QUESTION # 2 You have received a request from EXE plc to provide a quotation for the manufacture of a specialized piece of equipment. This would be a one-off order, in excess of normal budgeted production. The following cost estimate has already been prepared. Note ₤ Direct materials: Steel 10 meter sq @ ₤ 5 /meter sq 1 50 Brass fittings 2 20 Direct Labour: Skilled 25 hours @ ₤8/hour 3 200 Semi-skilled 10 hours @ ₤5/hour 4 50 Overhead 35 hours @ ₤10/hour 5 350 Estimating time 6 100 Administrative overheads Allocated @ 20% of production cost 7 154 Total cost 924 Profit @25% of total cost 231 Selling price 1155 Notes: The steel is regularly used, and has a current stock value of ₤5/ sq meter. There are currently 100 sq meters in stock. The steel is readily available at a price of ₤5.5 / sq meter. The brass fittings would have to be bought specifically for this job: a supplier has quoted the price of ₤20 for the fittings required. The skilled labour is currently employed by your company and paid at a rate of ₤8/ hour. If this job were undertaken it would be necessary either to work 25 hour overtime which would be paid at time plus one half or to reduce production of another product which earn a contribution of ₤13/hour. The semi skilled labour currently has sufficient paid idle time to be able to complete this work. The overhead absorption rate includes power costs which are directly related to machine usage. If this job were undertaken, it is estimated that the machine time required would be ten hours. The machines incur power costs of ₤0.75/hour. There are no other overhead costs which can be specifically identified with this job. The cost of the estimating time is that attributed to the four hours taken by engineers to analyse the drawings and determine the cost estimate given above. It is company policy to add 20% on to the production cost as an allowance against administration costs associated with jobs accepted. This is the standard profit added by your company as part of its pricing policy. REQUIRED: Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each value in your estimate. Also what factors need to be considered before quoting for this order?

QUESTION # 2 You have received a request from EXE plc to provide a quotation for the manufacture of a specialized piece of equipment. This would be a one-off order, in excess of normal budgeted production. The following cost estimate has already been prepared. Note ₤ Direct materials: Steel 10 meter sq @ ₤ 5 /meter sq 1 50 Brass fittings 2 20 Direct Labour: Skilled 25 hours @ ₤8/hour 3 200 Semi-skilled 10 hours @ ₤5/hour 4 50 Overhead 35 hours @ ₤10/hour 5 350 Estimating time 6 100 Administrative overheads Allocated @ 20% of production cost 7 154 Total cost 924 Profit @25% of total cost 231 Selling price 1155 Notes: The steel is regularly used, and has a current stock value of ₤5/ sq meter. There are currently 100 sq meters in stock. The steel is readily available at a price of ₤5.5 / sq meter. The brass fittings would have to be bought specifically for this job: a supplier has quoted the price of ₤20 for the fittings required. The skilled labour is currently employed by your company and paid at a rate of ₤8/ hour. If this job were undertaken it would be necessary either to work 25 hour overtime which would be paid at time plus one half or to reduce production of another product which earn a contribution of ₤13/hour. The semi skilled labour currently has sufficient paid idle time to be able to complete this work. The overhead absorption rate includes power costs which are directly related to machine usage. If this job were undertaken, it is estimated that the machine time required would be ten hours. The machines incur power costs of ₤0.75/hour. There are no other overhead costs which can be specifically identified with this job. The cost of the estimating time is that attributed to the four hours taken by engineers to analyse the drawings and determine the cost estimate given above. It is company policy to add 20% on to the production cost as an allowance against administration costs associated with jobs accepted. This is the standard profit added by your company as part of its pricing policy. REQUIRED: Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each value in your estimate. Also what factors need to be considered before quoting for this order?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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QUESTION # 2

You have received a request from EXE plc to provide a quotation for the manufacture of a specialized piece of equipment. This would be a one-off order, in excess of normal budgeted production. The following cost estimate has already been prepared.

		Note	₤
Direct materials:
Steel	10 meter sq @ ₤ 5 /meter sq	1	50
Brass fittings		2	20
Direct Labour:
Skilled	25 hours @ ₤8/hour	3	200
Semi-skilled	10 hours @ ₤5/hour	4	50
Overhead	35 hours @ ₤10/hour	5	350
Estimating time		6	100
Administrative overheads	Allocated @ 20% of production cost	7	154
Total cost			924
Profit	@25% of total cost		231
Selling price			1155

Notes:

The steel is regularly used, and has a current stock value of ₤5/ sq meter. There are currently 100 sq meters in stock. The steel is readily available at a price of ₤5.5 / sq meter.
The brass fittings would have to be bought specifically for this job: a supplier has quoted the price of ₤20 for the fittings required.

The skilled labour is currently employed by your company and paid at a rate of ₤8/ hour. If this job were undertaken it would be necessary either to work 25 hour overtime which would be paid at time plus one half or to reduce production of another product which earn a contribution of ₤13/hour.

The semi skilled labour currently has sufficient paid idle time to be able to complete this work.
The overhead absorption rate includes power costs which are directly related to machine usage. If this job were undertaken, it is estimated that the machine time required would be ten hours. The machines incur power costs of ₤0.75/hour. There are no other overhead costs which can be specifically identified with this job.
The cost of the estimating time is that attributed to the four hours taken by engineers to analyse the drawings and determine the cost estimate given above.

It is company policy to add 20% on to the production cost as an allowance against administration costs associated with jobs accepted.
This is the standard profit added by your company as part of its pricing policy.

REQUIRED:

Prepare, on a relevant cost basis, the lowest cost estimate that could be used as the basis for a quotation. Explain briefly your reasons for using each value in your estimate. Also what factors need to be considered before quoting for this order?

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