Relevant Costing

Hello Sir,

I would like to ask the note 3, why the relevant cost will only include 12,000 outsource (opportunity cost) and (2,400 hours X $12/hour) =28,800 ? (as to what I saw in ACCA BPP revision kit answer) Why the 800 hours skilled work done by the lead designer does not include as relevant costing?

John Robertson, a self employed builder, has been asked to provide a fixed price quotation for some building work
required by a customer. Robertson’s accountant has compiled the following figures, together with some notes as a
basis for a quotation.
$
Direct materials
Bricks 200,000 at $100 per thousand 20,000 note 1
200,000 at $120 per thousand 24,000

Other materials 5,000 note 2

Skilled 3,200 hours at $12 per hour 38,400 note 3

Unskilled 2,000 hours at $6 per hour 12,000 note 4

Notes
(1) The contract requires 400,000 bricks, 200,000 are already in inventory and 200,000 will have to be bought
in. This is a standard type of brick regularly used by Robertson. The 200,000 in inventory were purchased
earlier in the year at $100 per 1,000. The current replacement cost of this type of brick is $120 per 1,000. If
the bricks in inventory are not used on this job John is confident that he will be able to use them later in the
year.
(2) Other materials will be bought in as required; this figure represents the purchase price.
(3) Robertson will need to be on site whilst the building work is performed. He therefore intends to do 800 hours of the skilled work himself. The remainder will be hired on an hourly basis. The current cost of skilled workers is $12 per hour. If John Robertson does not undertake the building work for this customer he can either work as a skilled worker for other builders at a rate of $12 per hour or spend the 800 hours
completing urgently needed repairs to his own house. He has recently had a quotation of $12,000 for labour to repair his home.

(a) Explain how each item in the accountant’s estimate should be treated (6 marks)
(b) Using relevant costing principles, calculate the lowest price that John could quote for the customer’s
building work. Explain why in practice the minimum price is never actually used. (10 marks)
(c) Discuss the advantages and disadvantages of full cost-plus pricing. (4 marks)
(Total = 20 marks)