Part I

ABC Ltd uses a predetermined overhead rate to estimate the total manufacturing overhead for the quarter ending 30 September 2019. Based on this, the estimated total manufacturing overhead cost is $200,200 and the estimated level of activity is 11,000 machine hours.

By the end of 30 September 2019, ABC Ltd incurred actual total manufacturing overhead costs of $195 000 and 10 500 total machine hours.

Required:

(a) Calculate the predetermined overhead rate. (2 marks)

(b) Determine the amount of underapplied or overapplied manufacturing overhead for the quarter ending 30 September 2019. (3 marks)

Part II

The management at Han Products is trying to decide whether to continue manufacturing a part or to buy it from an outside supplier.

Han Products manufactures 30,000 units of part S-6 each year for use on its production line. At this level of activity, the cost per unit for part S-6 is:

Direct materials

$3.60

Direct labour

10.00

Variable manufacturing overhead

2.40

Fixed manufacturing overhead

9.00

Total cost per part

25.00

An outside supplier has offered to sell 30,000 units of part S-6 each year to Han Products for $21 per part. If Han Products accepts this offer, the facilities now being used to manufacture part S-6 could be rented to another company at an annual rental of $80,000. However, Han Products has determined that two-thirds of the fixed manufacturing overhead being applied to part S-6 would continue even if part S-6 were purchased from the outside supplier.

Required:

(a) Make a recommendation on whether S-6 should be manufactured or purchased. Support your answer with appropriate incremental analysis. (8 marks)

(b) What non-financial factors should management consider in making this decision? (4 marks)

Answer rating: 100% (QA)

Answer Part I a Calculating the predetermined overhead rate Estimated total manufacturing overhead c... View the full answer