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Smythes Ltd are facing a difficult future. Orders are hard to get and even then they fail
to make a profit. As the management accountant of the company you are asked to
investigate the situation and to make recommendations regarding the method of
charging overheads to jobs. At present the company charges overheads to jobs at the
rate of 120% of direct labour cost. The average labour rate is 4.50 per hour. You
decide that the company should change to a machine hour basis of charging overheads.
To illustrate your recommendations you are required to:
(a) Apportion the expenses to departments A,B,C and D and calculate machine hour
rates for each department,
(b) Prepare an estimate of the overhead cost of jobs PQ and RS, firstly, on the old
basis of 120% direct labour hours , secondly, using the above machine hour rate.
Hours to be spent on Job:
In Dept A
In Dept B
In Dept C
In Dept D
PQ
10
60
50
-
120 hrs
C
800
85000
8000
1
12
3000
1000
1775
66
2100
1900
RS
60
10
50
120 hrs
D
900
65000
16000
1
7
1000
600
1500
173
800
800
7525
6000
6200
9400
4500
1944
1171
185
150
2500
9250
Total
5000
486000
74000
8
62
9000
9400
7525
1171
10100
9300
48825
Answer:
Allocation and apportionment to departments:
Expense
Basis
Supervision
Ind. Labour
Hol. Pay
Tooling cost
Mach. maint.
Power
Small tools
Insure mach.
Insure bldg.
Rent & rates
Depreciation
Allocate
No. of persons
Total persons
Allocate
Maintenance hrs
Kwh
Allocate
Capital cost
Floor (sq metres)
Floor (sq metres)
Capital cost
A
B
2050 2200
2250 2250
1900 2400
3500 4300
1500 1000
1080
264
491
441
75
50
54
45
900
750
3750 2500
17550 16200
1775
750
1200
1000
1500
340
66
20
24
400
1000
8075
1500
750
700
600
500
260
173
40
27
450
2000
7000
Total
7525
6000
6200
9400
4500
1944
1171
185
150
2500
9250
48825
2100
1900
4.25
800
800
8.75
10100
9300
3200
3000
5.85
4000
3600
4.50
Applying the new machine hour rate and comparing it to the old direct labour cost rate:
Job PQ
Job RS
10 hrs in A @ 5.85
60 hrs in B @ 4.50
50 hrs in C @ 4.25
0 hrs in D @ 8.75
120
58.50
270.00
212.50
541.00
60 hrs in A @ 5.85
10 hrs in B @ 4.50
0 hrs in C @ 4.25
50 hrs in D @ 8.75
120
351.00
45.00
437.50
833.50
648.00
120
648.00
@ 120% x 4.50=
Material:
Direct
75,000
Internal Transport
5,000
Labour:
Machining 20,000 hours @ 60p
5,000 hours @ 50p
Assembling 10,000 hours @ 60p
10,000 hours @ 50p
10,000 hours @ 40p
Spraying
8,000 hours @ 50p
2,000 hours @ 40p
Internal Transport:
3,000
Quality Control:
6,000
Other Allocated Costs:
Machine Shop
11,120
Assembly Shop
9,360
Spray Shop
4,020
Internal Transport
2,000
Quality Control
2,000
On the basis of estimated benefit received, the service departments costs are
apportioned as follows:
Internal Transport
Machine Shop 60%, Assembly Shop 30%, Spray Shop 10%
Quality Control
Machine Shop 30%, Assembly Shop 30%, Spray Shop 30%, Internal Transport 10%.
Required:
(1) Prepare a statement showing the overhead to be absorbed by each of the three
production departments.
(10 marks)
(2) Briefly describe three methods by which overhead can be absorbed.
( 3 marks)
(3) Using the method you consider most appropriate calculate the overhead absorption
rate for each production department.
( 3 marks)
(4) The assumption underlying the above overhead absorption methods is that all
overheads are related to production volume. In comparison to Activity Based Costing
methods briefly discuss whether this assumption is still valid today. ( 9 marks)
Total 25 marks
Answer:
Indirect materials
Indirect labour
Indirect expenses
Reapportionment:
Quality control
Internal transport
PRODUCTION
Machine
Assembly
Spray
11120
11120
9360
9360
4020
4020
2400
6480
20000
2400
3240
15000
2400
1080
7500
Units
Direct Labour Hours
Direct Labour Cost
Machine Hours
TCCO / DLH:
TCCO / DLH:
TCCO / DLH:
=
=
=
=
SERVICE
Int Transp
5000
3000
2000
10000
800
(10800)
Machine
Assembly
Spraying
=
=
=
Quality C.
6000
2000
8000
(8000)
Spare Q&A
Famous Engineering Co. has two production departments and a service department.
Budgeted overhead expenses for the next year were as follows:
Production Depts.
Founding
Finishing
Allocated overheads
Indirect labour
Depreciation of machines
Indirect overheads
Factory light & heat
Supervisory salaries
40,000
18,000
Service Dept
Maintenance
60,000
16,000
Total
24,000
10,000
25,000
60,000
Cost of machinery ()
Floor space (sq. metres)
Maintenance hours
Number of employees
Machine hours
Founding
90,000
140,000
6,000
45
60,000
Finishing
80,000
90,000
4,000
40
40,000
Maintenance
50,000
20,000
5
-
Total
220,000
250,000
10,000
90
100,000
Apportion the indirect overheads to the production and service departments and
then the service department overheads to the production departments using the
bases which you consider to be most appropriate. Using the machine hour basis,
calculate the departmental overhead rates by means of which overheads may be
charged to product costs.
(70% marks)
B)
A
Indirect labour
Depreciation of machinery
Light and heat (floor area)
Supervisory salaries (employees)
Maintenance costs (maintenance manHours)
Total overhead costs
Machine hours
Machine hour overhead recovery rate
Funding
Finishing
Maintenance
40,000
18,000
14,000
30,000
60,000
16,000
9,000
26,667
25,000
10,000
2,000
3,333
23,600
125,600
60,000
2,093
15,733
127,400
40,000
3,185
39,333
Question 4
a) Alsace Hotel Overhead Statement
Basis
Residential Catering Housekeep. Maint.
Allocated
56,000
92,000
108,000
36,000
Allocated
66,000
52,000
46,000
22,000
Floor area
82,500
40,500
18,000
9,000
Value of equip. 28,000
20,000
6,000
6,000
Floor area
40,700
19,980
8,880
4,440
Value of equip. 70,000
50,000
15,000
15,000
343,200
274,480
201,880
92,440
Service depts.. re-apportioned
Maintenance 50:30:20
46,220
27,732
18,488 -92,440
Housekeeping 75:25
165,276
55,092 -220,368
Consumables
Staff costs
Rent and rates
Contents ins.
Heat and light
Depreciation
554,696
357,304
Total
292,000
186,000
150,000
60,000
74,000
150,000
912,000
912,000
554,696
8,600
Catering
357,304
48,000
Absorbed
9,100 x 64.50
46,500 x 7.44
Residential
586,950
Actual
Under/over absorption
Catering
345,960
578,400
357,000
8,550
over
(11,040)
under