,000 4,900 3,400 8,300 6,250 9,000 15,250 152,550 The following information is obtained: (i) Material Alfa: This is a regular stock item. The stock holding is more than sufficient for this job. The material currently held has an average cost of GH25 per unit but the current replacement cost is GH20 per unit. Compiled By: Hubert Anipa, C.A Page 5 of 13 Past Exam Questions on Short-term Decisions (For Class Discussion) (ii) Material Beta: A stock of 4,000 units of Beta is currently held in the stores. This material is slow-moving and the stock is the residue of a batch bought ten years ago at a cost of GH10 per unit. Beta currently costs GH24 per unit but the resale value is only GH18 per unit. A foreman has pointed out that Beta could be used as a substitute for another type of regularly used raw material which costs GH20 per unit. (iii) Direct labour: The work force is paid on a time basis. Skilled workers are frequently moved to jobs which do not make proper use of their skills. The wages included in the cost estimate are for the mix of labour which the job ideally requires. It seems likely if the job is obtained, most of the 4400 hours of direct labour will be performed by skilled staff receiving GH3.50 per hour. (iv) Overhead - Department Alfa: Department Alfa is the one department of Batosa Ltd that is working at full capacity. The department is treated as a profit centre and it uses a transfer price of GH25 per hour for charging out its processing time to other departments. This charge is computed as follows: GH Estimated variable cost per machine hour 10 Fixed departmental overhead 8 Department profit 7 25 Department Alfa's facilities are frequently hired out to other firms and a charge of GH30 per hour is made. There is a steady demand from outside customers for the use of these facilities. (v) Overhead: Department Beta: Department Beta uses a transfer price of GH20 for charging out machine processing time to other departments. This charge is calculated as follows: GH Estimated variable cost per machine hour 8 Fixed department overhead 9 Department profit 3 20 Required: a) Compute the relevant costs of the job and briefly justify each of the figures you state. State any assumptions. (15 marks) (b) Define relevant costs in the context of decision-making and give examples to explain the concept