Question

1. Coniston is preparing to quote a price for a one-off contract and you have been asked to advise on the contract price.

The contract requires 2,500 kg of material A, which is used regularly by the company. The company has 2,000 kg of material A in stock, which had been purchased the previous month for a total cost of £16,000. Since then the price per kg of material A has increased by 10%.

The contract also requires 150 kg of material B. There are 200 kg of material B in stock which are not required for normal production. This material originally cost a total of £2,750. If not used on this contract, the stock of material B would be sold for £10 per kg.

The contract requires 600 hours of skilled labour. Skilled labour is paid £8.00 per hour. There is a shortage of skilled labour and all the available skilled labour is fully employed in the company in the manufacture of product C. The selling price of product C is £80 per unit, with skilled labour costing £32 per unit and other variable costs of £18 per unit.

In order to complete the contract, a member of the finance team will be required to work 6 hours overtime. The individual’s annual salary is £30,000 per annum and they work a 37.5 hours per week. Overtime is paid at a rate of £16 per hour. Alternatively, an experienced contract accountant can be hired to administer the project in 75% of the time it would take the finance department member to complete. The contractor’s rate is £25 per hour. It took the member of the finance team 4 hours to put together the information for this quote and no overtime was required.

You are required to:

1. Calculate the relevant cost of using material A in the contract.                                        
2. Calculate the relevant cost of using material B in the contract.                                    
3. Calculate the relevant cost of using skilled labour in the contract.                               
4. The relevant cost of the finance department that should be included in the contract.                                                                                                                                                                                                 
5. Indicate for each of the statements below whether the statement is true or false and briefly explain your answer.

1. Sunk costs can never be a relevant cost for the purpose of decision-making.                                                                                                                                                                                         
2. If Coniston charges the minimum price for a product or service, based on relevant costs, it will not improve its overall profitability.                                                               

2. Shilton has a sales budget of 400,000 units for the coming year, based on 20% of the total market. On each unit, Shilton makes a profit of £3. Actual sales for the year were 450,000 units, but industry reports showed that the total market volume had been 2.2 million.

You are required to:

1. Find the traditional sales volume variance.                                                                                      
2. Split this into market size and market share (planning and operational) variances.                                                     
3. Analyse the result, ensuring that you consider the relative importance of sales variances when comparing actual to budgeted results.                                                                               

Critically comment on the part that variance analysis can play in dealing with performance appraisals of managers.                                                                                                                

Answer 1