SHORT TERM DECISION - RELEVANT COSTING TUTORIAL 3 (Unit 2)

Question 1

Materials

• Sable Chemicals (Pty) Ltd manufactures various types of fertilizers which it sells farmers local
around the Free State Province. The company has been asked to quote a price for a once-off
contract to supply a special type of fertilizer called diammonium phosphate (DAP). DAP is
produced from ammonia and phosphoric acid.

• The contract requires 3 500kgs of ammonia, which Sable Chemicals uses regularly to
produce other fertilizers. There are currently 1 800kgs of ammonia in inventory and this
quantity was bought last month at a total cost of R4 500. Since then, the price of ammonia
has increased by 8%. The contract also requires 3 000kgs of phosphoric acid. There are
currently 3 200kgs of phosphoric acid in inventory which is not required for normal
production. The phosphoric acid was purchased at a total cost of R8 960. If not used in the
current contract, the inventory will be scrapped at R2.75per kg less selling costs of R0.50 per
kg.

Labour

• The contract will require 900 minutes of skilled labour which is currently remunerated at
R180 per hour. There is currently a shortage of skilled labour and all available skilled labour
is fully employed in the company in the manufacture of ammonium nitrate fertiliser. The
current selling price and variable costs for a 50kg bag of ammonium nitrate are as follows:

Selling price R335.00

Materials (R88.00)

Skilled labour (R36.00)

Other variable cost (R40.00)

• The other order-specific variable costs are estimated at R2 875.

Required

• Prepare on a relevant cost basis, the lowest cost estimate that would be used as the basis
for a quotation for the contract. (12 marks)
Question 2 (23 Marks)

Mbulaheni decided to take her girlfriend (Tshifhiwa) who they dated for 1 year out on a special
occasion on valentine to Mpumalanga (Hazy View) – 14 February 2019. Background – Mbulaheni is a
garden specialist.
The following costs were incurred by Mbulaheni:

1. Car (AMG),which was bought on the 1st of February 2017.

a. Installment : R10 000
b. Car Insurance: R3 000
c. License disk: R200
d. Petrol to Mpumalanga : R1000
e. Tollgate: R100
f. Car cost (2 years back when bought) :R500 000
g. Car depreciation :R15 000
2. Additional Cost incurred by Mbulaheni
a. Mbulaheni has an obligation which started from the 2nd month of dating to give
Tshifhiwa R500 for personal use (DIZA Money)
b. Tshifhiwa requested Mbulaheni to give her R4000 (including the R500) for this
special occasion (EXTRA DIZA):
i. Brazilian hair
ii. Nails
iii. Cosmetics
iv. Airtime to call at home during the vacation
v. Attire (Shoes etc.)
c. Mbulaheni went to Woolies and buy
i. chocolates for R500 (Valentine special)
ii. Nice bunch of valentine roses : R1000
iii. Romantic bottle of wine : R150
3. Mbulaheni called the insurance company about the place where he will be during Valentine,
due to the high risk of accident zone on Mpumalanga road. Insurance company added an
increase of 10% on insurance premium just for this travel.
4. Mbulaheni paid R1200 for accommodation for this special occasion and a further R1800 on
entertainment while at Mpumalanga.
5. Mbulaheni as a garden specialist , bought a bunch of valentine flowers from one of his
supplier at a special price of R500 (assumed variable cost) . This was because the school
mates requested to supply them with roses on valentine day since he has a good taste when
it comes to flowers. He promised to sell each rose for R10. There were 65 students who
requested the roses. Due to the trip to Mpumalanga, Mbulaheni was not able to sell those
flowers. The students were so disappointed since they tried to call him and he never pick up
his cell since was worried that Tshifhiwa might think he is cheating. He didn’t even bother to
send them messages of apology or at least to inform that he will no longer fulfill his promise.
The 65 students decided to go to Thavhani mall and buy those roses.

Required:

a) Prepare relevant cost for Mbulaheni on this special occasion (15 Marks)
b) What are non-financial factors (Qualitative aspects) to be considered (5 Marks)
c) Discuss any ethical issues by Mbulaheni (3 Marks)
Question 3 (15
Marks)
Mr Shavhani has been asked to quote a price for a special contract. He has already prepared his
tender but has asked you to review it for him. He has pointed out to you that he wants to quote the
minimum price as he believes this will lead to more lucrative work in the future.

Mr Shavhani’s tender
R
Material: A 2 000 kgs @ R10 per kg 20 000
B 1 000 kgs @ R15 per kg 15 000
C 500 kgs @ R40 per kg 20 000
D 50 litres @ R12 per litre 600
Labour: Skilled 1 000 hrs @ R25 per hr 25 000
Semiskilled 2 000 hrs @ R15 per hr 30 000
Unskilled 500 hrs @ R10 per hr 5 000
Fixed overheads 3 500 hrs @ R12 per hr 42 000
Costs of preparing the tender:
Mr Shavhani's time 1 000
Other expenses 500
Minimum profit (5% of total costs) 7 725
———
Minimum tender price 166 825
———
Other information :
Material A
 1 000 kgs of this material is in stock at a cost of R5 per kg.
 Mr Shavhani has no alternative use for his material and intends selling it for R2 per kg.
 However, if he sold any he would have to pay a fixed sum of R300 to cover delivery costs.
 The current purchase price is R10 per kg.
Material B
 There is plenty of Material B in stock and it cost R18 per kg.
 The current purchase price is R15 per kg.
 The material is constantly used by Mr Shavhani in his business.
Material C
 The total amount in stock of 500 kgs was bought for R10,000 some time ago for another
one-off contract that never happened.
 Mr Shavhani is considering selling it for R6 000 in total or using it as a substitute for another
material, constantly used in normal production.
 If used in this latter manner it would save R8 000 of the other material.
 Current purchase price is R40 per kg.
Material D
 There are 100 litres of this material in stock.
 It is dangerous and if not used in this contract will have to be disposed of at a cost to Mr
Shavhani of R50 per litre.
 The current purchase price is R12 per litre.
Skilled labour
  Mr Shavhani only hires skilled labour when he needs it.
 R25 per hour is the current hourly rate.
Semiskilled labour
 Mr Shavhani has a workforce of 50 semiskilled labourers who are currently not fully utilised.
 They are on annual contracts and the number of spare hours currently available for this
project are 1 500. Any hours in excess of this will have to be paid for at time-and-a-half.
 The normal hourly rate is R15 per hour.
Unskilled labour
 These are currently fully employed by Mr Shavhani on jobs where they produce a
contribution of R2 per unskilled labour hour.
 Their current rate is R10 per hour, although extra could be hired at R20 an hour if necessary.
Fixed overheads
 This is considered by Mr Shavhani to be an accurate estimate of the hourly rate based on his
existing production.
Costs of preparing the tender
 Mr Shavhani has spent 10 hours working on this project at R100 per hour, which he believes
is his charge-out rate.
 Other expenses include the cost of travel and research spent by Mr Shavhani on the project.
Profit
 This is Mr Shavhani’s minimum profit margin which he believes is necessary to cover 'general
day-to-day expenses of running a business'.

Required:
Calculate and explain for Mr Shavhani what you believe the minimum tender price should be.