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Section A: Compulsory Question - Answer All Parts Question One In-Time Ltd provides curtain-making services to hotels, hospitals and a variety of other organisations It has commenced the preparation of its budgeted overhead costs for the coming period and has identified the following costs: Budgeted overhead costs Totals Fire insurance 13,000 Power Hilole 23,000 Heating and lighting Valable 19,500 Machine depreciation 26,300 Machine insurance 16,000 Rent and rates Fred 35,500 IFY In-Time Ltd has two production departments, a cutting department and a make-up department. It also has two service departments, material procurement and a general support office. Additional data about the coming period has also been provided: Material General Cutting Make-Up Procurement Support Square metres occupied 12.000 16,000 3,000 5,000 Book value of machinery 120,000 245.000 10,000 17,000 No. of employees 45 32 3 5 Kilowatt hours 4,500 8,200 500 250 Budgeted labour hours 14,230 8,500 Budgeted machine hours 5,500 28,600 The company is now deciding on the most appropriate method of assigning service department costs to operating departments. It has agreed that material procurement costs should be reapportioned based on the number of square feet occupied in each department, while the costs of the general support department should be reapportioned on the basis of the number of employees Required: a) With respect to cost classification explain how costs may be classified by their behaviour, with particular reference to the effects on both total and on unit costs. (10 marks) b) Explain the contribution approach and discuss two reasons why a contribution approach to product costing is preferable to a full cost approach. (10 marks) c) Prepare an overhead cost statement showing the allocation of overhead to the four cost centres, clearly showing the basis of apportionment. (15 marks) Reapportion service departments' costs to operating departments using the direct method and determine departmental overhead absorption rates for each production department. Justify the absorption method used (15 marks) d) Identify two reason as to why you would recommend that the company should adopt predetermined overhead rate in preference to an actual overhead rate. (10 marks) (Total: 60 marks)