Question 1

Beaver Limited is a company that specialise in producing bespoke wardrobes for customers to their particular specifications. It has two production departments P1 and P2 and two service departments S1 and S2. Budgeted overheads for the year are as follows:

Rent and rates	20,000
Heat and light	4,500
Machine insurance	9,000
Telephone	3,000
Depreciation (machine)	12,000

Statistical information:

	P1	P2	S1	S2
Floor area (sq.metres)	900	1,100	300	200
Machine value (000)	100	70	50	30
Direct labour hours	3,000	4,000
Telephone: sample of calls	15%	10%	30%	45%
Allocated overheads: specific to each department	12,600	8,400	5,100	7,400

Service department S1 works 60% for P1 department and 40% for P2. Service department S2 works 50% for P1, 30% for P2, and 20% for S1. The labour rates in P1 are 15 per hour and in P2 are 12 per hour.

Requirements:

1. Calculate the overhead cost for each department and an overhead absorption rate for each department based on direct labour hours. (14 marks)

2. Job number Q110 has the following costs:

Direct material 400

Labour hours: P1: 20 hours and P2: 10 hours

Beaver quotes prices to customers that reflect a required profit of 25% on selling price. Calculate the price to be charged to the customer for Job Q110. (3 marks)

3. Comment on the differences between Activity Based Costing (ABC) and absorption costing. (5 marks)

4. Outline three reasons for the rise in the use of Activity Based Costing (ABC) by business. (3 marks)