QUESTION TWO

EC$,$ an ongineoring company, produces tools and compononts to customers' specific

$[20]$

requiroments. EC utes absorption costing to absorb ovorhends into the cost of oach customer order. Selling prices are usually determined by adding a $30\%$ mark up to the costs incurred in completing the order.

Ec has recently boon asked to provide a quotation for a now customer. The details of the work have been discussed at a meeting with the eustomer and the rollowing resource requirements heve been determined. The cost of these resources has been calculated using the company's routine costing system.

Direct matorial A

Direct material E

skillod Inbour

Untikillod Inbour

Suporvision labour

Machine overhend

other overhead

Total cost

Note

$1$

$2$

$3$

$4$

$5$

$6$

$7$

$7$

Notes:

Notes:

Direnot meterial A is durrently heid in irvontory and is in requiar was. The latest price sold for motorial A wes Rz$2$ per square motre. but the roplocomont cosk would bo R$23$ por square motre.

Girect motorial es is currently not used by tice and would hove to bo bought if tho work is undertaken. The minimum ordor trom the supplier of mentorial is is for $25$ square motres Ece dous not expect to be able to whe this moterint on arny other work, thotah it Would be able to soll it as scrop ror R$2$ por ikguare moptre employens are transforred from other work that thay are currontly doind. This other work coula be done by sub$-$contractors who could be hired on an hourly balts at a comt or Ee$,$ por hour. Alternotively sub$-$contrectortl gouth be thred to work on this now oustomor's order at a cost of Ro por hour. EC's ourrant skillod tabour is pald Fe por nour

The unakillod labour is paid an hourly rete or Fes but only for hours that thoy are actively workino. Thore are only $40$ hours of aciditionol unskilled labour avallable within normal working hours. In order to complate tha eustomor order an time they

Tho work would bo suporvised by the oxistimg supervisor as part or his normal ror a so hour working weok. dirforont machines would bo required: maohuno $W$ ror $12$ hours and maohine $2$ ror $8$ moohine. Maohine $2$ is in contstant wse by EC and, If it is required for this customer $($oxciuding rumnino colts$)$ to ruirul uts normal work.

EC would liko to win this order as at believess that it will probably win ropeot orcters from the gustomer. The directors have therefore decicied to price this work on the basis of its relevant cost plus $1096$

REOUIRED:

$2\mathrm{.}1$ Prepare a scheduto that shown the relovant oost of the now customer's order.

$2\mathrm{.}2$ Explain, for ench of the resiourae item: numbered $1$ to $7,$ the reason for anah of the values you have inelusiend in your arnwwer to $2\mathrm{.}1$ above.

$7.$ EC's non$-$machine related fixed overhead costs are absorbed into product costs using an absorption rate per labour hour.