Build Limited plans to start a project (Project Beta) for the forthcoming yearthat will be sold to an international corporation. Build Limited is yet to pay for the research costs to date, which total Rs. 150,000. The following additional costs have been estimated by the managing director to complete project Beta. Materials Two materials are needed for project Beta – Material A and Material B. Material A has already been purchased at a cost of Rs. 60,000. It is toxic; and if not used in project Beta, it must be disposed of at a cost of Rs. 5,000. Material B – there are 50 kgs available in inventory which has been purchased at Rs. 400 per kg. project Beta will require a total of 150 kgs of this material. The current purchase price if Rs. 450 per kg and this material is regularly used in other projects currently undertaken by Build Limited. Labour Project Beta will require skilled labour which is hard to recruit in the present situation. Workers will have to be transferred from another project (project Omega) which is currently in operation. Project Omega is expected to generate sales of Rs. 150,000 in the next year. The prime cost of these sales is expected to be Rs. 100,000, including Rs. 40,000 for the labour cost itself. The overhead absorbed into this production (project Omega) is expected to be Rs. 20,000. Monitoring team A monitoring team will be set up to ensure successful implementation of project Beta. The wages of the staff in this team are expected to be Rs. 60,000 per annum. It has already been decided that when work on project Beta ceases, the monitoring team will be made redundant. Redundancy and severance allowances are expected to be Rs. 35,000 in one year’s time. Machinery Project Beta will require a specialised machinery which cost Rs. 18,000 three years ago. It has a current disposal value of Rs. 8,000 and if used in project Beta, it is estimated that the disposal value in one year’s time will be Rs. 6,000. Share of general building services Project Beta will be charged with Rs. 35,000 per annum to cover generalbuilding expenses. The space that will be occupied by project Beta is currently being sublet to a local community group for gatherings and entertainment at an annual rent of Rs. 7,500. Build Limited will advise the group to seek another location for the forthcoming year. Required: (a) Using relevant costing principles, determine the minimum price at which project Beta can be sold to the multinational company to ensure that Build Limited break-even on this project. You are also required to explain the reasons for the treatment of each item. In recent board meeting, one of the directors of Build Limited has suggested the following: ‘Lifecycle costing should be used to determine the total cost and total profitability of project Beta’. (b) In line with the view expressed by the director, discuss the use of lifecycle costing for project Beta. Your discussion should include examples of costs that would be taken into account as well as the benefits and the challenges that Build Limited would face by using lifecycle costing.
Build Limited plans to start a project (Project Beta) for the forthcoming yearthat will be sold to an international corporation. Build Limited is yet to pay for the research costs to date, which total Rs. 150,000. The following additional costs have been estimated by the managing director to complete project Beta.
Materials
Two materials are needed for project Beta – Material A and Material B.
Material A has already been purchased at a cost of Rs. 60,000. It is toxic; and if not used in project Beta, it must be disposed of at a cost of Rs. 5,000.
Material B – there are 50 kgs available in inventory which has been purchased at Rs. 400 per kg. project Beta will require a total of 150 kgs of this material. The current purchase price if Rs. 450 per kg and this material is regularly used in other projects currently undertaken by Build Limited.
Labour
Project Beta will require skilled labour which is hard to recruit in the present situation. Workers will have to be transferred from another project (project Omega) which is currently in operation. Project Omega is expected to generate sales of Rs. 150,000 in the next year. The prime cost of these sales is expected to be Rs. 100,000, including Rs. 40,000 for the labour cost itself. The overhead absorbed into this production (project Omega) is expected to be Rs. 20,000.
Monitoring team
A monitoring team will be set up to ensure successful implementation of project Beta. The wages of the staff in this team are expected to be Rs. 60,000 per annum. It has already been decided that when work on project Beta ceases, the monitoring team will be made redundant. Redundancy and severance allowances are expected to be Rs. 35,000 in one year’s time.
Machinery
Project Beta will require a specialised machinery which cost Rs. 18,000 three years ago. It has a current disposal value of Rs. 8,000 and if used in project Beta, it is estimated that the disposal value in one year’s time will be Rs. 6,000.
Share of general building services
Project Beta will be charged with Rs. 35,000 per annum to cover generalbuilding expenses. The space that will be occupied by project Beta is currently being sublet to a local community group for gatherings and entertainment at an annual rent of Rs. 7,500. Build Limited will advise the group to seek another location for the forthcoming year.
Required:
(a) Using relevant costing principles, determine the minimum price at which project Beta can be sold to the multinational company to ensure that Build Limited break-even on this project. You are also required to explain the reasons for the treatment of each item.
In recent board meeting, one of the directors of Build Limited has suggested the following:
‘Lifecycle costing should be used to determine the total cost and total profitability of project Beta’.
(b) In line with the view expressed by the director, discuss the use of lifecycle costing for project Beta. Your discussion should include examples of costs that would be taken into account as well as the benefits and the challenges that Build Limited would face by using lifecycle costing.
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