Case Study - 1 North West Engineering Works L.L.C is a leading "Pre-Engineered Steel Building Company" in Sultanate of Oman. The Company is specialized in designing, metal fabrication and renovation works for more than 25 years. The Company received a special Pre-Engineered Steel Building project from a customer and the cost accountant provided the following cost estimates for fixing the price of the project. (RO) 800,000 450,000 Direct Materials : Steel Metal @ RO 2500 per kg Acacia Wood @ RO 20 per cubic feet Direct Labour : Civil Engineering @RO 50 per hour Semi-skilled @ RO 25 per hour Variable Overheads Fixed Overheads TOTAL COST 200,000 150,000 100,000 75,000 1,775,000 The Chairman of North West Engineering Works L.L.C asked your opinion about the cost estimates on which price of the project has to be prepared. You have reviewed the cost data and found that: i) 400 Kgs of steel metal is readily available in the company, which was purchased at RO 2400 per kg. However, steel metal is regularly used in other projects. The steel metal is readily available in the market at RO 2550 per Kg. The realisable value is RO 1800 per kg. 15,000 cubic feet of Acacia wood is in stock, which was purchased in the past at a price of RO 18 per cubic feet in anticipation of a new project, which did not materialise. The realisable value is RO 14 per cubic feet and the current market price is RO 21 per cubic feet. iii) The Civil Engineers are paid at the rate of RO 50 per hour. Due to contracting in the activities of construction sector, 3000 civil engineering hours are idle. The company has decided to continue them in anticipation of the revival of the construction sector in the coming years. iv) v) The Semi-skilled labour are short in supply in the market. They need to be diverted from another project, which will result in a loss of RO 175,000. Variable Overheads are charged at the rate of RO 25 per civil engineering hour. Currently, the fixed overheads incurred by the company amount to RO 50,000. The Company generally adds a Margin of 20% on these type of projects. vi) vii) You are required to (a) estimate the price for the project if relevant costing principles are applied. (6 Marks) (b) present a report to the management of the company the reasons for the differences if any between the cost estimates made using relevant costing principles and initial cost estimates. (4 Marks) Case Study - 1 North West Engineering Works L.L.C is a leading "Pre-Engineered Steel Building Company" in Sultanate of Oman. The Company is specialized in designing, metal fabrication and renovation works for more than 25 years. The Company received a special Pre-Engineered Steel Building project from a customer and the cost accountant provided the following cost estimates for fixing the price of the project. (RO) 800,000 450,000 Direct Materials : Steel Metal @ RO 2500 per kg Acacia Wood @ RO 20 per cubic feet Direct Labour : Civil Engineering @RO 50 per hour Semi-skilled @ RO 25 per hour Variable Overheads Fixed Overheads TOTAL COST 200,000 150,000 100,000 75,000 1,775,000 The Chairman of North West Engineering Works L.L.C asked your opinion about the cost estimates on which price of the project has to be prepared. You have reviewed the cost data and found that: i) 400 Kgs of steel metal is readily available in the company, which was purchased at RO 2400 per kg. However, steel metal is regularly used in other projects. The steel metal is readily available in the market at RO 2550 per Kg. The realisable value is RO 1800 per kg. 15,000 cubic feet of Acacia wood is in stock, which was purchased in the past at a price of RO 18 per cubic feet in anticipation of a new project, which did not materialise. The realisable value is RO 14 per cubic feet and the current market price is RO 21 per cubic feet. iii) The Civil Engineers are paid at the rate of RO 50 per hour. Due to contracting in the activities of construction sector, 3000 civil engineering hours are idle. The company has decided to continue them in anticipation of the revival of the construction sector in the coming years. iv) v) The Semi-skilled labour are short in supply in the market. They need to be diverted from another project, which will result in a loss of RO 175,000. Variable Overheads are charged at the rate of RO 25 per civil engineering hour. Currently, the fixed overheads incurred by the company amount to RO 50,000. The Company generally adds a Margin of 20% on these type of projects. vi) vii) You are required to (a) estimate the price for the project if relevant costing principles are applied. (6 Marks) (b) present a report to the management of the company the reasons for the differences if any between the cost estimates made using relevant costing principles and initial cost estimates. (4 Marks)
