Knowing that you are studying for the CIMA qualification, a friend who manages a Question SM 4.1 small business has sought your advice about how to produce quotations in Overhead response to the enquiries which her business receives. Her business is sheet metal analysis, fabrication supplying ducting for dust extraction and air conditioning installa- calclation of tions. She believes that she has lost orders recently through the use of a job cost overhead rates estimating system which was introduced, on the advice of her auditors, seven and a product years ago. You are invited to review this system. cost Upon investigation, you find that a plant-wide percentage of 125% is added to prime costs in order to arrive at a selling price. The percentage added is intended to cover all overheads for the three production departments (Departments P, Q and R), all the selling, distribution and administration costs, and the profit. You also discover that the selling, distribution and administration costs equate to roughly 20% of total production costs, and that to achieve the desired return on capital employed, a margin of 20% of sales value is necessary ou recommend an analysis of overhead cost items be undertaken with the objective of determining a direct labour hour rate of overhead absorption for each of the three departments work passes through. (You think about activity-based costing but feel this would be too sophisticated and difficult to introduce at the present time.) There are 50 direct workers in the business plus 5 indirect production people From the books, records and some measuring, you ascertain the following infor- mation which will enable you to compile an overhead analysis spreadsheet, and to determine overhead absorption rates per direct labour hour for departmental over- head purposes: Cost/expense Annual amount Basis for apportionment where allocation not given Repairs and maintenance Depreciation Wage-related costs Technical assessment: P E42 000, Q 10 000, R 10 000 62 000 0 000Cost of plant and equipment 9 000 87 000 90 000 30 000 26 000 Direct labour hours 12.5% of direct wages costs Direct labour hours Number of direct workers Floor area su Indirect labour Business rates and insurance