Question
Among the papers Sally handed you earlier, you have found some estimated data on a new manufacturing division at Newcastle which is at the final
- Among the papers Sally handed you earlier, you have found some estimated data on a new manufacturing division at Newcastle which is at the final approval stage from EU cosmetic legislation to commence production. The Senior Management Team of the group is currently looking for a suitable accountant for the pre-opening assignments and Sally has been assigned to set up the costing system for the time being. Sally has collated the following information based on her experience with other similar division in the group.
- This division will produce different beauty products and costs will be allocated to jobs. Like the other existing divisions of the group, the Newcastle division will have five departments- two manufacturing (Processing and Sealing) and three service departments (maintenance, recreation and Estate). Recreation departments overhead costs will be apportioned equally between manufacturing departments. Other service departments costs will be apportioned in the following manner:
| Processing | Sealing | Recreation |
Maintenance | 40% | 50% | 10% |
Estate | 50% | 35% | 15% |
- For the year to 30th April, the departments (cost centre) expenses and other relevant information Sally estimated are as follows:
| Total costs () | Proc | Seal | Main | Can | Estate |
Indirect wages | 200,000 (approx.) |
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| Living wages 20/21 for above 25 years+ 20% premium | Living wages 20/21 for above 25 years | Living wages 20/21 for above 25 years |
Indirect material | 300,000 | 15% | 20% | 40% | 15% | 10% |
Utility | 900,000 |
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Machine depreciation | 300,000 |
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Mortgage | 600,000 |
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Factory supervisors salary | 75,000 |
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Indirect labour hours |
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| 10,000 | 4,000 | 6,750 |
Direct material cost | 1,500,000 | 11,500 kgs | 3,500 kgs |
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Machine hours |
| 50,000 | 80,000 | 20,000 |
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Floor space (in sq metre) |
| 7,000 | 5,000 | 1,000 | 800 | 1,200 |
Direct labour hours | 3,000,000 | 120,000 | 30,000 |
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Sally is hoping you would prepare a report with a detailed explanation of the available costing system you are planning to use and exhibiting the calculation of manufacturing overhead absorption rate and how that rate will be used to calculate product cost. In your report, you may also include your suggestion for a better costing system and the requirements to implement it in the new division. You are allowed to make up some imaginary information as example to clarify the proposed system. Also, any research findings would be helpful to convince the board of directors.
- In addition to the above, Sally is asking you to calculate the cost of first order- (J001) to be manufactured in order to conduct testing and get certificates from the compliance authority. The following information has been collected from the operation manager who is working on this pre-opening project.
| Processing | Sealing |
Direct material | 100 kgs | 30 kgs |
Direct labour | 300 hours | 150 hours |
Machine hours | 120 hours | 200 hours |
How do the different costing systems you suggested in your report influence cost calculation of J001? Explain their differences as well.
- Do you believe that the costing system would be entirely different from the above if Newcastle division would produce single, homogeneous product that would flow through a continuous production process? How much would be per unit cost then? You are allowed to make reasonable assumptions and figures to clarify how the new system might work. (Hints: Assume that instead of several health and beauty products, if the division only produces hand sanitizers in 100 ml cosmetic bottles, what would be the costing system? How would you calculate cost per product when the annual manufacturing costs provided in the 3(b) will be incurred for producing 200,000 bottles? Presentation and clarification of tentative cost calculation are key here.) (45 marks)
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