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a) Calculate the relevant cost to produce the special order of roofing sheets for 100 houses for the

Mbuya Nehanda Housing Coo

Material required per Total units for special


Description unit order Total quantity

Roofing sheets 154.64 metres 100 15,464

Paint 15 litres 100 1,500

Direct labour

Labour cost - Mr White

Other variable costs 77.32 hours 100 7,732

Fixed overheads

Opportunity cost

Minimum amount chargeable


Available
Maximum

Workings
Budgeted sales orders
Domestic Commercial
June: Actual (given) 52 38
Variances -10% 5%
June: Budgeted 57.778 36.190
July sales (=June Budgeted) 57 36
Average metres of roofing sheets per order (output) 200 450
Normal loss 3% 4%
Average metres of roofing sheets per order (input) 206.19 468.75

Evaluation of constraints Roofing sheets (m) Paint (litres)

Total available 32,000 5,000


Needed for normal production (28,628) (4,710)
Available for use in special order 3,372 290
Needed for special order 15,464 1,500
Potential constraint??? Yes No
Next order expected to Paint will be
be received in two sourced from
months' time. No local supplier. No
certainty about receiving indicator of a
Justification these roofing sheets as potential
government is tightly limitation on
monitoring offshore renewal of
payments. contract

Direct labour
Hours needed for special order 7,500
Less hours remaining from normal production (1,311)
Extra hours needed 6,189

Option 1: work existing employees overtime


Normal hours @ normal rate (1311hrs$2.50) 3,277.50
Overtime @ 1.5 times normal rate (6189hrs$2.50*150%) 23,208.75
Total labour cost 26,486.25
Option 2: hire new staff
Normal hours @ normal rate (13112.50) 3,277.50
New staff - 25% less productive (6189hrs1.25$2.50) 19,340.63
Total labour cost 22,618.13

Decision: Hire new staff as it is cheaper.

Current price of roofing sheets 2.50


Drop of roofing sheets by 12.5% (mid rate between 10% & 15%) (0.31)
Expected price 2.19

Other variable costs


Hours needed for special order 7,732
Less hours remaining from normal production 5,824
Hours to be worked by Mr. White on third machine 1,908

Contribution of roofing per order


Domestic Commercial
Average number of metres per order 200 450
Selling price 1,500.00 3,150.00
Variable costs (1,058.46) (2,809.88)
Roofing sheets (515.46) (1,171.88)
Paint (48.00) (81.00)
Direct labour (375.00) (1,125.00)
Other variable costs (120.00) (432.00)
Contribution 441.54 340.13
Constraint: roofing sheets 200.00 450.00
Contribution/roofing metre 2.21 0.76
Ranking 1 2
1 constraint, 2 products: therefore use Contribution per limiting factor

Description Roofing metres


Maximum of resources available 32,000
Less: resources for special order (154.64m100 houses) (15,464)
Remaining for normal production 16,536
Allocation based on: roofing metres
Domestic (ranked 1) (11,753)
4,784
Commercial (ranked 2) (4784/468.75)
10 orders 4,688
Remaining roofing sheets 96

Commercial orders sacrificed (36 - 10) 26


Contribution per order 340
Total lost contribution 8,843.25

b) Identify any additional factors that FP should consider when deciding whether or not to accept the special order.
-Are we able to meet the 31 July 2016 completion date as requested by the client?
-Are we going to perform a quality job that can guarantee a repeat business, given the following factors?
-The tight deadline of 31 July 2016.
-The fact that Mr White is only available for 4 hours per day, this may result in delays in finishing the job.
-The inefficiency of the third machine may also result in time delays and possible poor quality roofs.
-What is the probability that we will be successful in negotiating for a 5% discount in acquiring paint from our supplier?
-Given the current economic downturn in Zimbabwe, will our supplier of paint be able to continue in operation and prov
-Is Mbuya Nehanda Housing Cooperative able to pay us the money for this job, given the tight liquidity situation prevail
-What is the possible effect on our existing clients whom we have not been able to satisfy as a result of accepting this s
-Are they going to still give us business or they are likely to give business to our competitors?
-Is sacrificing our existing clients worth the acceptance of the new special order? Are we going to receive repeat busine
-How will our existing clients in the domestic market react given that they hear of the amount we have charged to this C
-If we get more business from this or other housing cooperatives, how are we going to manage our constraints - roofing
-Should we hire more staff or hire part time workers as and when needed?
-The fact that we have done a job for housing cooperative can be a strong marketing tool for MRS
-Does the new staff to be hired need training before executing the job?
-Any other valid point
Available
Maximum

c) Calculate the allocated overhead cost per unit using Activity Based Costing

Cost description Cost driver Domestic Commercial


$ $
Ordering costs 410,000 Number of orders
Domestic 5 157,692.31
Commercial 8 252,307.69
Total 13

Machine set up costs 350,000 Number of set ups


Domestic 185 136,315.79
Commercial 290 213,684.21
Total 475

Depreciation 440,000 Number of machine hours


Domestic 5800 136,034.12
Commercial 12960 303,965.88
Total 18760

Cutting costs 300,000 Number of metres


Domestic 11400 123,913.04
Commercial 16200 176,086.96
Total 27600

Other overheads 150,000 Number of metres


Domestic 11400 61,956.52
Commercial 16200 88,043.48
Total 27600
TOTAL OVERHEAD
Available
Maximum

d) What potential challenge is MRS likely to face in cost allocation using ABC?
-Inaccurate identification of a cost driver per activity area
-Potential cash constraints if MRS wants to adopt a more accurate ABC system.
-Inaccurate information to use as bases of allocation may be gathered for example, number of orders, number of set
-Difficulties in assigning resources to activities.
-Any valid point
Mbuya Nehanda Housing Cooperative [25 marks]

Cost per unit Total cost Comment

2.19 33,827.32 Needed for normal production, hence relevant 3

1.14 1,710.00 Needed for normal production, hence relevant 2

22,618.13 Waged employees, hence incremental cost 7

5,724.74 2

1.20 9,278.35 Incremental cost, hence relevant 1

- Irrelevant cost, would be incurred anyway 0.5

Relevant cost, represents lost contribution of


8,843.25 normal production by accepting special order 20

82,001.79
35.5
25
2

Labour Machine time


(hours) (hours)

27,000 25,200
(25,689) (19,376) 4
1,311 5,824
7,500 7,732 4
No No 2
Current labour Mr. White can
can work be hired to
overtime or new operate third
labour can be machine for an
sourced. additional 2000
hours

0.5
1
1
0.5
1
1

Alternative
2.50
(0.25) 1
2.25 1

@ $3 per hour 5,725 2

2
2
2
2

1
1
1

he special order.
1
wing factors? 1
1
finishing the job. 1
ality roofs. 1
ing paint from our supplier? 1
ntinue in operation and provide us with paint? 1
ght liquidity situation prevailing in Zimbabwe? 1
s a result of accepting this special order? 1
1
ing to receive repeat business from Mbuya Nehanda Ho 1
unt we have charged to this Co-operative? 1
age our constraints - roofing sheets and labour? 1
1
1
1
1
17
10

Total
$

1
410,000.00 1
1

1
350,000.00 1
1

1
440,000.00 1
1
1
300,000.00 1
1

1
150,000.00 1
1
1,650,000.00
15
10

1
1
of orders, number of set 1
1
1

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