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13:44 11.0 Solution to Relevant costs - Read-only o ka Ky QUESTION 2 Kemp Limited has been invited to tender for a comparatively large job which is outside the range of its normal activities and, since there is surplus capacity, the management is keen to quote as low a price as possible. The estimating department has spent 10 hours on work in connection with the quotation and they have incurred travelling expenses of Rs5,000 in connection with visits to the prospective customer's factory. The following cost estimate has been prepared on the basis of their study. Rs 50,000 2,000 12,500 24,500 30,000 Direct materials and components 2,000 kilos of A at Rs25 per kilo 200 kilos of B at Rs10 per kilo Materials to be bought in Direct labour 70 hours of skilled labour at Rs350 per hour 150 hours of unskilled labour at Rs 200 per hour Overhead Department X-20 hours at Rs 250 per hour Department Y-40 hours at Rs 200 per hour Estimating department 10 hours at Rs 500 per hour Planning department 30 hours at Rs500 per hour 5,000 8,000 5,000 15,000 152,000 13:44 11.0 Solution to Relevant costs - Read-only 20 ka Ky The following information is also available: Material A: This is a regular stock item. The material currently has an average cost of Rs25 per kilo but the current replacement cost is Rs20 per kilo. Material B: A stock of 4,000 units is currently held in the stores. It is a slow moving item and the stock is the residue of a batch bought five years ago at a cost of Rs10 per kilo. It currently costs Rs24 per kilo but the resale value is only Rs18 per kilo. A foreman has pointed out that the material could be used as a substitute for another type of regularly used raw material which cost Rs20 per kilo. Direct Labour: The workforce is paid on a time basis. There a are sufficient skilled staff to work on the contract. 30 hours of unskilled staff will have to be hired for the job. Overhead-Department X: This department is working at full capacity. It uses a price of Rs250 per hour for charging out its processing time to other departments. Its facilities are frequently hired out to other firms at Rs 300 per hour. There is steady demand from outside customers for the use of these facilities. Overhead-Department Y: This department uses a price of Rs 20 for charging out machine processing time to other departments. This charge is calculated as follows: Rs 80 Variable cost per machine hour Fixed departmental overhead Departmental profit 90 30 200 6 of 7 13:44 11.0 Solution to Relevant costs - Read-only
