Question 2 The following is an extract from the records of Ratio Manufacturers TOTAL PER UNIT Budgeted production (units) Budgeted direct material cost Budgeted labour cost Budgeted manufacturing overheads 25 000 R150 000 R130 000 R60 000 R6,00 R5,20 R35 00 R25 00 Fixed Variable Budgeted direct labour hours Budgeted machine hours 35 000 40 000 1,40 1,60 You are required to Calculate predetermined overhead rates using each basis listed below: product unit basis; labour hour basis; labour cost basis; machine hour basis; material cost basis; and primary cost basis.
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1. Anderson Ltd. manufacture gearboxes for use in cars. At thestart of the
year, the management of Anderson Ltd. estimated that its costswould be:
This was based on the following:
Direct labour Direct material Variable production overhead Fixed production overhead Administration overhead | 8 50 8 12 5 |
80 employees
2000 hours worked by each employee
40 000 gearboxes manufactured in the year as budgetedproduction
£200 unit selling price.
You have recently been employed by the company to establish astandard
costing system. At the end of the year you were able to extractthe
following information:
⢠labour costs £4.40/hour
⢠32 000 units sold
⢠£210/unit selling price
⢠160 000 hours were worked
⢠variable production overheads were £640 000
⢠fixed production overheads were £810 000
⢠administration costs were £350 000
⢠raw material prices were 10% higher than expected
⢠total expenditure on raw material was £3.696 M
⢠there were no opening or closing stocks of raw materials.
(a) You are required to prepare an operating statement for theyear, using
a standard absorption costing system.
Calculations should proceed according to the followingheadings
suffixing âAâ for Adverse and âFâ for Favourable whereappropriate.
Resulting quantities required for the statement are then enteredin the
âOperating Statement for the Yearâ sheet shown on page 6.
(All working must be shown.)
(Budgeted) Costs
Unit cost
£
Direct labour
Direct materials
Variable overhead
Fixed overhead
Admin. overhead
Total
Selling price
Standard profit (per unit)
Budgeted profit
Sales price variance
Sales quantity variance
Cost Variances
Labour Variances
Standard hours =
Standard cost/hour =
Rate variance =
Standard time =
Actual time =
Time variance =
Efficiency variance =
Material Variances
Material price =
Material usage â standard =
â actual =
Material usage variance =
Variable overheads
Standard cost =
Actual cost =
Expenditure variance =
Efficiency variance =
Fixed overheads
Expenditure variance =
Volume variance =
Admin overhead (treat as fixed)
Expenditure variance =
Volume variance =
Operating Statement for the Year
壉000 壉000
Budgeted Profit
Sales variance âprice
â quantity
Cost variances
Labour â rate
â efficiency
Material â price
â usage
Variable â expenditure
â efficiency
Fixed â expenditure
â volume
Admin â expenditure
â volume
Actual Profit
(b) Give reasons/explanations why the variances in (a) abovehave
occurred for the following:
(i) material price
(ii) labour efficiency
(iii) fixed overhead expenditure.
(c) The accountant suggests that a standard marginal costingsystem may
be more suitable. He asks you to outline the strengths and
weaknesses of both systems and recommend the most suitable.
(d) The Board of Anderson Ltd. want to adopt âidealâ standardsbecause
they feel it will encourage harder work. You are asked toproduce a
brief report giving your views.
Citra bhd manufacturers two types of components, C1 and C2 andabsorbs overheads on the basis of direct labour hours. Anticipatedoverheads for the upcoming accounting period is RM 972500,information about the company products is as follows
C1 | C2 | |
Expected production volume (units) | 3000 | 12000 |
Diect material costs | RM 32 PER UNIT | RM 40 PER UNIT |
Direct labour /unit (rm 15/hour) | RM 30 | RM 60 |
The overheads od citra bhd of RM 972500 can be identified withthree main activities as follows
Order processing | Rm 180000 |
Machine processing | Rm 650000 |
Product inspection | Rm 142500 |
These activities are driven by number of orders processed ,machine hours worked and insoection hours respectively. Datarelevant to these activities are as follows
C1 | C2 | |
Order processed | 380 | 220 |
Machine hours worked | 22000 | 28000 |
Inspection hours | 3000 | 12000 |
Q1A â Assuming the use of direct labour hours to apply overheadsto production, compute the unit manufacturing costs of products C1and C2 if the expected manufacturing volume is attained
Q1B - compute the absorption rates that would be used for orderprocessing, machine processing and product inspection
Q1C â assuming the use of activity based costing compute theunit manufacturing costs of products C1 and C2 if the expectedmanufacturing volume is attained
Q1D â comparing the unit product costs calculated under the twocosts calculated under the two costing systems state which productis overcost and which product is undercost, and how much?Additionally calculate the amount of the cost distortion for eachproduct.