Question

1. As the management accountant of TAR Ltd, a printing company, you have been asked to prepare a quotation for a large museum that requires a catalogue of its exhibits to be printed for sale to visitors. This is a new business sector for TAR Ltd to operate in, with much of its existing business in the local government and public sector fields. The printing manager has carried out a sample production run, and worked with existing and new suppliers, to establish the resource requirements to meet this order for catalogues. This initial work incurred a cost of £650, and has provided you with the following information. I. Two machines will be required to meet this order: i) The printing of the catalogues will be done by the printing press, and is expected to take 20 hours of machine time. The printing press currently has 30 hours of unused time every week, but that time is utilised by other printing companies paying a rate of £12 per hour. ii) Catalogues will then be bound using a binding machine, requiring 25 hours work. This machine is used at full capacity in the normal working week, so any work on it will have to be done ‘out of hours’ incurring overtime costs for labour [see point III]. The running costs of the machines are £5 per hour for the printing press and £4 per hour for the binding machine. II. i) Two materials are required for this catalogue order: 10,000 sheets of printing paper will be required. The company has 3,400 sheets of this paper in inventory, and it is in regular use. The inventory originally cost £1.40 per sheet. The current market price is £1.50 per sheet. The sheets in inventory could be sold for £1.20 per sheet. ii) A special ink is required that has a purchase cost of £8 per litre. Although the catalogue order requires 200 litres the minimum order size is 250 litres. TAR Ltd cannot foresee any further use for this ink, so will hold any surplus in inventory. The company has a policy of reviewing its inventory records regularly, and writing off the cost of any items that have not been used for six months; any write off will appear as an expense in the profit calculations in the period that the review occurs. III. Staff-related costs include direct labour and supervisory costs: i) TAR Ltd currently employs sufficient direct workers to take on this additional catalogue order, though some overtime may be required to accommodate the availability of the binding machine. Direct labour basic salary is £8 per hour, overtime is paid at a rate of £10 per hour. Employees are paid using the hourly rate, with a guaranteed minimum wage for their normal working week. The order will require 150 hours of work, of which 50 hours will Page 3 of 5 be in excess of the normal working week (to work on the binding machine), i.e. overtime hours. ii) The existing supervisor will take responsibility for the catalogue order in addition to her existing duties since she has the capacity to absorb this work. Her basic salary is £500 per week, and the whole order is expected to be completed within one week. IV. There will be a £400 delivery cost incurred in transporting the completed catalogues to the customer. V. TAR Ltd uses an absorption costing system, with a fixed overhead absorption rate of £20 per direct labour hour. VI. It is standard practice in TAR Ltd to apply a 30% mark-up to costs in order to obtain a selling price, or order quotation price. TASKS (a) To assist the management of TAR Ltd in preparing their quotation for this piece of work prepare the following: i) A schedule showing the relevant costs for the production of these museum catalogues, and ii) Supporting explanations for the inclusion, or exclusion, of every resource cost relating to this order. (b) Assess FOUR non-financial factors that would need to be considered by TAR Ltd’s management team in establishing a final quotation price for this piece of work, providing an indication of how these factors could affect the final price. (c) Decisions on whether to outsource services such as payroll accounting and systems development are much like make-or-buy decisions. What factors should influence the decision on whether to outsource payroll functions?

Answer 1

i) a Costs Details
Direct Material cost
Printing Paper cost
Printing paper in inventory (pcs)	3,400
Printing paper required to be purchased (pcs)	6,600
Rate per unit of paper in inventory (£)	1.20
Rate per piece of paper in market (£)	1.50
Total Paper cost (£)	13,980
Special Ink cost
Ink required (ltr)	250
Rate per litre (£)	8
Total Ink cost (£)	2,000
Total Direct Material cost (£)	15,980
Direct Labour cost
Normal work hours required (hrs)	100
Normal labour rate per hour (£)	8
Overtime work hours required (hrs)	50
Overtime rate per hour (£)	10
Total Labour Charges (£)	1,300
Manufacturing overhead
Costs required for printing press
No of hours required (hrs)	30
opportunity cost per hour (£)	7
Total cost for printing (£)	210
Costs required for Binding
No of hours required (hrs)	25
Rate per hour (£)	4
Total cost for binding (£)	100
Total Machine costs required (£)	310
Fixed overhead costs
Number of Direct Labour hours	100
Rate per direct labour hour	20
Total Fixed Overhead	2000
Delivery Expenses (£)	400
Total Costs (£)	19,990
Add: Markup (30%) (£)	5,997
Total price to be quoted for order	25,987

i) For Printing paper costs lying in inventory rate of (£) 1.20 should be used since the material needs to be consumed further, replacement costs and current market price is inappropriate

ii) Supervisor charges are not included since the expenses is required to be incurred irrespective of the catalogue order

iii) Ink though required was 200 ltrs but since the remaining ink is of no use it needs to be expensed and same should be considered here

iv) Expenses of manager to find out the requirement for the order should not be included since it’s a sunk costs