Advanced: Product cost calculation and costs for decision-making Kaminsky Ltd manufactures belts and braces. The firm is organized into five departments. These are belt-making, braces-making, and three service departments (maintenance, warehousing, and administration).

Direct costs are accumulated for each depart¬ ment. Factory-wide indirect costs (which are fixed for all production levels within the present capacity limits) are apportioned to departments on the basis of the percentage of floorspace occupied. Service department costs are apportioned on the basis of estimated usage, measured as the percentage of the labour hours operated in the service department utilized by the user department. Each service department also services at least one other service department.

Budgeted data for the forthcoming year are shown below:

(a) You are required to calculate the total cost per unit of belts and braces respectively, in accor¬ dance with the system operated by Kaminsky Ltd. (12 marks)

(b) In addition to the above data, it has been decided that the selling prices of the products are to be determined on a cost-plus basis, as the unit total cost plus 20%.
Two special orders have been received, outside the normal run of business, and not provided for in the budget.
They are as follows:
(i) an order for 1000 belts from Camfam, an international relief organization, offering to pay £5000 for them.
(ii) a contract to supply 2000 belts a week for 50 weeks to Mixon Spenders, a chainstore, at a price per belt of ‘unit total cost plus 10%’.
You are required to-set out the considerations which the management of Kaminsky Ltd should take into account in deciding whether to accept each of these orders, and to advise them as far as you are able on the basis of the information given. (8 marks)

(c) ‘Normalized overhead rates largely eliminate from inventories, from cost of goods sold, and from gross margin any unfavourable impact of having production out of balance with the long-run demand for a company’s products.’ You are required to explain and comment upon the above statement.

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(1) Output and sales (units): Output Admin- Main- Belts Braces istration tenance Ware Company dept dept housing total capacity 150 000 60 000 Output budgeted 100 000 50 000 Sales budgeted 100 000 50 000 (2) Direct variable costs (000): Materials 120 130 Labour 80 70 Total 200 200 128 20 50 80 50 100 329 30 300 20 300 50 600 (3) Factory-wide fixed indirect costs (000) 1000 (4) Floor-space (%) 40 40 5 20 10 5 100 (5) Usage of service department labour hours (%) Administration 40 40 Warehousing 50 25 Maintenance 30 30 221 815 10 10 100 25 100 40 100 888