2 Question 2 (10 Marks) A company uses 15,000 units of stock item 6786 each year. The item has a purchase cost of R4 per unit. The cost of placing an order for re-supply is R220. The annual holding cost of one unit of the item is 10% of its purchase cost. Data relating to stores item 6787 are as follows. Daily use: Lead time for re-supply: Reorder quantity: Required: i. ii. 300 Units 5-20 Days 10,000 Units What is the economic order quantity for item 6786, to the nearest unit? What would be the effect of an increase in the annual holding cost per unit on (1) the EOQ and (2) total annual ordering costs? What should be the reorder level for this stock item (6787), to avoid the possibility of inventory-outs? Question 3 (12 Marks) Two grades of direct labour workers are employed to produce units of Product 1234. There are 40 Grade 1 employees and 20 Grade 2 employees. All employees work a basic week of 40 hours. Grade 1 employees are paid R10 per hour and Grade 2 employees are paid R15 per hour. If employees work any overtime, they are paid at time-and-one-third (a premium of one third over the basic rate). There are also five 'support workers', such as maintenance engineers, who are paid R12 per hour for a basic 40-hour week. During Week 23, the Grade 1 employees and support workers each worked 40 hours, and the Grade 2 employees worked 46 hours. Due to difficulties with some equipment, 250 hours of Grade 1 labour and 100 hours of Grade 2 labour were recorded as idle time in the week. During Week 23, 4,000 units of Product 1234 were manufactured. Required: a) Calculate the direct labour costs and the indirect labour costs in Week 23. Calculate the direct labour cost per unit of Product 1234 in Week 23. b) Question 4 A production centre has three production departments, A, B and C. Budgeted production overhead costs for the next period are as follows: R 60,000 80,000 20,000 18,000 Factory rent Equipment depreciation Insurance Heating and lighting Indirect materials: Department A Department B Department C Indirect labour: Department A Department B Department C 7,000 6,600 9,400 40,000 27,000 20,000 Direct labour hours Number of employees Floor area (square metres) Cost of equipment (R000s) Volume (cubic metres) Insurance costs relate mainly to health and safety insurance, and will beapportioned on the basis of the number of employees in each department. Heating and lighting costs will be apportioned on the basis of volume. Other relevant information is as follows: Total Department 18,000 50 1,200 1,000 18,000 A 8,000 20 300 200 8,000 Department B 6,000 16 400 600 6,000 Department (10 Marks) C 4,000 14 500 200 4,000 Required: a) Calculate the overhead costs for each production department. b) Calculate an overhead absorption rate for the period for each department, assuming that a separate direct labour hour absorption rate is used for each department. c) Calculate an overhead absorption rate for the period, assuming that a single factory-wide direct labour hour absorption rate is used. Question 5 (12 Marks) In a factory with four production departments and two service departments, theoperating costs for the month of October were as shown below. Production Department 1 Production Department 2 Production Department 3 Service departments Canteen Boiler house R 700,000 300,000 400,000 The costs of running the canteen are apportioned to each department on the basis of the estimated use of the canteen by employees in each department. Production Department 1 Production Department 2 Production Department 3 Service departments 78,000 100,000 1,578,000 The costs of the boiler house are apportioned on the basis of the estimatedconsumption of power by each department. The service departments' costs are therefore apportioned as follows: Canteen Boiler house Canteen % 40 20 30 10 Boiler house % 30 30 20 20 Required: Prepare a statement showing the allocation of costs to the production departments. Question 6 (6 Marks) Entity Z is trying to obtain a cost estimate for the costs of repairs. The following monthly repair costs have been recorded for the past six months. Plack Company is a manufacturing company that makes and sells a single product. The following information relates to the company's manufacturing operations in the next financial year. Opening and closing stock: Production: Sales: Fixed production overheads: Fixed sales overheads: Nil 18,000 units 15,000 units R117,000 R72,000 Using absorption costing, the company has calculated that the budgeted profit for the year will be R43,000. Required: What would be the budgeted profit if marginal costing is used, instead of absorption costing? Question 7 A manufacturing company operates two processes. Output from Process 1 is transferred as input to Process 2. Output from Process 2 is the finished product. Data for the two processes in January are as follows: Process 1 Opening work in process Units introduced into the process Units completed and transferred to the next process (Process 2) Closing work-in-progress Material cost added during the period Conversion cost added during the period Process 2 Opening work-in-process Units transferred into the process from Process 1 Closing work-in-progress Units completed and transferred to finished goods inventory Costs for the period: Cost of production transferred from Process 1 Conversion cost added during the period Added materials during Process 2 Materials are input into Process 1 at the start of the process and conversion costs are incurred at a constant rate throughout processing. The closing work-in-progress in Process 1 at the end of January is estimated to be 50% complete for the conversion work. Required: Calculate: Nil 14,000 10,000 4,000 R70,000 R48,000 a) b) C) Nil 10,000 1,000 9,000 (20 Marks) R90,000 R57,000 R36,000 The materials from Process 1 are introduced at the start of processing in Process 2, but the added materials are introduced at the end of the process. Conversion costs are incurred at a constant rate throughout processing. The closing work-in-progress in Process 2 at the end of January is estimated to be 50% complete. the cost of completed output from Process 1 and Process 2. the cost of the closing work-in-process in each process at the end of January. Prepare the Process 1 account and the Process 2 account for January. Question 8 (14 Marks) Domco makes and sells a single product, Product P. It is currently producing 112,000 units per month, and is operating at 80% of full capacity. Total monthly costs at the current level of capacity are R611,000. At 100% capacity, total monthly costs would be R695,000. Fixed costs would be the same per month at all levels of capacity between 85% and 100%. At the normal selling price for Product P, the contribution/sales ratio is 60%. A new customer has offered to buy 25,000 units of Product P each month, at 20% below the normal selling price. Domco estimates that for every five units that it sells to this customer, it will lose one unit of its current monthly sales to other customers. Required: a) Calculate the variable cost per unit of Product P and total fixed costs per month. b) Calculate the current normal sales price per unit, and the contribution per unit at this price. c) Calculate the effect on total profit each month of accepting the new customer's offer, and selling 25,000 units per month to this customer. Recommend whether the customer's offer should be accepted. Question 9 (5 Marks) A contract is under consideration which would require 1,400 hours of direct labour. There is spare capacity of 500 hours of direct labour, due to the cancellation of another order by a customer. The other time would have to be found by asking employees to work in the evenings and at weekends, which would be paid at 50% above the normal hourly rate of R15. Alternatively, the additional hours could be found by switching labour from other work which earns a contribution of R5 per hour. Required: Calculate the relevant cost of direct labour if the contract is accepted and undertaken. Question 10 What are the five elements of a cost accounting system