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:
Materials
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
kg.

Labour
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.
Required:
Explain how you would decide which overhead costs would be relevant in the financial appraisal
of the contract.