Chapter 1 Costing

Chapter 1 Costing

Question 1 – Overhead apportionment

A company makes a range of products with total budgeted manufacturing overheads of £973 560 incurred in three production departments (A, B and C) and one service department.

Department A has 10 direct employees, who each work 37 hours per week.

Department B has five machines, each or which is operated for 24 hours per week.

Department C is expected to produce 148 000 units of final product in the budget period.

The company will operate for 48 weeks in the budget period.

Budgeted overheads incurred directly by each department are:

The balance of budgeted overheads are apportioned to departments as follows:

Service department overheads are apportioned equally to each production department.

Required:

(a) Calculate an appropriate predetermined overhead absorption rate in each production department. (9 marks)

(b) Calculate the manufacturing overhead cost per unit of finished product in a batch of 100 units which take 9 direct labour hours in department A and three machine hours in department B to produce. (3 marks)

(Total 12 marks)

Question 2 – Overhead apportionment

JR Co. Ltd’s budgeted overheads for the forthcoming period applicable to its production departments, are as follows:

The budgeted total costs for the forthcoming period for the service departments, are as follows:

The use made of each of the services has been estimated as follows.

Required:

Apportion the service department costs to production departments:

(a) Using the step-wise (elimination) method, starting with G;

(b) Using the reciprocal (simultaneous equation) method;

(8 marks)

Question 3 – Overhead calculation and over/under overhead absorption

BEC Limited operates an absorption costing system. Its budget for the year ended 31 December shows that it expects its production overhead expenditure to be as follows:

During the year it expects to make 200 000 units of its product. This is expected to take 80 000 machine hours in the machining department and 120 000 labour hours in the hand finishing department.

The costs and activity are expected to arise evenly throughout the year, and the budget has been used as the basis of calculating the company’s absorption rates.

During March the monthly profit statement reported:

(i) that the actual hours worked in each department were

Machining / 6,000 hours
Hand finishing / 9,600 hours

(ii) that the actual overhead costs incurred were

(iii) that the actual production was 15,000 units.

Required:

(a) Calculate appropriate pre-determined absorption rates for the year ended 31 December. (4 marks)

(b) (i) Calculate the under/over absorption of overhead for each department of the company for March; (4 marks)

(ii) Comment on the problems of using predetermined absorption rates based on the arbitrary apportionment of overhead costs, with regard to comparisons of actual/target performance; (4 marks)

(Total 15 marks)

Question 4 – Marginal and Absorption Costing

A manufacturer of glass bottles has been affected by competition from plastic bottles and is currently operating at between 65 and 70 per cent of maximum capacity.

The company at present reports profits on an absorption costing basis but with the high fixed costs associated with the glass container industry and a substantial difference between sales volumes and production in some months, the accountant has been criticized for reporting widely different profits from month to month. To counteract this criticism, he is proposing in future to report profits based on marginal costing and in his proposal to management lists the following reasons for wishing to change:

1. Marginal costing provides for the complete segregation of fixed costs, thus facilitating closer control of production costs.

2. It eliminates the distortion of interim profit statements which occur when there are seasonal fluctuations in sales volume although production is at a fairly constant level.

3. It results in cost information which is more helpful in determining the sales policy necessary to maximise profits.

From the accounting records the following figures were extracted: Standard cost per gross (a gross is 144 bottles and is the cost unit used within the business):

*The fixed production overhead rate was based on the following computations:

Total annual fixed production overhead was budgeted at £758,400 or £632,000 per month.

Production volume was set at 1,008,000 gross bottles or 70 per cent of maximum capacity.

There is a slight difference in budgeted fixed production overhead at different levels of operating:

You may assume that actual fixed production overhead incurred was as budgeted.

Additional information:

There were no finished goods in stock at 1 September.

Required:

(a) to prepare monthly profit statements for September and October using

(i) absorption costing; and

(ii) marginal costing. (16 marks)

(b) to comment briefly on the accountant’s three reasons which he listed to support his proposal. (9 marks)

(Total 25 marks)

Q1-5