Accounting Assignment

Accounting Assignment

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. Marks will be allocated to both the calculations and the reasoning given.35%

Answer:

Direct materials

Amount

Paper

£ 12,000

Inks

£ 5,000

Direct Labour

Skilled (125 hours x £ 4 plus 125 hours x £ 5)

£ 1,125

Unskilled (216 hours x £ 3.5)

£ 406

Variable overhead (350 hours x £ 4)

£ 1,400

Printing press depreciation (200 hours x £ 2.5)

£ 500

Fixed production costs (366 hours x £ 6)

£ 2,196

Estimating department costs

£ 400

Total Cost

£ 23,027

The skilled labour is calculates by splitting the required time into two portions: the 50 % normal working hours at the rate £ 4.00, and the 50 % working hours that have to be worked in the weekends at 20 % increased rate that makes it £ 5.00. Thus, the total becomes £ 1,125.

The unskilled labour is calculated by adding 2 hours, which were given off yet paid, into the normal 8 hours working duration. This makes the total hours 116 and the total cost at the rate £ 3.5 per hour to be £ 406.

The variable overhead costs and the printing press depreciation costs stay the same. However, the fixed production cost slightly rises due to the fact that the total hours being paid for have increased. Thus, the total fixed production costs, which is £ 6.0 per labour hour absorbed, is applied at 366 hours (150 hours plus 116 hours) totalling to £ 2,196.

Similarly, the opportunity cost of accepting this order would be £ 1,098. This is because the forgone hours, which are being invested in the production of this order are totaling to 366 hours. Moreover, the contribution margin gained by hiring the printing press outside is £ 3.00 per hour. Thus, the total opportunity cost of accepting the project would be equal to £ 1,098 (i.e. 366 x £ 3.00).

The minimum price that could be accepted for this order should earn more profit than that being earned by hiring it outside. This means that the minimum price for the complete order should be no less than £ 24,125.

Explain the opportunity cost theory used in the calculation in part (a) 15%

Answer:

This is the basic principle of opportunity cost, which is the price we pay for taking a particular decision and have chosen other alternatives that might have represented a higher profit (Crawford, 2002, pp 188). The opportunity cost of an investment is the value dropped due to the realization of the same or even the cost of not making the investment. Is measured by the return expected from the funds invested in the project (or assignment of immobilization to other utilities, for example, in this case it is the loosing of the marginal profit earned by not hiring the printing press to the outside companies. This criterion is one of those used in investment choices. In principle, the yield is at least equal to the cost ...