QUESTION TWO (20 MARKS)

Buffalo Contractors recently tendered for the construction of a grain silo - a tender that had been advertised by Kenya Cereals and Produce Board. A summary of the cost estimates used for the purposes of purposes of arriving at the tender price is as follows:

Cost Estimates - Grain Silo

$000

Direct materials - steel

600

Direct materials - wiring and other ancillaries

100

Direct labour - Engineering 3000 hours @ $100

300

Direct labour - unskilled labour 10000 hours @ $40

400

Variable overheads

150

Fixed overheads absorbed

110

Hire of equipment

40

Total cost

1,700

Buffalo Contractors had tendered a price of $2,040 million by adding on a markup of 20% on the above costs. The company has just been informed that the tender was unsuccessful. The managing director of the company has asked your opinion as to whether the cost estimates on which the tender price was based were correct.

You ascertain the following:

(i)The company maintains engineers in their payroll even when there is no active contract. To retain the engineers, the company has to pay $40 per hour they spend in the company to the engineers. This amount would have to be paid even if the contract to build the grain silo was not taken up.

(ii)Due to a recent cancellation of another order, the company expects to have 6000 idle unskilled hours available to work on the job. Any additional unskilled labour required will be employed on casual basis.

(iii)The wiring material was already in stock for the previous job that was cancelled. The wiring has no other use and would be sold at a scrap value of $10,000.

(iv)The fixed overheads absorbed represent an allocation of Buffalo's head office costs.

(v)This tender would have incurred specific fixed costs of $20,000 and $4000 of depreciation on equipment.

(vi)Steel was in stock and cost $600,000. The steel is regularly used and would be replaced at a cost of $250,000.

(vii)Variable costs represent light and heat costs that would be incurred on this tender.

(viii)The tender would require hiring of some equipment at a cost of $40,000. This amount would however not be paid as Buffalo contractors have an internal agreement with Giraffe contractors (a subsidiary company) to use such equipment whenever they are idle without charging the company.

Required:

(a)State which of the stated costs are relevant and irrelevant to the pricing of the grain-silo tender

(b)Prepare a revised tender price statement if the relevant costing principles were applied with the same profit mark up.

(c)

QUESTION THREE (20 MARKS)

Farm Equipment Limited (FEL) produces tractors and other farm machinery. Each piece of equipment is built to customer specifications. During May 2016, its first month of operations, the company began working on three customer orders: jobs 1, 2, and 3. The following transactions occurred during the month of May 2016:

(i)Processed material requisitions for the following items:

$

Job 1 direct materials

77,600

Job 2 direct materials

38,600

Job 3 direct materials

45,000

Indirect materials

87,000

248,200

(ii)Processed time sheets shows the following:

$

Job 1 direct labour (700 hours)

14,800

Job 2 direct labour (500 hours)

11,800

Job 3 direct labour (300 hours)

6,500

Indirect labour

9,700

42,800

(iii) Manufacturing overheads are absorbed at the rate of 160% of direct labour.

(iv)All jobs are priced at a 25% profit margin.

Required

Calculate the total cost of each of the three jobs and determine the profits