3.23 Intermediate: Make-or-buy decision. Shown below is next year's budget for the forming and finishing departments of Tooton Ltd. The departments manufacture three different types of component, which are incorporated into the output of the firm's finished products. Production (units) Prime cost ( per unit): Direct materials Forming dept Direct labour Forming dept Finishing dept Manufacturing times (hours per unit): Machining Forming dept Direct labour Forming dept Finishing dept Variable overheads Fixed overheads Machine time required and available Labour hours required and available A 14,000 A 8 00 6 10 24 4 23 30 65 60 Forming department 200,900 401,800 602,700 98,000 hours Component B Component 10,000 B 3 3 10 7 9 15 31 C 2 4 12 (Continued) Finishing Department () 115,500 231,000 346,500 82,000 hours 154,000 hours The forming department is mechanized and employs only one grade of labour; the finishing department employs several grades of labour with differing hourly rates of pay. Required: (a) Calculate suitable overhead absorption rates for the forming and finishing departments for next year and include a brief explanation for your choice of rates. (6 marks) (b) Another firm has offered to supply next year's budgeted quantities of the above components at the following prices: Component A Component B Component C Advise management whether it would be more economical to purchase any of the above components from the outside supplier. You must show your workings and, considering cost criteria only, clearly state any assumptions made or any aspects that may require further investigation. (8 marks) (c) Critically consider the purpose of calculating production overheads absorption rates. (8 marks) ACCA Foundation Costing 6,000 9 12 8 29

3.23 Intermediate: Malce-or-bury decislon. Shown below is next year's budgot for the forming and finishing departments of Tooton Ltd. The departments manufacture three different types of component, which are incorporated into the output of the firm's finished products. Manufacturing times Pours per unity: Machinine Foming dept 4 3 2 Direct labour Formine dept Finishing dept 2 3 3 10 12 The formine department is mechasand and enobovs only one crase of iabour; the finishine degartinent emoloys several crades of labour with oflenire houly rates of pas. Required (a) Calculate sultable oveifead absoption ines for the a brief explanation for your choice of abes. (6) maks) (b) Another firm has chered so suoph nest years budueted quartives of the above comocreits ax the folkwins prices: Component A Component 8 120 Componene C res Advise manapoment whecher t would be more economical to purchase any of the abowe camconerts fom the outside supplec You must shoe your mokines and, consiserine. aspects that may mouie farther inesticition. (8) marks (e) Cratically consider the purpose of calculatine production overtieads absorption rates. (6 maks)