Case Study 4

Awtab Steel Structure LLC, is one of the leading "Pre-Engineered Steel Building Company" in Sultanate of Oman. The Company uses latest automatic equipment in plant to produce better steel buildings for the clients. 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.

Direct Materials :

Steel Frames @ RO 2000 per Kg

Metal Roof Sheets @ RO 15 per Square meter Direct Labour :

Civil Engineering @RO 40 per hour Unskilled Labour @ RO 10 per hour Variable Overheads

Fixed Overheads

TOTAL COST

(RO)

800,000 450,000

200,000 75,000 250,000 125,000

1,900,000

The Chairman of Awtab Steel Structure LLC 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) 300 Kgs of steel frames are readily available in the company, which was purchased at RO 2000 per Kg. However, steel frames are regularly used in other projects. The steel frames are readily available in the market at RO 2050 per Kg. The realisable value is RO 1900 per Kg.

ii) 2000 square meters of metal roof sheets are in stock, which was purchased in the past at a price of RO 15 per square meter. However, metal roof is one of the raw material used in all the construction projects. The realisable value is RO 14 per square meter and the current market price is RO 16 per square meter

iii) The Civil Engineers are paid at the rate of RO 40 per hour. All the civil engineers are currently engaged in other construction projects. If this project is accepted, the civil engineers need to be diverted from other products, which will result in delay in completion of the projects as a result of which the

company will suffer with a loss of RO 90,000.

iv) The unskilled labour need to be hired from the market at the rate of RO 10 per

hour.

v) Variable Overheads are charged at the rate of RO 50 per civil engineering

hour.

vi) Currently, the fixed overheads incurred by the company amount to RO 75,000.

vii) The Company generally adds a Mark-Up of 25% on these type of projects.

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)