Case Study – 4
Awtab Steel Structure LLC, is one of the leading
"Pre-Engineered Steel Building Company" in Sultanate of Oman. The
Company uses latest automatic equipment in plant to produce better
steel buildings for the clients. The Company received a special
Pre- Engineered Steel Building project from a customer and the cost
accountant provided the following cost estimates for fixing the
price of the project.
Direct Materials :
Steel Frames @ RO 2000 per Kg
Metal Roof Sheets @ RO 15 per Square meter Direct Labour
:
Civil Engineering @RO 40 per hour Unskilled Labour @ RO 10 per
hour Variable Overheads
Fixed Overheads
TOTAL COST
(RO)
800,000 450,000
200,000 75,000 250,000 125,000
1,900,000
The Chairman of Awtab Steel Structure LLC asked your opinion
about the cost estimates on which price of the project has to be
prepared. You have reviewed the cost data and found that :
i) 300 Kgs of steel frames are readily available in the
company, which was purchased at RO 2000 per Kg. However, steel
frames are regularly used in other projects. The steel frames are
readily available in the market at RO 2050 per Kg. The realisable
value is RO 1900 per Kg.
ii) 2000 square meters of metal roof sheets are in stock,
which was purchased in the past at a price of RO 15 per square
meter. However, metal roof is one of the raw material used in all
the construction projects. The realisable value is RO 14 per square
meter and the current market price is RO 16 per square meter
iii) The Civil Engineers are paid at the rate of RO 40 per
hour. All the civil engineers are currently engaged in other
construction projects. If this project is accepted, the civil
engineers need to be diverted from other products, which will
result in delay in completion of the projects as a result of which
the
company will suffer with a loss of RO 90,000.
iv) The unskilled labour need to be hired from the market at
the rate of RO 10 per
hour.
v) Variable Overheads are charged at the rate of RO 50 per
civil engineering
hour.
vi) Currently, the fixed overheads incurred by the company
amount to RO 75,000.
vii) The Company generally adds a Mark-Up of 25% on these type
of projects.
You are required to
(a) estimate the price for the project if relevant costing
principles are applied.
(b) present a report to the management of the
company the reasons for the differences if any between the cost
estimates made using relevant costing principles and initial cost
estimates.