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Homework answers / question archive / Walitato (Pty) Ltd has been offered a contract which, if accepted, would significantly increase next year's activity levels
Walitato (Pty) Ltd has been offered a contract which, if accepted, would significantly increase next year's activity levels. The contract requires the production of 20 tons of product XX and specifies a contract price of N$100 per kg. The resources used in the production of each kg of XX include: Resource per kg of xx Cost per hour Labour: Grade 1 12 hours N$4 Grade 2 16 hours N$2 Material: A 2 units B 1 litre Grade 1 labour is highly-skilled and is currently under-utilised in the firm. It is Walitato policy to continue to pay Grade labour in full. Acceptance of the contract would reduce the idle time of Grade 1 labour. Idle time payment is treated as non-production overheads. Grade 2 is unskilled labour, with a high turnover, and may be considered a variable cost. The materials required to fulfil the contract would be drawn from those materials already in stock. Material A is widely used within the firm regularly. Material B was purchased to fulfil an expected order which was not received; if material B is not used for the contract it will be sold. For accounting purposes, FIFO is used. The various values and costs for material A and B are: A B (N$) per unit (N$) per unit 8 30 Carrying value Replacement cost Net realizable value 10 32 9 25 A single recovery rate for fixed factory overheads is used throughout the firm, even though some fixed production overheads could be attributed to single products or departments. The overhead is recovered per productive labour hour, and initial estimates of next year's activity, which excludes the contract, show fixed production overheads to be N$600 000, with productive labour hours of 300 000. Acceptance of the
Required Calculate the relevant cost of labour Grade 2 related to the contract
Solution:
Relevant cost of Grade 2 labour
= 20,000 kg x 6 hours x N$2
= N$ 240,000
Explanation:
Grade 2 is high turnover labour and is not permanent.
Therefore, these type of labour has to be employed for the contract and paid Saperatly.
