The decision to accept a special order depends upon the potential immediate and future quantitative and qualitative benefits that result from the order A
Incremental analysis is a key topic in decision-making questions These questions include deciding on acceptance of a special order; optimal
ABSTRACT: This study aims to determine the application of differential accounting information in decision making to accept or reject product special orders
Special orders are the simplest decision: if the special order is not accepted, then nothing changes; if the special order is accepted, then the only change
Keywords: Lean Accounting, Cost Accounting, Special Decisions, Two areas of coverage that would benefit students are accepting special orders and
Special Orders – Part 2 If Jet accepts the special order, the incremental revenue will exceed the incremental costs In other
Apply costing concepts and techniques in business decisions, e g “hire, make or buy”, “accept or reject an order at a special price”, “retain or replace
24 jui 2014 · No marketing costs will be necessary for the 5,000-unit one-time-only special order Accepting this special order is not expected to affect the
Cost Accounting Horngreen, Datar, Foster It focuses on specific decisions such as accepting or rejecting a one-time-only special order, insourcing or
Managerial Accounting Fifth Edition Weygandt Kimmel Kieso Identify the relevant costs in accepting an order at a special
1466_221_CostingforDecisionMaking_E.pdf
ProfessionalDevelopmentProgramme onEnriching
KnowledgeoftheBusiness,AccountingandFinancialStudies (BAFS)Curriculum
Course Title: Cost Accounting for Decision Making
1 LearningOutcomes
Uponcompletionofthiscourse,teacherparticipantsshould beableto: •applycostͲvolumeͲprofitanalysistechniquestoascertain theinterͲrelationshipsamongcosts,sellingprice,unitssold, breakevenpoint,targetprofitandmarginofsafety; •statetheassumptionsandlimitationsofcostͲvolumeͲ profitanalysis; •identifyanddifferentiaterelevant costsandirrelevant costsindifferentbusinessscenarios;and •makerecommendationtoshortͲtermbusinessdecisions. 2 SyllabusinHKDSEExamination
•Identify thenatureofvariouscostitemsandtheir relevancetodecisionͲmaking:sunkcosts,incremental costsandopportunitycosts. •Apply costingconceptsandtechniquesinbusiness decisions,e.g."hire,makeorbuy","acceptorrejectan orderataspecialprice","retainorreplaceequipment", "sellorprocessfurther" and"eliminateor retainan unprofitablesegment". •ConductcostͲvolumeͲprofitanalysistoassesstheeffects ofchangesincosts,sellingpriceandunitssoldonthe breakevenpointandtargetprofit. •Identifythenatureofvariouscostitemsandtheir relevancetodecisionͲmaking:sunkcosts,incremental costsandopportunitycosts. •Applycostingconceptsandtechniquesinbusiness decisions,e.g."hire,makeorbuy","acceptorrejectan orderataspecialprice","retainorreplaceequipment", "sellorprocessfurther" and"eliminate orretainan unprofitablesegment". •ConductcostͲvolumeͲprofitanalysistoassesstheeffects ofchangesincosts,sellingpriceandunitssoldonthe breakevenpointandtargetprofit. 3 WhatͲifanalysis
Contents
•Breakevenpoint •Salelevelrequiredtoachievetargetprofit •Marginofsafety •WhatͲifanalysis(Illustrations1&2) •Salesmix(Illustration3&4) •Relevantcostsvs.irrelevantcosts(Illustrations5&6) •Acceptorrejectanorder(Illustration7) •Hiredecision(Illustration8) •Makeorbuy(illustration9)•Retainorreplaceequipment(Illustration10) •Sellorprocessfurther(Illustration11) •Eliminateorretainanunprofitablesegment(Illustration12)4 PriorKnowledgeRequired
5 CostͲVolumeͲProfitAnalysis
(CͲVͲPAnalysis) (BreakevenAnalysis) 6 Whatisit?
•Breakeven=noprofit,orloss,thatis, -TotalSalesRevenue=TotalCosts(VariableCosts+ FixedCosts)
-TotalContribution=FixedCosts •Itstudieshowcost,revenueand production/salesvolumeaffectprofit •Twoapproaches: -ByFormula -ByGraph 7 BreakevenPoint-ByFormula
8 or where SalesLevelRequiredtoAchieve
TargetProfit
9or MarginofSafety-ByFormula
10 WhatͲifAnalysis
•Itstudieshowtheresultwillchangeifthe originaldatachanges. •Itanswersquestionssuchas: -Whatwillbethebreakevenpointifvariablecost perunitincreasedby5%? -Whatwillbetheprofitifsalesvolumeincreases by5%? 11 EffectsofChangesinCosts,SellingPrice
ontheBreakevenPoint 12 Illustration1
EffectofChangesinCostsonBreakevenPoint
•Amanufacturingcompanyproducesandsells asingleproductasfollows: •Thefixedcostperannumisestimatedtobe $600,000. 13 Sellingpriceperunit $250
Variablecostsperunit $150
Illustration1
EffectofChangesinCostsonBreakevenPoint
•Thesalesmanagerwouldliketoproposea changetopayasalesmanoncommission basisof$10perunitsoldratherthanonfixed monthlysalariesof$8,000permonth. •Whatwouldbethebreakevenpointsinunits forthe situationsbeforeandafterthe change? 14 Illustration1
EffectofChangesinCostsonBreakevenPoint
Breakevenpointbeforechange:
$600,000/($250Ͳ$150) =6,000units Breakevenpointafterchange:
($600,000Ͳ$8,000x12)/[$250Ͳ($150+$10)] =5,600units 15 Illustration1
EffectofChangesinCostsonBreakevenPoint
•Itdoesnotmeanthattheproposedscenario isbetterthantheoriginalscenariobecauseof lowerbreakevenpoint. •Italldependsontheactualsalesvolume. •Forexample,ifthesalesvolumeis10,000 units,theprofitintheoriginal scenariowillbe $400,000(10,000x$100Ͳ$600,000)while thatinproposedscenarioitwillonlybe $396,000(10,000x$90- $504,000). 16 EffectsofChangesinCosts,SellingPrice
andUnitsSoldontheProfit 17 Illustration2
EffectsofChangesinCostsandUnitsSoldontheProfit
•Acompanyproducesandsellsasingle product.Inthecurrentyear,20,000unitswill besoldat$50each.Thefixedcostis$300,000 andtheprofitis$100,000. •Thecompanyisconsideringspending$30,000 tolaunchapromotioncampaigninthenext yeartoboostthesalesvolume by5%. •Thesellingpriceandotherfixedoverheadwill keepconstantoverthetwoyears. 18 Illustration2
EffectsofChangesinCostsandUnitsSoldontheProfit
Required1)Forthecurrentyear,calculate:
a) thebreakevenpoint inunits,and b) themarginofsafetyin% 2)Preparetheincomestatementsforboth
currentyearandnextyear. 3)Explainwhetherthepromotioncampaign
shouldbelaunched.19 Illustration2
EffectsofChangesinCostsandUnitsSoldontheProfit
1) a) Totalcontribution=$300,000+$100,000=$400,000
Contributionperunit=$400,000/20,000=$20
Breakevenpointinunits=$300,000/$20=15,000units
b) Marginofsafetyin%=(20,000Ͳ15,000)/20,000x100% =25%20 Illustration2
EffectsofChangesinCostsandUnitsSoldontheProfit
ContributionIncome
Statements
CurrentYear
NextYear
$ $ Sales($50perunit)
1,000,000
1,050,000
Variablecost($30perunit)
600,000
630,000
Totalcontribution
400,000
420,000
Less:Fixedcost
300,000
330,000
NetProfit
100,000
90,000
21
2) Illustration2
EffectsofChangesinCostsandUnitsSoldontheProfit
3) Thepromotionshouldnotbelaunchedas
itwouldlowerthenetprofit. 22
Activity1
IllustrativeIntegratedQuestion
CostͲProfitͲVolumeAnalysis
23
Question(1)
•Amanufacturingcompanyproducesandsellsa singleproduct.Theaccountanthasjustpreparedthe company'sbudgetforthecomingyear.The budgeteddataisextractedasfollows:24 Salesvolume 90,000units
Fixedcosts $440,000
Variablecostsperunit $10
Loss $80,000
Question(2)
•Thedirectorsaredissatisfiedwiththebudgetedloss andsuggestproposalsforimprovement. •DirectorAsuggestsspending$50,000onadvertising toincreasesales.Hewishestoachieveatargetprofit of$100,000. •DirectorBsuggestsreducingsellingpriceby$1per unittoincreasesales.Heexpectsthatthesales volumewouldincreaseby80%. •DirectorCsuggestsbuyingamoreefficientmachine whichwouldreduceunitvariablecostsby50%.The usefullifeofthemachineis1year. 25
Question(3)
Requireda)ForDirectorA'sproposal,whatisthepercentage increaseinsalesrequiredtoachievethetarget profit? b)ForDirectorB'sproposal,whatwouldbetheprofit orloss? c) ForDirectorC'sproposal,whatwouldbethe maximumcostofthemachineforbreakeven?26 Answers
a) 50% b) Profit$46,000 c) $370,00027 ByGraph- BreakevenChart
28
0 Activity (Sales units)Sales revenue/Costs
Total costs
Variable
costs Fixed
costs Profit
Loss Profit
SalesFixed
costs Break-even
point ByGroup- ContributionGraph
29
0 Total costs
Profit
Loss Profit
Sales Contribution
Activity (Sales units)Sales revenue/Costs
Break-
even point Fixed
costs Variable costs
ByGraph-ProfitͲVolumeGraph
30
0 Profit / Loss ($'000)
LossProfit
Break-even
point Fixed
costs Profit
Contribution
Activity
(Sales units) BreakevenPointforSalesMix
Whenacompanyproducesmultipleproducts,it
isassumedthattherelativecombinationofthe productssold(salesunits)willbeconstant.31 Illustration3
BreakevenPointforSalesMix
•ProductXandProductYaresoldinsalesmixof3:1. Detailsaboutthetwoproductsare:
•Thefixedcostis$30,000. •Whatisthebreakevenpointinunitsanddollars?32 ProductX
ProductY
Sellingpriceperunit
$5 $10 Variablecostperunit
$4 $3 Unitcontribution
$1 $7 Illustration3
BreakevenPointforSalesMix
Since1standardbatchconsistsof3unitsofproductX
and1unitofproductY,thebreakevenpointis9,000 unitsofproductXand3,000unitsofproductY . 33
Breakevenpoint(in$)34
Sales $ ProductX:9,000x$5
45,000
ProductY:3,000x$10
30,000
Breakevenpoint
75,000
Illustration3
BreakevenPointforSalesMix
Alternatively,thebreakevenpointin$canbe
calculatedbyusingthecontributionmargin ratio: Contributioninstandardsalesmix
=$1x3+$7x1=$10 Sellingpriceinstandardsalesmix
=$5x3=$10x1=$2535 Illustration3
BreakevenPointforSalesMix
•Hence,thecontributionmarginratiois •Thebreakevenpointin$is36 Illustration3
BreakevenPointforSalesMix
•Continuewithillustration3.Asthemarketing managerobservesthatProductYismore profitable,heisconsideringspending additional$5,000onmarketingcampaignto boostthesalesofProductY.Itisestimated thatsalesvolumeofProductYcanbe increasedby1/3. •HowmanyunitsofProduct Xshouldbesold
atleastinordertoachievebreakeven? 37
Illustration4
EffectofChangeinExpensesonSalesMix
$ Originalfixedcost
30,000
Marketingexpenses
5,000 ContributionfromProductY($7x3,000x4/3)
(28,000) Uncoveredfixedcost
7,000 38
Illustration4
EffectofChangeinExpensesonSalesMix
Hence, number of units of Product X to be sold for achieving breakeven = AssumptionsofCͲVͲPAnalysis
•Sellingpriceperunitandvariablecostperunit areconstant. •Fixedcostperperiodisconstant. •Productionunitsequalsalesunits. •Asingleproductissoldorthesalesmixis constant.39 LimitationsofCͲVͲPAnalysis
•Unitsellingpricemayvary,e.g.duetobulk discountsofferedtocustomers. •Unitvariablecostsperunitmayvary,e.g.due toeconomiesofscalesorovertimepremium etc. •Fixedcostsmaychangeatdifferentlevelsof activity,e.g.stepcosts,i.e.indifferent relevantranges,thefixedcost willvary. 40
CostClassification&Items
41
42
RelevantCostvs.IrrelevantCostRelevantCostRelevantCost Costthatwillbe
changedbya decisionCostthatwillbechangedbya decisionIrrelevantCost IrrelevantCost
Costthatwillnotbe
changedbya decisionCostthatwillnotbechangedbya decision 43
RelevantCosts
IncrementalCostIncrementalCost
Additionalcostwhich
willbespecifically incurredbecauseofa decisionAdditionalcostwhich willbespecifically incurredbecauseofa decision OpportunityCostOpportunityCost
Benefitwhichwillbe
forgonewhenthe choiceofonecourseof actionrequiresan alternativecourseof actionbegivenupBenefitwhichwillbe forgonewhenthe choiceofonecourseof actionrequiresan alternativecourseof actionbegivenup 44
IrrelevantCost
SunkCostSunkCost
Costofaresource
alreadyacquiredand areunaffectedby choicebetween alternativesCostofaresource alreadyacquiredand areunaffectedby choicebetween alternatives CommittedCostCommittedCost
Costwhichhasbeen
committedalthoughit hasnotbeenincurred orpaid.Costwhichhasbeen committedalthoughit hasnotbeenincurred orpaid. 45
MaterialCost:
HowRelevant?
46
Illustration5
MaterialCost:HowRelevant?
•Ajobrequires1,000unitsofmaterialXwhich havealreadybeenintheinventory. •Theywerepurchasedatacostof$8perunit. •Thematerialscanbesoldatanetrealizable valueof$12perunit. •Itcanalsobeused inanotherjobassubstitute for1,500unitsofmaterialYofwhichthe currentpurchasingpriceis$10. 47
Illustration5
RelevantCostforMaterialX
48
Analysis:
•Theoriginalpurchase priceofmaterialXis irrelevantsinceitisa sunkcost •Theopportunitycost wouldbethehigherof NRVorCostingSavings,
i.e.$15,000 •Therefore,therelevant costofmaterialXis $15,000Analysis: •Theoriginalpurchase priceofmaterialXis irrelevantsinceitisa sunkcost •Theopportunitycost wouldbethehigherof NRVorCostingSavings,
i.e.$15,000 •Therefore,therelevant costofmaterialXis $15,000 Labour Cost:
HowRelevant?
49
Illustration6
Labour Cost:HowRelevant?
Acompanyhasbeenofferedaspecialorder
whichrequires1,000directskilledlabour hours at$400perhour.Becauseoffullcapacityand limitedsupply,thedirectskilledlabour hours havetobedivertedfromexistingproductionof 500unitsofProductXwhichgivescontribution
of$300 perunit. 50
Illustration6
Labour Cost:HowRelevant?
RelevantCostsforDirect
Labour
$ IncrementalCost($400x1,000)
400,000
ContributionLost($300x500)
150,000550,000
51
ShortͲTermBusinessDecisions
52
FactorstoConsiderinBusiness
DecisionMaking
•Quantitativefactors:costvs.benefitanalysis inmonetaryterms. •Qualitativefactors:socialresponsibility, corporategoodwill,employeemoraleetc.53 Concentratethisinthiscourse
54
AcceptorReject
anOrderata SpecialPrice
55
AcceptorReject
anOrderata SpecialPrice
56
AcceptorReject
anOrderata SpecialPrice
Illustration7
AcceptorRejectanOrderataSpecialPrice
Afirmcurrentlymakes50,000unitsofproductper
annumandsellsat$30each.Theoperating statementisasfollows:57 $ Sales(50,000x$30)
1,500,000
Less:Materials
(500,000) Labour
(680,000) Contribution
320,000
Less:FixedCosts
(200,000) NetProfit
120,000
Illustration7
AcceptorRejectanOrderataSpecialPrice
Acustomeroffersanorderfor10,000unitsat
sellingpriceof$28each. Iftheorderisaccepted:
•Fixedcostwouldincreaseto$250,000. •Extralabour wouldberequiredatovertime premiumof20%. •4%discountwouldbeobtainedforallmaterials.58 Illustration7
AcceptorRejectanOrderataSpecialPrice
CostͲBenefitAnalysisforAccepting
$ IncrementalBenefitsIncreaseinsalesrevenue(10,000x$28) 280,000
Savingsinmaterialcostforexistingproduction(500,000x4%) 20,000
300,000
IncrementalCostsMaterialcostforadditionalproduction($500,000/50,000x10,000x96%) 96,000
Labour costforadditionalproduction($680,000/50,000x10,000x120%) 163,200
Increaseinfixedcost($250,000Ͳ$200,000)
50,000
309,200
Decreaseinnetprofit
9,200 59
Illustration7
AcceptorRejectanOderataSpecialPrice
•Conclusion:Astheincrementalbenefitisless thantheincrementcost,theordershouldbe rejected. 60
61
HireorNotHire
62
HireorNotHire
63
HireorNotHire
Illustration8
HireorNotHire
•Acompanycurrentlyproduced1,000unitsof productXpermonthatunitvariablecostsof $50. •ProductXwassoldat$120perunit. •Thecompanyisconsideringhiringan additionalmachinewhichcanreducetheunit variablecoststo$48andincrease production by20%. •Themonthlyhirechargeis$200,000. 64
Illustration8
HireorNotHire
CostͲBenefitAnalysisforHiring
$ Savingsinvariablecostsforexistingproduction
[($50Ͳ$48)x1,000] 2,000 Increaseincontributionfromadditionalproduction
[($120Ͳ$48)x(1,000x20%)] 14,400
Increaseincontribution
16,400
Less:Hirecharge
20,000
Decreaseinprofit
3,600 65
Illustration8
HireorNotHire
•Conclusion:Sincehiringwouldleadtoa decreaseinprofit,itshouldnotbehired. 66
67
MakeorBuy
68
MakeorBuy
69
MakeorBuy
Illustration9
MakeorBuy
•Acompanyrequires800unitsofcomponentXspecificallyfor asingleorderandisconsideringmakingthecomponents itselforbuyingthemfromoutsidesupplier. •Inmaking,itrequires$3,000materials,100labour hoursat hourlyrateof$28tobedivertedfromotherteamswhichare idlebutcannot befiredbecauseoftheemploymentcontract. •Ifthecompanymakesthecomponentsitself,theexisting productionofproductYwillfallby100units.ProductY providesacontributionof$8perunit. •Thecomponentsaresoldatamultipleof1,000unitsat $4,500per1,000units.Anyexcess ofthedemandcanbereͲ soldatapriceof$1perunit. 70
Illustration9
MakeorBuy
RelevantCostforMaking
$ Materials
3,000 Contributionlost($8x100)
800
TotalRelevantCost
3,800 71
Since the labour is idle, the cost is irrelevant.
Illustration9
MakeorBuy
RelevantCostforBuying
$ Purchasecost
4,500 ReͲsaleofexcess[(1,000Ͳ800)x$1]
(200) TotalNetRelevantCost
4,300 72
Illustration9
MakeorBuy
•Conclusion:Sincetherelevantcostformaking islowerthanthatofbuying,thecomponents shouldbemade. 73
74
Retainor
Replace
Equipment
75
Retainor
Replace
Equipment
76
Retainor
Replace
Equipment
Illustration10
RetainorReplaceEquipment
Acompanyisconsideringreplacinganoldmachine
withanewone.Detailsabouttheoldmachineandthe newmachineareasfollows:77 OldMachineOriginalCost
$1,000,000 Depreciatedamount
$800,000 Remainingusefullife
3years
Currentdisposalvalue
$10,000 Disposalvalueafter3years
Nil Illustration10
RetainorReplaceEquipment
NewMachineCurrentpurchasecost
$300,000 Usefullife
3years
Disposalvalueafter3years
$60,000 78The new machine can reduce operating costs
by $80,000 per annum. Illustration10
RetainorReplaceEquipment
CostͲBenefitAnalysisforReplacement
$ IncrementalBenefitsofReplacementTotalcostssaving(3x$80,000) 240,000
Disposalvalueofnewmachineafter3years
60,000
Currentdisposalvalueofoldmachine
10,000
310,000
Less:IncrementalCosts
Purchasecostofnewmachine
(300,000) NetIncrementalBenefitsofReplacement
10,000
79
Note: Time value of money is ignored.
Illustration10
RetainorReplaceEquipment
•Conclusion:Sincereplacementwouldmakea netincrementalbenefit,itshouldbereplaced. 80
81
SellorProcess
Further
82
SellorProcess
Further
83
SellorProcess
Further
Illustration11
SellorProcessFurther
•AcompanyisconsideringwhethertoprocessasemiͲ finishedproductwhichhasbeenproducedattotal variablecostof$60,000andcanbesoldat$100,000. •IfthesemiͲfinishedproductisfurtherprocessedto makeitafinishedproduct,itcanbesoldat $220,000.Thecostsinvolved intheprocessareas follows: 84
$ Directmaterials
150,000
Directlabour
10,000
Overheads
180,000
Illustration11
SellorProcessFurther
•Contracthasbeensignedforthepurchaseofthe $150,000materials.Thematerialsareforspecial purposeandcannotbeusedinanotheralternative. Ifitisnotused,itcanbesoldat$30,000.
•Overheadsinclude$70,000specifictofurther processandallocatedgeneraloverheadsof $110,000. •Thefinished productafterthefurtherprocesscanbe soldat$220,000. 85
Illustration11
SellorProcessFurther
$ IncrementalBenefitsfromFurtherProcessingIncreaseinsalesrevenue($220,000Ͳ$100,000) 120,000
RelevantCoststoCompletionDirectmaterials
30,000
Directlabour
10,000
Overheads
70,000
110,000
NetIncrementalBenefits
10,000
86
Illustration11
SellorProcessFurther
•Conclusion:Sincethebenefitoffurther processingisgreaterthanthecosts,further processingisrecommended. 87
88
Eliminate or
Retain an
Unprofitable
Segment
89
Eliminate or
Retain an
Unprofitable
Segment
90
Eliminate or
Retain an
Unprofitable
Segment
Illustration12
EliminateorRetainanUnprofitableSegment
ACompanyhastwodepartmentsproducingproductsX
andYrespectively.Thebudgetedoperatingstatement forthecomingyearissummarizedasfollows: Ofthetotalcost70%isvariable,10%isspecificfixed
and20%isgeneralfixed.91 ProductX
ProductY
$ $ Sales 60,000
100,000
Less:TotalCost
70,000
80,000
NetProfit/(Loss)
(10,000) 20,000
Illustration12
EliminateorRetainanUnprofitableSegment
ContributionIncomeStatement
ProductX
ProductY
Total $ $ $ Sales 60,000
100,000
160,000
Less:Variablecost(70%oftotalcost)
49,000
56,000
105,000
Contribution
11,000
46,000
55,000
Less:Specificfixedcost(10%oftotalcost)
7,000 8,000 15,000
4,000 36,000
40,000
Less:Generalfixedcost(20%of$150,000)
30,000
Netprofit
10,000
92
Illustration12
EliminateorRetainanUnprofitableSegment
•Conclusion:Sincethedepartmentproducing productXmakescontribution,itshouldbe retained.Ifitiseliminated,theprofitwillbe only$6,000insteadof$10,000. 93
Activity2
IntegratedIllustrativeQuestion
94
Question(1)
Amanufacturingcompanyhasbeenaskedtoquotefor
aoneͲoffjobwhichwouldrequirethefollowing resources: MaterialA1,000kgwouldberequired.Thematerialisused
regularlyinotherjobs.Currentlythereare4,000kgin theinventorywhichwaspurchasedat$8perkg.Itcan besoldat$7ifnotused.Thecurrentreplacementcost is$9perkg.95 Question(2)
MaterialBorMaterialC100kgwouldberequired.MaterialBisnotinthe inventoryandhastobeorderedatacurrentpriceof $15perkg.However,materialCcanbeusedto substitutematerialB.MaterialCisininventoryandhas beenpurchasedatacostof$20perkg. Itwas specificallypurchasedforuseinaproductlinewhich hasnowbeendiscontinued.Itcanbesoldatanet realizablevalueof$8perkg.Ifitisusedtosubstitute materialB,additionalconversioncostof$6perkghas tobeincurred. 96
Question(3)
SkilledlabourDirectskilledlabour costforthejobwouldbe$40,000. Skilledlabour isinshortsupply.Iftheworkersworkfor
thisjob,theycannotworkforanotherjobwhichwould makeatotalcontributionof$5,000.97 Question(4)
UnskilledlabourUnskilledlabour receivingpaytotaling$16,000willbe transferredfromanotherdepartmentwhichwillrecruit additionallabour atatotalcostof$17,000including payandrecruitmentcosts.98 Question(5)
Machinehours50machinehourswouldberequired.Amachine currentlylyingidlewillbeusedinthejob.Detailsabout themachineryareasfollows: Ifthemachineisnotused,themachinehourscanbe
hiredfromaleasingcompanywhichcharges$1,000 perhour.99 Depreciationduetouse $10,000
Currentnetrealizationvalue $240,000
Estimatednetrealizablevalueafteruse $200,000
Question(6)
RequiredCalculatetheminimumpricethatshouldbe
quotedforthejob.100 Answer
RelevantCosts
$ MaterialA
9,000 MaterialC
1,400 Skilledlabour
45,000
Unskilledlabour
17,000
Machinehours
40,000
112,400
101
FurtherReadings
Burgstahler,D.,Horngren,C.,Schatzberg,J.,Stratton,W.,&Sundem, G.(2008).IntroductiontoManagementAccounting,14thed. UpperSaddleRiver:PrenticeHall.Chapters2&5Ͳ6.
Drury,C.(2008).ManagementandCostAccounting,7thed.London: SouthͲWesternCengage Learning.Chapters8Ͳ9&11Ͳ12. Horngren,C.T.,Datar,
S.M.,Foster,G.,Raian,M.&Ittner,C.(2009).
CostAccounting:AManagerialEmphasis,13thed.UpperSaddle River:PrenticeHall.Chapters3&11.
Lucey,T.(2009).Costing,7thed.London:SouthͲWesternCengage Learning.Chapters17&20Ͳ21.
102