Question

A company in the civil engineering industry with headquarters locate in Accra undertakes contract anywhere in Ghana

The company has had its tender for a job in Kumasi Accepted for GHS 288,000 and work is due to begin in June 2020. However, the company has also been asked to undertake a contract on the Coast of Accra. The price offered for this contract is GHS 352,000. Both of the contracts cannot be undertaken simultaneously because of constraints on staff site management personnel and on plant available. An escape clause enables the company to withdraw from the contract in Accra, provided notice is given before the end of April, 2020 and an agreed penalty of GHS 28,000 is paid.

The company’s quantity surveyor has submitted the following estimates

Cost Estimates
	Kumasi	Coastal Accra
	GHS	GHS
Materials:
In inventory at original cost, Material X	21,600
In inventory at original cost, Material Y		24,800
Firm orders placed at original cost, Material X	30,400
Not yet ordered - Current cost, Material X	60,000

Not yet ordered - Current cost, Material Z			71,200
Labour - hired locally		86,000	110,000
Site management		34,000	34,000
Staff accommodation and travel for site management		6,800	5,600
Plant on site - depreciation		9,600	12,800
Interest on capital		5,120	6,400
Total local contract cost		253,520	264,800
Headquarters cost allocated at 5% to total contract
cost		12,676	13,240
Contract Cost		266,196	278,040
Contract Price		288,000	352,000
Estimated Profit		21,804	73,960

Additional Information:

1. X, Y and Z are three building materials. Material X is not in common use and would not realize much money if re-sold; however, it could be used on other contracts but only as a substitute for another material currently quoted at 10% less than the original cost of X. The price of Y a material in common use has doubles since it was purchased; it net realizable value if resold would be the new price less 15% to cover the disposal cost. Alternatively, it could be kept for use on another contract in the following year.

2. With the construction industry not yet recovered from the recent recession, the company is confident that manual labour, both skilled and unskilled could be hired locally on a sub-contract basis to meet the needs of each of the contracts

3. The plant, which would be needed for the Coast of Accra contract, has been owned by for some years and GHS 12,800 is the year’s depreciation on a straight-line basis. If the Kumasi contract is undertaken , less plan will be required but the surplus plant will be hired out for the period of the contract at a rental of GHS 6,000

4. It is the company’s policy to charge all contracts with nominal interest at 8% on estimated working capital involved in contracts. Progress payments would be made receivable from the contractee

5. Salaries and general cost of operating the small headquarters amount to about GHS 108,000 each year. There are usually ten contracts being supervised at the same time

6. Each of the two contracts is expected to last from June 2020 to December 2020 which, coincidentally is the company’s financial year

7. Site management is treated as a fixed cost

Required:

As a management accountant to the company, present comparative statements to show the net benefit to the company for undertaking the more advantageous of the two contracts.

Explain the reasoning behind the inclusion and omission from your comparative financial statement for each item given in the cost estimates and the notes relating thereto

Answer 1

Comparative statement is shown below:

The penalty fees and loss on X is included in computation of profit from the coastal acrra contract while the rental equipment is included in the Kumasi contract. All the other items given are included in the comparitive statement as they are necessary for the comparison of the two projects.

Based on the above computation the Coastal Acrra contract should be preferred as the net profit for this contract is higher than the other contract.