2. You have just been appointed as the management accountant of a publishing and printing company. They have been asked been asked to quote for the production of an in-house magazine for a local brewery. This work would be carried out in addition to the normal work of the company. Because of existing commitments, some weekend working would be required to complete the printing of the magazine. The previous accountant has produced the following cost estimate. They have based it upon the resources required as specified by the production manager:
Direct materials − paper (book value)
− inks (purchase price)
Direct labour − skilled
250 hours @ £8.00
100 hours @ £5.00
350 hours @ £5.50
Printing press depreciation
200 hours @ £4.50
Fixed production costs
350 hours @ £8.00
Estimating department costs
You are aware that considerable publicity could be obtained for the company if you are able to win this order, and the price quoted must be very competitive.
The following notes are relevant to the cost estimate above:
(1) The paper to be used is currently in stock at a value of £9,000. It is of an unusual colour which has not been used for some time. The replacement price of the paper is £13,000, whilst the scrap value of that in stock is £2,500. The production manager does not foresee any alternative use for the paper if it is not used for the magazines.
(2) The inks required are not held in stock. They would have to be purchased in bulk at a cost of £4,000. 75% of the ink purchased would be used in printing the magazines. No other use is foreseen for the remainder.
(3) Skilled direct labour is in short supply, and to accommodate the printing of the magazines, 50% of the time required would be worked at weekends, for which a premium of 25% above the normal hourly rate is paid. The normal hourly rate is £8.00 per hour.
(4) Unskilled labour is presently under-utilised, and at present 200 hours per week are recorded as idle time. If the printing work is carried out at a weekend, 25 unskilled hours would have to occur at this time, but the employees concerned would be given two hours time off (for which they would be paid) in lieu of each hour worked.
(5) Variable overhead represents the cost of operating the printing press and binding machines.
(6) When not being used by the company, the printing press is hired to outside companies for £8.00 per hour. This earns a contribution of £4.00 per hour. There is unlimited demand for this facility.
(7) Fixed production costs are those incurred by and absorbed into production, using an hourly rate based on budgeted activity.
(8) The cost of the estimating department represents time spent in discussions with the brewery concerning the printing of its magazine.
(a) Prepare a revised cost estimate using the opportunity cost approach, showing clearly the minimum price that the company should accept for the order. Give reasons for each resource valuation in your cost estimate.
(b) Identify the assumptions that are made when calculating the relevant cost
(c) Explain what the term 'qualitative factors' means when applied to relevant costing. Identify and explain 6 qualitative factors which could be considered.