QUESTION 2 (20 marks) You are the management accountant of publishing and printing company which has been asked to quote for the production of a program for the local village fair. This work would be carried out in addition to the normal work of the company. Because of existing commitments, some weekend working would be required to complete the printing of the program. A trainee accountant has produced the following initial cost estimate based upon the resources required as specified by the production manager: $ | Direct material - Paper (book value) 5,000 2 Direct material - Inks (purchase price) 2,400 3 Direct labor (Skilled) 250 hours @ $4.00 1,000 4 Direct labor (Unskilled) 100 hours @ $3.50 350 5 Variable overhead 350 hours @ $4.00 1,400 6 Printing machine depreciation 200 hours @ $2.50 7 Fixed production costs 350 hours @ $6.00 2.100 8 Estimating department costs 400 13150 500 2 You are aware that considerable publicity could be obtained for the company if you are able to win the order and the price quoted must be very competitive. The following additional notes are relevant to the cost estimate above: 1 The paper to be used is currently in stock at a value of $5,000. It is of an unusual color which has not been used for some time. The replacement price of the paper is $8.000, whilst the scrap value of that in stock is $2,500. The production manager does not have any alternative use for the paper if it is not used for the village fair program. The inks required are not held in stock. They would have to be purchased in bulk at a cost of $3,000. 80% of the ink purchased would be used in printing the program. No other use is foreseen for the remainder. Skilled direct labor is in short supply, and to accommodate the printing of the program, 50% of the time required would be worked at weekends for which a premium of 25% above the normal hourly rate is paid. The normal hourly rate is 54.00 per hour. Unskilled labor is presently under-utilized, and at present 200 hours per week are recorded as idle time. The unskilled employees for this printing program would be given two hours' time off in lieu of each hour worked. Variable overhead represents the cost of operating the printing press and binding machines. 3 4 5 QUESTION 2 (continued) 6 7 When not being used by the company, the printing machine is rented to outside companies for $6.00 per hour. This earns a contribution of $3.00 per hour. There is unlimited demand for this facility. Fixed production costs are those incurred and absorbed into production, using an hourly rate based on budgeted activity. The cost of estimating department represents time spent by the printing company own existing fixed monthly salary staff in discussion with the village fair committee concerning the printing of its program. 8 Required: Prepare a revised cost estimate showing clearly the minimum price that the company should accept the order. Your revised cost estimate must indicate the financial impact of EVERY ITEM shown in the initial cost estimate and in the additional notes. (Show workings and round to 2 decimal places) (20 marks)
