Question details

See ‘Budgeted overhead rates’ in Chapter 3 for an explanation of why
$ 15.00

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Answers to extra questions for Chapter 3 Cost assignment

Answer to question 3.1

a) (£) (£)

Photography: 64 pages at £150 per page 9 600

Set-up:

Labour – 64 plates × 4 hours per plate

= 256 hours at £7 per hour 1 792

Materials – 64 plates at £35 per plate 2 240

Overhead – 256 labour hours at £9.50 per hour 2 432

––––

6 464

Printing:

Materials (paper):

100 000 catalogues × 32 sheets ×

1

£

0

1

0

2

0

×

1

9

0

8

0

39 184

Materials (other):

10

5

0

0

0

0

00

× £7 1 400

Labour and Overheads

10

1

0

00

0

0

00

m/c hours at £62 per hour 6 200

––––

46 784

Binding:

Labour and Overheads

10

2

0

50

0

0

00

m/c hours at £43 per hour 1 720

––––––

Total costs 64 568

––––––

Selling price – £64 568 ×

1

9

0

0

0

71 742

––––––

(b) Estimated hours = 256

Actual hours = 256 ×

1

9

0

0

0

= 284.4

Additional costs = (284.4 – 256) × £16.50 (£7 labour rate + £9.50 overhead rate)

= £469.3

Answer to question 3.2

(a) The service department cost should be reallocated using the following bases:

Canteen: Number of employees

Engineering shop: Number of service hours

Stores: Number of stores orders

The canteen does not receive any services from the other service departments. Therefore the canteen should be

reallocated first. The Engineering Shop receives services from the other two service departments and should be

reallocated last.

1

 

 

 

Overhead allocation

Dept. Basis M

/

C Assemb Paint Eng Stores Canteen

shop shop

(£) (£) (£) (£) (£) (£)

Allocation 180 000 160 000 130 000 84 000 52 000 75 000

Canteen Employees 27 000 17 000 13 000 10 000 8 000 (75 000)

Stores Orders 24 000 18 000 12 000 6 000 (60 000)

Eng. shop Service hrs 45 000 30 000 25 000 (100 000)

–––––– –––––– –––––– ––––––– –––––– ––––––

Total overhead 276 000 225 000 180 000

Machine hours 9 200

Direct labour hours 11 250

Labour cost £45 000

Machine hour rate £30

Direct labour hour rate £20

Direct labour cost rate 400% of direct labour cost

(b)

Overhead absorption statement

M

/

C Assembly Paint shop

(£) (£) (£)

Overhead absorbed

a

300 000 156 000 140 000

Actual overhead 290 000 167 000 155 000

–––––– –––––– ––––––

(Under-) 11 000 15 000

Over-absorption 10 000

Notes

a

10 000 machine hours

£30 per hour.

a

7800 Direct labour hours at £20 per hour.

a

400% of direct labour cost of £35 000.

(c) See ‘Budgeted overhead rates’ in Chapter 3 for an explanation of why overheads should be absorbed using

predetermined bases. The second part of the question relates to whether or not volume allocation base (i.e. machine

hours and direct labour hours or cost) are appropriate, particularly when direct labour is a small proportion of total

cost. The answers should discuss the need for developing non-volume-based cost driver rates using activity-based

costing systems.

Answer to question 3.3

(a) With the direct method of allocation inter-service department apportionments are ignored, service department costs

are reapportioned to production departments only.

Personnel and

Administration Maintenance Stores Moulding Extrusion Finishing

(£000) (£000) (£000) (£000) (£000) (£000)

Materials 36 23 330 170 20

Labour 155 25 18.72 168.75 115.2 81

Variable

overhead 71.25 151.8 30

Fixed overhead 15 15 17.28 449.30 371.7 67

––– ––– ––––– –––––– ––––– ––––

206 63 36 1019.3 808.7 198

Personnel

a

(206) 100.98 64.63 40.39

Maintenance

reallocation

b

(63) 18 36 9

Stores

reallocation

c

(36) 8 12 16

––– ––– ––––– –––––– ––––– ––––

Total cost £1146.28 £921.33 £263.39

––– ––– ––––– –––––– ––––– ––––

Notes

a

Personnel costs are reapportioned on the basis of the number of employees in each production department. For exam-

ple, 25

/

51 of the personnel department costs of £206 000 are apportioned to the moulding department.

b

Maintenance costs are reapportioned in proportion to the total maintenance hours worked in each department.

c

Stores costs are reapportioned in proportion to stores floorspace.

(b) This method is the specified order of closing described in Appendix 3.1. There the service department that provided

the largest proportion of services for other service departments was closed first. In this answer the service department

providing the largest value of cost input to other service departments (namely the personnel department) is closed

first, and the department providing the second largest value of cost input to other service departments is closed next.

Return charges are not made.

2

 

Available solutions