HKDSE Sample 2 (Paper 2A, 7) (Job costing)
Joy Ltd manufactures a range of products. The company has two production departments (A and B) and two service departments (X and Y), and each department operates 50 weeks per year. Department A has 12 direct employees, each of whom works for 45 hours per week. Department B has 6 machines, each of which operates for 30 hours per week. Manufacturing overheads are allocated to Department A and Department B based on the total direct labour hours and the total machine hours respectively. In 2012, the total budgeted manufacturing overheads of the company are $999,000, of which $599,000 is allocated to respective departments as follows:
Department / $A / 272 500
B / 211 500
X / 65 000
Y / 50 000
599 000
The remaining balance of the budgeted manufacturing overheads is to be apportioned as follows:
Department / %A / 35
B / 30
X / 15
Y / 20
Services provided by the service departments for the production departments are to be apportioned as follows:
Service Department / Production departmentA / B
X / 60% / 40%
Y / 30% / 70%
REQUIRED:
(a) Prepare an overhead analysis sheet to calculate the predetermined overhead absorption rate for each of the production departments.
Joy Ltd has just been asked to quote for a one-off job to produce 600 units of Product H in December 2012.
Additional information:
(i) Department A requires 10 cm of direct materials to produce one unit of Product H. The purchase cost of the direct materials is $3 per cm.
(ii) Department B requires 2 kg of direct materials to produce one unit of Product H. The purchase cost of the direct materials is $8 per kg.
(iii) The direct labour hours required for department A and department B to produce each unit of Product H is 0.5 and 0.25 respectively.
(iv) The basic wage rate of direct labour for both production departments is $50 per hour. The remaining total capacity in December 2012 will be 400 direct labour hours. The wage rate for overtime work is 130% of the basic wage rate and will be counted as the direct labour cost.
(v) The total machine hours required for department A and department B to produce 600 units of Product H are 30 and 100 respectively.
REQUIRED:
(b) Calculate the production cost per unit of Product H.
(c) If the actual manufacturing overheads and the actual direct labour hours of department A in 2012 are $560 800 and 28 300 hours respectively,
(1) calculate the amount of manufacturing overheads over / under absorbed by department A in 2012; and
(2) give two reasons to explain why the use of the predetermined manufacturing overheads absorption rate is preferred to the use of the absorption rate based on actual data when calculating product cost.
(a)
Production department / Service departmentsA / B / X / Y
$ / $ / $ / $
Direct allocation / 272 500 / 211 500 / 65 000 / 50 000
Apportioned / 140 000 / 120 000 / 60 000 / 80 000
412 000 / 331 500 / 125 000 / 130 000
Department X apportioned / 75 000 / 50 000 / (125 000) / —
Department Y apportioned / 39 000 / 91 000 / — / (130 000)
526 500 / 472 500 / 0 / 0
Predetermined overhead absorption rate:
Department A = $526 500 / (12 x 45 x 50)
= $19.5 per direct labour hour
Department B = $472 500 / (6 x 30 x 50)
= $52.5 per machine hour
(b) The production cost per unit of Product H:
$Direct material – A (10 x 600 x $3) / 18,000
– B (2 x 600 x $8) / 9,600
Direct labour [$50 x 400 + $50 x 130% x (0.75 x 600 – 400)] / 23,250
Overheads – A (0.5 x 600 x $19.5) / 5,850
– B (100 x $52.5) / 5,250
Total production cost / 61,950
Unit production cost ($61,950 / 600) / 103.25
(c) (1)
$Actual overheads / 560,800
Absorbed overheads ($19.5 × 28 300) / 551,850
Under-absorbed overheads / 8,950
(c) (2)
Reasons:— The actual overhead absorption rate (OAR) cannot be calculated until the end of the period, while
predetermined OAR can be calculated prior to the accounting period using estimated or budgeted
figures for overheads and units of the absorption base chosen,
— which could provide more information for decision making on pricing and cost control and,
— it is less volatile than the use of the actual OAR as actual overheads are subjected to fluctuations.
(2 marks for each relevant explanation, max. 4 marks)
HKET 2011 (Paper 2A, 5) (Job costing)
5. Leon Enterprise is a limited company for manufacturing brand-name jeans, and its products include products for men, women or children.
Here is the information for manufacturing related to these three products in the last quarter.
From 1 Oct to 31 Dec, 2011Products / Men / Women / Children
Cost / Unit
Direct material / ($/pair) / 40 / 45 / 30
Direct labour / ($/pair) / 120 / 180 / 100
Quantity produced / Pairs / 4,000 / 6,000 / 5,000
Total machine operating time / (hours) / 600 / 750 / 550
Material procurements / (times) / 25 / 20 / 15
Material collections / (times) / 80 / 100 / 85
Mark-up / 60% / 70% / 80%
Activities: / Cost Drivers: / Indirect manufacturing cost
($)
Manufacturing machine operation / Machine hours / 42,750
Material procurement / Material procurement times / 26,000
Warehouse storage / Material collection times / 38,000
Material carriage and packing / Material collection times / 19,000
REQUIRED:
Calculate the following items for Leon Enterprise using activity-based costing (Calculate to one decimal place):
(a) The cost driver rates for the above activities
(b) The indirect manufacturing costs and selling prices for each product
(a)
Activities: / Calculations: / Cost driver ratesManufacturing machine operation / $42,750 / (600 + 750 + 550) / $22.5 per machine hour
Material procurement / $26,000 / (25 + 20 +15) / $433.3 per material procurements time
Warehouse storage / $38,000 / (80 + 100 + 85) / $143.4 per material collection time
Material carriage and packing / $19,000 / (80 + 100 + 85) / $71.7 per material collection time
(b)
Indirect manufacturing costs: / Men / Women / ChildrenManufacturing machine cost / 600 x $22.5
= $13,500 / 750 x $22.5
= $16,875 / 550 x $22.5
= $12,375
Material procurement cost / 25 x $433.3
= $10,832.5 / 20 x $433.3
= $8,666 / 15 x $433.3
= $6,499.5
Warehouse storage cost / 80 x $143.4
= $11,472 / 100 x $143.4
= $14,340 / 85 x $143.4
= $12,189
Material carriage and packing cost / 80 x $71.7
= $5,736 / 100 x $71.7
= $7,170 / 85 x $71.7
= $6,094.5
Total indirect manufacturing costs / $41,540.5 / $47,051 / $37,158
Quantity produced (pairs) / 4,000 / 6,000 / 5,000
Indirect manufacturing costs (per pair) / $10.4 / $7.8 / $7.4
Selling price for each product / Men / Women / Children
$ / $ / $
Direct material (per pair) / 40 / 45 / 30
Direct labour (per pair) / 120 / 180 / 100
Indirect manufacturing costs (per pair) / 10.4 / 7.8 / 7.4
Product cost (each pair) / 170.4 / 232.8 / 137.4
Selling price / 272.6 / 395.8 / 247.3
HKDSE Sample 1 (Paper 2A, 7) (Job Costing)
Top Four Co Ltd is a manufacturing firm specializing in producing tailor-made souvenirs. The sales manager has received an urgent order of 1,000 metal photo frames at the price of $15 each to be supplied in one week’s time. The following information relates to the order:
(i) Materials:
(1) Metal bar is the materials for the frame and hard plastic board for the backing. A batch of 20 photo frames requires 8 metres of metal bar and 4 pieces of standard plastic board.
(2) The metal bars are in constant use and there is sufficient stock in hand for the order. The cost information is as follows:
$ per metreHistorical cost / 5
Current buying-in cost / 7
Scrap value / 2
(3) The cost of the plastic board currently in stock is $50 per piece. It is made of a traditional material which has been banned in some western countries. The replacement price of the plastic board is currently $70 per piece while the scrap value of that in stock is $5 per piece. The production manager does not foresee any alternative use for the plastic board if it is not used for the order.
(ii) Direct labour
(1) Labour hours are required at 15 minutes per photo frame.
(2) The hourly rate is $20.
(3) Being the low season, there is a total idle time of 100 hours for direct labour. However, if the job is accepted, overtime work will be required and a bonus of 50% on the normal rate has to be paid.
(iii) Overheads
(1) The overhead costs for the year ended 31 December 20X7 are budgeted as follows:
$’000Depreciation (factory building) / 1,000
Supervision / 900
Depreciation (machinery) / 450
Insurance (machinery) / 150
Heating and lighting / 200
(2) Overheads are allocated to the three departments on the following basis:
Metal work / Assembly / StoreFloor area (square metres) / 2,000 / 1,200 / 800
Number of employees / 47 / 24 / 4
Book value of machinery / 13,000 / 2,000 / —
Number of material requisitions / 3,500 / 500 / —
Total direct labour hours / 200,000 / 90,000 / —
(3) If the order is accepted, no additional overheads will be incurred.
(iii) Pricing
The business normally adds a 10% profit on job cost to arrive at its invoice price.
REQUIRED:
(a) Prepare an overheads distribution statement and determine the overheads absorption rate both for the metal work and assembly departments. (Correct all amounts to the nearest dollar.)
(b) Based on the absorption costing method and the company’s pricing policy, calculate the selling price that should be charged for the above order.
(c) Should the order be accepted if the relevant cost approach is used? Support your suggestion with appropriate figures to convince the management.
(d) Suggest two other factors that the management should consider before making the decision.
(a) / Overhead distribution statementCost Items / Bases / Total / Cost Centres
Metal work / Assembly / Store
$’000 / $’000 / $’000 / $’000
Depreciation (factory building) / Floor area / 1,000 / 500 / 300 / 200
Supervision / No of employees / 900 / 564 / 288 / 48
Depreciation (equipment) / Book value / 450 / 390 / 60
Insurance (equipment) / Book value / 150 / 130 / 20
Heating and lighting / Floor area / 200 / 100 / 60 / 40
2,700 / 1,684 / 728 / 288
Secondary apportionment / 3500 : 500 / 252 / 36 / (288)
2,700 / 1,936 / 764 / —
Absorption rate per labour hour / 10 / 8
(b) / Absorption costing approach
Materials / $
Metal bar (1,000/20 x 8 x $5) / 2,000
Plastic board (1,000/20 x 4 x $50) / 10,000
Direct labour
Basic pay (1,000 x 15/60 x $20) / 5,000
Overtime bonus [(1,000 x 15/16 - 100) x $20 x 50%] / 1,500
Overheads
Metal work (1,000 x 15/60 x $10) / 2,500
Assembly (1,000 x 15/60 x $8) / 2,000
Total cost / 23,000
Profit loading (10%) / 2,300
Invoice price / 25,300
(c) / Relevance costing approach
Materials / $
Metal bar (1,000/20 x 8 x $7) / 2,800
Plastic board (1,000/20 x 4 x $5) / 1,000
Direct labour
Basic pay [(1,000 x 15/16 - 100) x $20) / 3,000
Overtime bonus [(1,000 x 15/16 - 100) x $20 x 50%] / 1,500
Total cost / 8,300
— The normal selling price is built on historical cost concept and has little relevant in making decision.
— The relevant costing approach looks to the future such that the offer of $15 per frame should be
accepted as it is higher than the cost of $8.3, at which the firm will make neither a loss nor a gain.
(d) / — Other customers may request the lower price charged and the current buyers may ask for the same
special offer in future.
— The firm should be sure they can meet the rush order with premium quality, or the
reputation of the firm will be impaired.
— The competitive state of the market should be considered. The firm may not be able to
afford to lose potential customers.
— There may be limiting factors which will affect the completion of the order.
— Legal/social implications in relation to the banned materials should be considered.
(HKALE 2007, Paper 2, 5) (Job Costing)
Porsha Company used to produce only one product, Product X. It operated at its full production capacity of 10,000 units per month, and its costs consisted of the following:
(i) Direct material cost $89 per unit.
(ii) Labour cost amounted to $750,000 in total. $500,000 were fixed in nature attributable to the employment of full-time workers paid on a monthly basis. The remaining required direct labour was filled up by part-time workers hired and paid on an hourly basis.
(iii) Both production overhead and administration expenses were fixed in nature and amounted to $200,000 and $250,000 respectively.
(iv) Sales commission to sales agents was $10 per unit sold.
You are required to:
(a) Calculate the total variable cost per unit of Product X.
In October 2006, the management of the company had a meeting to discuss whether or not to produce and sell a new product, Product Y. The sales department anticipated that the demand for Product Y would last at least 5 years. Additional factory space costing $10,000 per month and a new machine costing $120,000 with a useful life of 5 years were required. The company adopted the straight line method of depreciation and zero scrap value was expected from the new machine at the end of Year 5.
The new factory space would solely be used for the production of Product Y. The variable production cost of Product Y was estimated at $90 per unit, and the sales commission at $10 per unit. The company expected to sell it at $200 per unit, which would be the same as the selling price of Product X.