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MC Question 29
The Hi Life Co (HL Co) makes sofas. It has recently received a request from a customer to provide a one-off order of sofas, in excess of normal budgeted production. The order would need to be completed within two weeks. The following cost estimate has already been prepared:
A quotation now needs to be prepared on a relevant cost basis so that HL Co can offer as competitive a price as possible for the order.
| $ | ||
|---|---|---|
| Direct materials: | ||
| Fabric | 200 m2 at $17 per m2 | 3,400 |
| Wood | 50 m2 at $8·20 per m2 | 410 |
| Direct labour: | ||
| Skilled | 200 hours at $16 per hour | 3,200 |
| Semi-skilled | 300 hours at $12 per hour | 3,600 |
| Factory overheads | 500 hours at $3 per hour | 1,500 |
| Total production cost | 12,110 | |
| General fixed overheads as 10% of total production cost | 1,211 | |
| Total cost | 13,321 |
Which statement correctly describes the treatment of the general fixed overheads when preparing the quotation?
A. The overheads should be excluded because they are a sunk cost
B. The overheads should be excluded because they are not incremental costs
C. The overheads should be included because they relate to production costs
D. The overheads should be included because all expenses should be recovered