You received the following email from Una.

___________________________________________________________________________

From: Una Volk, Finance Manager

To: Finance Officer

Subject: Budget, KPls and one-off contract

Gavin Thorpe, Production Director, is concerned about the handling of raw materials into production at the new production facility. Apparently, raw materials are not always placed in the correct production area quickly enough leading to delays in production and employee idle time. Gavin wonders part of the problem is that raw materials handling was only allocated a small budget. I've suggested that we re-think the budget for this function using a zero-based budgeting (ZBB) approach. I know that the original budget allows for two small forklift trucks and two operating staff who are responsible for picking raw materials from the warehouse and moving these into the appropriate production area. Other than the forklift trucks there is currently no automated lifting equipment.

Another area that Gavin is concerned about is the in-house Machinery Maintenance Department. The objective of the department is to ensure that all production machinery is kept in optimal working order to protect the quality and efficiency of production. It is responsible for regular 6- monthly routine maintenance of all machinery as well as dealing with repairs when required. Gavin is keen that the performance of the department is adequately monitored with the use of KPIs and has asked for suggestions.

On a different matter, we have been negotiating with a hotel chain to supply it with 500 hybrid mattresses. Gavin thinks this could lead to large in orders in the future. He is now trying to decide if we should accept its latest price offer which is lower than our full cost. I've attached a schedule with information about the order.

Schedule

	Costs associated with the potential hotel chain order
Note	Cost item	Total cost for the 500 mattresses (E$)
I	Covering fabric	22,500
II	Other raw materials	32,500
III	Direct labour	31,000
IV	Total production overheads	52,000
V	Additional costs	2,500
	Total cost	140,500

Notes:

1. The cost of E$22,500 is for 3,750 square metres of covering fabric at standard cost of E$6 per square metres. There are 4,000 square metres of covering fabric in inventory which is no longer used in normal production that could be used for this order. If not used for this order this covering fabric can be sold for E$2.50 per square metres. This covering fabric cost E$5.50 per square metres to purchase.
2. The cost of E$32,500 is based on the standard cost of other raw materials. All of the other raw materials are in inventory and are currently used in normal production. Prices for these other raw materials have recently increased.
3. The direct labour cost of E$31,000 is the standard cost of labour. Direct employees are a paid for a fixed number of hours per week. There is spare capacity and therefore 75% of this order can be made during normal working hours. The other 25% will require overtime to be worked by the direct employees, for which they are paid a premium of 50% above normal wage rate.
4. The total production overheads of E$52,000 is the total of variable and fixed production overheads absorbed.
5. In addition to the above, the hotel chain has asked for the name of the hotel to be stitched onto each mattress which will require hiring an embroidery machine at a cost of E$2,000. In a addition, a Sales Manager has visited the company on a couple

of occasions to discuss the order at a cost of E$500.

Required:

Explain whether each of the costs on the attached schedule (Notes I to V) are relevant or irrelevant costs of deciding whether to accept the order.

[32 marks]