After adding production overhead to prime cost, gross profit is ascertained by increasing production cost by one-third.

Required:

a) Calculate the overhead plant-wide rate.

b) Apply the plant-wide rate to the contract undertaken for PINTEREST. Calculate the full production cost of this contract.

c) Calculate departmental overhead rates.

d) For each of the departmental overhead rates calculated in (c) above, explain (in detail) why you chose a particular activity base (or cost driver). You must provide reasons for each overhead rate calculated. You must also justify your choice of activity base (or cost driver) by relating each driver back to the case-facts. You must not make generalised statements in justifying your choices.

e) Apply the departmental overhead rates to the contract undertaken for client PINTEREST. Calculate the full cost of this contract.

f) Compare the costs figures in (b) and (e) for the contract for client PINTEREST. Explain the difference in cost figures: you must explain how well the overhead rates reflect the overhead costs incurred and consumed. Identify the overhead rate that better allocates overhead costs.

g) What are the challenges faced when allocating overhead costs to products. Can these challenges identified be overcome by using Activity Based Costing? Explain using your own words. Your answer should INCLUDE an explanation of the implications of the hierarchy of overhead costs and activities.

JONIRY Company has 3 production departments. The company uses a plant-wide rate to allocate overhead costs; it uses direct wages cost as the activity base (or cost driver) You are given production information for 2019: Production overhead costs Production Dept Direct wages (S) Direct labour hours Machine hours 80,000 50,000 20,000 (S) 60,000 90,000 75,000 225,000 Assembly Painting Packaging Total 40,000 20,000 25,000 20,000 30,000 50,000 150,000 85,000 During 2019, the firm incurred the following costs and consumed the following resources to complete a particular contract for client PINTEREST: Production Dept Direct material (S) Direct wages (S) Direct labour hours Machine hours Assembly Painting Packaging 40 10 60 60 120 100 20 40 10 10 10