Q1.

Imagine a business which makes handmade tables and chairs

Each table has the following direct costs (easy to calculate):

Direct material: 4 sq. metres of wood @ $10 per sq. metre = $40

Direct labour:1.5 hrs @ $30 per hr = $45

It also budgets for manufacturing overhead costs per month of $5,000

How do we include these overhead costs in the cost of each table (using one plant-wide rate)?

Think about what information you would need and how you would use it

We need more information to allocate the overhead costs of $5,000 to tables (and chairs)

We need to know what drives / causes the costs before we can allocate them

For the moment, we will assume that labour hours cause the overhead costs, so that the products that take the most labour hours to make will have the most overhead allocated to them

Assume that 200 labour hours per month are budgeted for and that 100 tables are expected to be made in the month

Now calculate the overhead costs and the total manufacturing costs per table

Q2.

X Ltd makes widgets.

It has no opening inventory

Budgeted and actual fixed manufacturing costs are $100,000

Budgeted and actual fixed non- manufacturing costs are $40,000

Budgeted and actual production are 10,000 units

Variable manufacturing cost was $30 per unit

Variable non-manufacturing cost was $5 per unit sold

X Ltd sold 9,000 units at $60 per unit

Calculate the Operating Income according to both Absorption and Variable costing and explain the difference

Q3.

Y Ltd makes gadgets.

It has no opening inventory

Closing inventory was 600 units

Budgeted and actual fixed manufacturing costs are $800

Budgeted and actual production is 1600 units

Variable manufacturing cost was $1.50 per unit

The selling price was $5 per unit

Sales commissions of 5% of sales revenue are paid to sales people

Other non-manufacturing fixed costs total $300

Calculate the Operating Income according to both Absorption and Variable costing and explain the difference.