Bakeson Bearings Ltd is preparing to submit a bid for a bearings order. Janet Lake, CEO of the Manufacturing Division, has asked Jason Docker, the management accountant, to prepare the bid. Bakeson's policy is to mark up full costs by 10% for all orders. Lake considers the bid to be very important, stating "we need to be successful with the bid and I expect a very competitive bid when the figures are calculated. Do what ever is necessary to ensure the bid price is a low as possible". Lake and other senior members of the management team will receive at 25% bonus if they meet their sales targets. This order will provide enough new sales to ensure the target set for the bonus scheme is reached. Docker has gathered the following information about the projected costs for the job:
Direct materials costs $40,000
Direct labour costs $10,000
Projected overhead costs:
Based on estimated usage of resources
- Design and parts administration $4,000
- Production planning $5,000
- Setup costs $5,500
- Materials handling $6,500
- General costs $9,000
The setup and design costs are incremental costs of the order.
The firm's usual approach to the allocation of overhead is to apply the overhead costs at a rate of 250% of direct labour as time spent on a job is a good surrogate for measuring the complexity of the work involved.
Write a memo to Janet Lake setting out the cost calculations you believe are appropriate. Justify your approach to costing the job and provide a recommendation on the price to set on the job. You may present alternative costing approaches if you think these are relevant to your recommendations and discussion.
Remember a memo should be relatively brief and we would not expect your discussion and recommendations to exceed three pages excluding your calculations.
NB: even though referencing is not usual in a memo as this is an academic piece of work please provide full reference details of any ideas and material taken from the literature.
In a separate memo, to Jason Docker, evaluate whether Lake's suggestion to make the costs as low as possible is ethical and discuss what steps he should or could take in the circumstances.