Jamleck Ltd has been asked to quote a price for a one-off contract. The company’s management
accountant has asked for your advice on the relevant costs for the contract. The following
information is available:
The contract requires 3,000 kg of material K, which is a material used regularly by the company
in other production. The company has 2,000 kg of material K currently in stock which had been
purchased last month for a total cost of Sh19,600. Since then the price per kilogram for material
K has increased by 5%. The contract also requires 200 kg of material L. There are 250 kg of
material L in stock which are not required for normal production. This material originally cost a
total of Sh3,125. If not used on this contract, the stock of material L would be sold for Sh11 per
The contract requires 800 hours of skilled labour. Skilled labour is paid Sh9·50 per hour. There is
a shortage of skilled labour and all the available skilled labour is fully employed in the company
in the manufacture of product P.
Explain how you would decide which overhead costs would be relevant in the financial appraisal
of the contract.