Creative Designing plc a printing company is seeking to increase its business by winning work from new customers. It has received an order from a multinational national company for printing New Year Greeting Cards.
The technical team of Creative Designing has given a detailed report on the resource requirement for the order. The total cost has been calculated as $1,000 and its details are summarized below:
Production period –
It is expected that the total time required to print and dispatch the cards will be one week.
Material X –
10,000 sheets of special printing paper will be required. This is a paper that is in regular use by the company and it has 3,400 sheets in inventory. These originally cost $1·40 per sheet but the current market price is $1·50 per sheet. The resale price of the sheets held in inventory is $1·20 per sheet.
Material Y –
This is a special ink that Creative Designing will need to purchase at a cost of $8 per litre. 200 litres will be required for this order but the supplier has a minimum order size of 250 litres. Creative Designing does not foresee any other use for this ink, but will hold the surplus in inventory. Creative Designing’s inventory policy is to review slow moving items regularly. The cost of any inventory item that has not been used for more than 6 months is accounted for as an expense of the period in which that review occurs.
Direct labor –
Sufficient people are already employed to print the cards, but some of the printing will require overtime working due to the availability of a particular machine that is used on other work. The employees are normally paid $8 per hour, the order will require 150 hours of work and 50 of these hours will be in excess of the employees’ normal working week. A rate of $10 per hour is paid for these overtime hours. Employees are paid using an hourly rate with a guaranteed minimum wage for their normal working week.
An existing supervisor will take responsibility for the cards in addition to his existing duties. He is not currently fully employed and receives a salary of $500 per week.
Two different types of machine will be required:
Machine A will print the cards. This is expected to take 20 hours of machine time. The running cost of machine A is $5 per hour. There is currently 30 hours of unused time on machine A per week that is being sold to other printers for $12 per hour.
Machine B will be used to cut the cards. This machine is being used to full capacity in the normal working week and this is why there is a need to work overtime. The cards will require 25 machine hours and these have a running cost of $4 per hour.
There will be a delivery cost of $400 to transport the cards to the customer.
Fixed overhead costs
The absorption rate that it uses is $20 per direct labor hour.
Creative Designing applies a 30% mark-up to its costs to determine its selling prices.
Creative Designing has appointed you as the management accountant of the company, in order to assist the management in preparing its quotation, prepare a schedule showing the relevant costs for the production of the catalogues. State clearly your reason for including or excluding each value that has been provided in the above scenario.
|Particulars||Total Cost||Relevant Cost||Remarks|
|(3400 sheets @ $1.50 per sheet)||$5,100||$5,100||Replacement cost (since the material is in regular use)|
|(6600 sheets @ $1.50 per sheet)||$9,900||$9,900||Replacement cost (fresh purchase from the market)|
|(200 Lts @ $ 8 per ltr)||$1,600||$1,600||Replacement cost (fresh purchases)|
|(50 Lts @ $ 8 per ltr)||$400||$400||Purchases made for this order and have no other use have to borne by this order|
|Normal Hrs (100Hrs @ $ 8 per hour)||$800||$0||Labor is paid/week wages irrespective of this order|
|Overtime Hrs (50Hrs @ $ 10 per hour)||$500||$500||Incurred specifically for this order|
|Supervisor’s Salary||$500||$0||Supervisor is paid/week salary irrespective of this order|
|Running cost (20Hrs @ $ 5 per hour)||$100||$100||Incurred specifically for this order|
|Opportunity cost (20Hrs @ $ 7per hour)
($ 12 – $ 5)
|$140||$140||Opportunity cost (contribution foregone by not selling the idle hours)|
|Running cost (25 Hrs @ $ 4 per hour)||$100||$100||Incurred specifically for this order|
|Transportation||$400||$400||Incurred specifically for this order|
|Fixed overhead costs (150Hrs @ $ 20 per hour)||$3,000||$0||Sunk costs hence not relevant|
|Profit Markup||$5,472||Profit mark-up depends on the competitors’ pricing and could go down to zero in aggresive competition|
Therefore the quotation for catalogues should be $ 23,712.