Intermediate: Overhead analysis, calculation of overhead rates and a product cost Knowing that you are studying for the CIMA qualification, a friend who manages a small busi¬ ness has sought your advice about how to produce quotations in response to the enquiries which her business receives. Her business is sheet metal fabrication - supplying ducting for dust extraction and airconditioning installations. She believes that she has lost orders recently through the use of a job cost estimating system which was introduced, on the advice of her auditors, seven years ago. You are invited to review this system.

Upon investigation, you find that a plant-wide percentage of 125% is added to prime costs in order to arrive at a selling price. The percentage added is intended to cover all overheads for the three production departments (Departments P, Q and R), all the selling, distribution and administra¬ tion costs, and the profit.

You also discover that the selling, distribution and administration costs equate to roughly 20% of total production costs, and that to achieve the desired return on capital employed, a margin of 20% of sales value is necessary.

You recommend an analysis of overhead cost items be undertaken with the objective of deter¬ mining a direct labour hour rate of overhead absorption for each of the three departments work passes through. (You think about activity-based costing but feel this would be too sophisticated and difficult to introduce at the present time.)

There are 50 direct workers in the business plus 5 indirect production people.

From the books, records and some measuring, you ascertain the following information which will enable you to compile an overhead analysis spread¬ sheet, and to determine overhead absorption rates per direct labour hour for departmental overhead purposes:

Required:

(a) Calculate the overhead absorption rates for each department, based on direct labour hours. (9 marks)

(b) Prepare a sample quotation for Job 976, utilizing information given in the question, your answer to

(a) above, and the following additional information:

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Cost/expense Annual amount Basis for apportionment where allocation not given Repairs and maintenance 62 000 Technical assessment: Depreciation Consumable supplies Wage-related costs Indirect labour P 42 000, Q 10 000, R 10 000 40 000 Cost of plant and equipment 9000 Direct labour hours 87 000 12% of direct wages costs 90 000 Direct labour hours