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Relevant costs

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Relevant costs

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.
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  • December 5, 2018 at 11:33 am #487423
    ruhusha
    Member
    • Topics: 1
    • Replies: 0
    • ☆

    Delphi plc is a national company with a centralized maintenance department that undertakes repairs on all the company’s buildings in the country. Following a recent report from the Health and Safety inspector, Delphi is now required to replace the existing wall insulation material in its company buildings.

    After the Health and Safety inspectors report was received Delphi plc commissioned a study by insulation specialists Snuggy Ltd. An invoice for £35,000 has just been received from Snuggy Ltd for this report.

    Delphi plc is unsure whether the insulation work should be completed by its own maintenance department or whether it should be subcontracted.
    If the work is to be subcontracted, a recent quote shows that the total cost, including all labour, material and disposal costs, would be £110,000.

    If the company maintenance department decides to complete the work itself the following costs would need to be considered:
    • The main insulation material which can be used for the work is already in stock and was originally purchased for £18,000. The maintenance department can make use of this insulation material on other jobs and therefore would need to replace the full amount used at a cost of £20,000.
    • More specialized insulation material would also be needed. This material is also in stock but currently has no use to the company. It could be sold for £3,000. The material was originally bought for £12,000.
    • There will be a cost of £5,000 incurred for the disposal of waste.
    • The work will require 500 hours of skilled labour and 600 hours unskilled labour from within its own workforce. Skilled labour is paid £20 per hour and unskilled £15 per hour.
    ? Skilled Labour: These staff are currently fully employed. However it is estimated that 400 hours could be found by not proceeding with another external job, this external job would generate £25 contribution per skilled labour hour. The other 100 hours could be found by paying overtime to these skilled staff at twice their normal rate.
    ? Unskilled staff: These staff are currently underutilised and if not engaged on this project would be laid off normal duties. Staff laid off are paid 60% of their normal wages.
    • The company will need to use a project manager to supervise the project. The project manager is currently employed by the company at a cost of £45,000. He is extremely busy and if he undertakes this job another project manager will need to be employed at a cost of £40,000.
    • Additional costs specifically associated with the contract are estimated at £15,000.
    • Finally, the installation of the new insulation material will require 30 staff to attend a one day training course on insulation safety procedures. It is now company policy for all 30 staff to attend the training whether the contract proceeds or not. Staff will attend the course in groups of three at a cost of £750 for all three staff.

    Required:

    Write a report for senior management which includes the following information:

    i) The relevant cost to the company of undertaking the contract themselves and advise them, based on the cost information, whether they should undertake the project themselves or sub-contract the project at the agreed cost of £110,000. You should clearly explain any assumptions you make.
    (17 marks)

    ii) Outline any other, financial or non-financial factors the council should consider before they make a decision on whether to undertake the project themselves or sub-contract it.
    (8 marks)

    December 5, 2018 at 3:28 pm #487601
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    There is absolutely no point is setting a question like this and expecting me to provide you with an answer!!

    Unless it was set you as a test question, then you must have an answer in the same book in which you found the question – so ask about whatever it is in the answer that you are unclear about and then I will explain.

    (If it was given you as a test question, then we certainly do not do your homework for you 🙂 )

    I would also point out that this question can not possibly be asked in Paper MA (F2). You cannot be asked to write reports in Paper MA, and relevant costing is not in the syllabus for Paper MA (it was removed years ago and is not asked until Paper PM, although again, you cannot be asked to write a report in Paper PM).

    My lectures are a complete free course for Paper MA and cover everything needed to be able to pass the exam well.

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