Revision question on relevant costing principles (NBAA May 2019)



The Selefa ltd is a company specializing in the provision of CCTV camera systems for commercial clients. There are two parts of the business: installing CCTV camera systems in the businesses, either first time installation or replacement installations and supporting the CCTV camera systems with annually renewable maintenance contracts. Selefa ltd has been approached by potential customer, Mwangaza co who want to install CCTV camera system in its new office. Although the work will not earn big profit, Selefa ltd is hopeful of future business in the form of replacement systems and support contracts for Mwangaza co. Selefa ltd, is therefore keen to quote a competitive price for the job. The following information should be considered:

(i) One of the company’s salesmen has already visited Mwangaza co to give them a demonstration of the new system together with a complementary lunch, the cost of which is totaled TZS 400,000/=



(ii) The installation is expected to take one week to be completed and would require three technician, each of whom is paid a monthly salary of TZS 4,000,000/=. The technician have just had their annually renewable contract renewed with Selefa ltd. One of three technician has spare capacity to complete the work, but the other two would have to be moved from contract X (in order to complete this one). Contract X generate the contribution of TZS 5,000/= per technician hour. There are no other technician available to continue with contract X if these two technician are taken off the job. It would mean that Selefa ltd would miss it contractual completion deadlines on the contract X by one week. As a result, Selefa ltd would have to pay a one off penalty of TZS 500,000/=. Since there is no other work scheduled for their technician in one week time, it will not b e a problem for them to complete contract X at this point.

(iii) Selefa ltd technical advisor would also need to dedicate eight hours of his time to the job. He is working at fully capacity, so he would have to work over time in order to do this. He is paid an hourly rate of TZS 40,000/= and is paid for all overtime period at premium of 50% above his usual hourly rate.



(iv) Two visit would need to be made by the site inspector to approve the completed work. He is an independent inspector who is not employed by Selefa ltd and charges Mwangaza co directly for the work. His cost is TZS 200,000/= for each visit made.

(v) Selefa’s system trainer would need to spend one day at Mwangaza co delivering training. he is paid a monthly salary of TZS 1,500,000/= but also receives commissions of TZS 125,000/= for each day spent delivering training at a client’s site.

(vi) 120 cameras would need to be supplied to Mwangaza co. the current cost of these is TZS 18,200/= each, although Selefa ltd already has 80 camera in inventory. These were bought at price of of TZS 16,800/= each. The handsets are the most popular model on the market and frequently requested by Selefa ltd’s customers.



(vii) Mwangaza co would also need computerized control system called catch 2. The current market price of catch 2 is TZS 10,800,000/=, although Selefa ltd has an older version of the system, catch 1 in the inventory which could be modified at cost of TZS 4,600,000/=. Selefa ltd paid TZS 5400,000 for catch 1 when it ordered it in error two month ago and has no other use for it. The current market price of catch 1 is TZS 5,450,000/=, although if Selefa ltd, tried to sell the one they have, it would be deemed to be ‘used’ and therefore only worth TZS 3000000/=

(viii) 1000 meters of cable would be required to wire up the system. The cable is used frequently by Selefa ltd and it has 200 meters in inventory, which cost TZS 1200 per meter. the current market price for the cable is TZS 13OO per meter

(ix) You should assume that there are four weeks in each month and that the standard working week is 40 hours long.



Required:

  1. Prepare cost statement using relevant costing principles showing the minimum cost that Selefa ltd should charge for the contract. Make detailed notes showing how each cost has been arrived at and explaining why each of the cost above has been included or excluded from your cost statement.
  2. explain the relevant costing principles used in part (1) and explain the implications of the minimum price that has been calculated in relations to the final price agreed with Mwangaza co.

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