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(c) Explain why relevant costing principles áre used lor one-c (d) Referring to the proposed contract and briefly explaining the reasons for your choices, give examples of the following costs: run sions. (i) Sunk cost (ii) Incremental cost

(c) Explain why relevant costing principles áre used lor one-c (d) Referring to the proposed contract and briefly explaining the reasons for your choices, give examples of the following costs: run sions. (i) Sunk cost (ii) Incremental cost

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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(c) Explain why relevant costing principles are used for one-off/short run decisions. (d) Referring to the proposed contract and briefly explaining the reasons for your choices, give examples of the following costs: (i) Sunk cost (ii) Incremental cost
Transcribed Image Text:(c) Explain why relevant costing principles are used for one-off/short run decisions. (d) Referring to the proposed contract and briefly explaining the reasons for your choices, give examples of the following costs: (i) Sunk cost (ii) Incremental cost
Flynn Design Ltd produce bespoke timber fumiture for the hospitality trade, supplying its UK and European customers from its factory in Navan, which is rented at an annual cost of €300,000. They have received notification that a recent order has been cancelled as a direct result of Covid-19, This has resulted in one quarter of the factory becoming unoccupied for the next six months. Attracting replacement business has proved difficult. However, recent Covid related outdoor dining regulations on the hospitality industry has resulted in a demand for fold-away tables and chairs. The management team are considering using their available production capacity to meet this demand. Their Sales Director has found a customer that would be willing to purchase 5,200 dining sets (1 table and 4 chairs) at a price of €500 per set. The Sales Director has already incurred €850 in travel expenses while secking to attract this replacement customer. Their Production Manager suggests that the following be considered when estimating the cost of producing a dining set: 1. Over the 26-week contract it is estimated that 200 dining sets can be produced per week and that 15% of the factory space will be required to fulfil the order. 2. 4 oak panels will be required per dining set. It has been agreed that 3,000 oak panels currently in stock, which have a book cost €10 per metre, will be used to produce the dining sets. It was originally planned to use these panels to produce 60 drinks cabínets. The cost of panels to produce each cabinet is €15. All further panels required will be bought at €22 per panel. 3. Flynn Design Ltd work closely with a local external contractor, who can provide the 5,200 table frames required to complete the order, at a cost of €18 per frame. The external contractor estimates it will take sixteen weeks to produce the frames and has suggested that they will rent the remaining unused 10% of the factory space at an agreed rental of €2,250 per week. The contractor has agreed to cover all related material, utility and labour costs associated with the production of the frames. 4. Flynn Design Ltd's two full time packing employees who are currently idle as a result of the cancellation will be retained by the company, and utilised on this contract. Additional packing staff can easily be recruited as needed to fulfil this order. Packing staff work a standard 40 hour week and are paid €11.50 per hour. It is estimated cach dining set will take 30 minutes to pack. The variable cost (in addition to labour) of packing a dining set will be €S per hour. 5. The electricity cost of operating the plant is €23 per machine hour and it is estimated that 2 machine hours are required to produce each dining set. The plant used to produce the sets will depreciate by €3,500 per month. 6. Each week a batch of 200 dining sets will be transported to their customer's depot in Manchester, 370 kilometres (740 km return) from their Navan facility. Flynn Design Ltd will cover travel expenses and while no additional fixed transport costs will be incurred for the deliveries but variable costs will occur. The total costs and kilometres travelled for the past four weecks are tabulated below. Week Kilometres Cost 1 15,000 €31,500 2 36,000 €42,000 3 27,000 €37,500 4. 60,000 €54,000
Transcribed Image Text:Flynn Design Ltd produce bespoke timber fumiture for the hospitality trade, supplying its UK and European customers from its factory in Navan, which is rented at an annual cost of €300,000. They have received notification that a recent order has been cancelled as a direct result of Covid-19, This has resulted in one quarter of the factory becoming unoccupied for the next six months. Attracting replacement business has proved difficult. However, recent Covid related outdoor dining regulations on the hospitality industry has resulted in a demand for fold-away tables and chairs. The management team are considering using their available production capacity to meet this demand. Their Sales Director has found a customer that would be willing to purchase 5,200 dining sets (1 table and 4 chairs) at a price of €500 per set. The Sales Director has already incurred €850 in travel expenses while secking to attract this replacement customer. Their Production Manager suggests that the following be considered when estimating the cost of producing a dining set: 1. Over the 26-week contract it is estimated that 200 dining sets can be produced per week and that 15% of the factory space will be required to fulfil the order. 2. 4 oak panels will be required per dining set. It has been agreed that 3,000 oak panels currently in stock, which have a book cost €10 per metre, will be used to produce the dining sets. It was originally planned to use these panels to produce 60 drinks cabínets. The cost of panels to produce each cabinet is €15. All further panels required will be bought at €22 per panel. 3. Flynn Design Ltd work closely with a local external contractor, who can provide the 5,200 table frames required to complete the order, at a cost of €18 per frame. The external contractor estimates it will take sixteen weeks to produce the frames and has suggested that they will rent the remaining unused 10% of the factory space at an agreed rental of €2,250 per week. The contractor has agreed to cover all related material, utility and labour costs associated with the production of the frames. 4. Flynn Design Ltd's two full time packing employees who are currently idle as a result of the cancellation will be retained by the company, and utilised on this contract. Additional packing staff can easily be recruited as needed to fulfil this order. Packing staff work a standard 40 hour week and are paid €11.50 per hour. It is estimated cach dining set will take 30 minutes to pack. The variable cost (in addition to labour) of packing a dining set will be €S per hour. 5. The electricity cost of operating the plant is €23 per machine hour and it is estimated that 2 machine hours are required to produce each dining set. The plant used to produce the sets will depreciate by €3,500 per month. 6. Each week a batch of 200 dining sets will be transported to their customer's depot in Manchester, 370 kilometres (740 km return) from their Navan facility. Flynn Design Ltd will cover travel expenses and while no additional fixed transport costs will be incurred for the deliveries but variable costs will occur. The total costs and kilometres travelled for the past four weecks are tabulated below. Week Kilometres Cost 1 15,000 €31,500 2 36,000 €42,000 3 27,000 €37,500 4. 60,000 €54,000
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