Question 1

BudaZen manufactures a single product - vaccine called Budavax, with the following variable cost per unit:

Direct Materials	7.00
Direct Labour	5.50
Manufacturing Overheads	2.00

The expected total fixed overhead costs for the period are:

Fixed non-manufacturing costs	875,000
Fixed manufacturing costs	1,340,000

Fixed manufacturing overhead costs are allocated into following departments:

Manufacturing	Research	Service	General factory
(000)	(000)	(000)	(000)
380	465	265	230

Manufacturing and Research are production departments; the rest are service departments.

General factory costs represent space costs, for example rates, lighting and heating. Space utilization is as follows:

	Space Utilisation
Production Department:
Manufacturing	40.00%
Research	50.00%
Service	10.00%

Normal (expected) production department activity:

Production Department	Direct Labour Hours	Machine Hours	Production Units
Manufacturing	80,000	2,400	120,000
Research	100,000	2,400	120,000

Other information:

1. Selling price is set at 36.00 per unit.
2. 60% of service department costs are labour related, the remaining 40% are machine related.
3. Fixed manufacturing overheads are absorbed at a predetermined rate per unit of production for each production department, based on normal activity.
4. Costs for the period as per expectation, except for additional expenditure of 20,000 on fixed manufacturing overhead in Manufacturing department.
5. Production and sales were 116,000 and 114,000 units, respectively, for the period.
6. Opening inventory of finished goods for the period is zero.

Required:

	Prepare the following under the full absorption costing system as described above. Where relevant, show each element of cost separately:
(i)	Overhead cost per unit of each production department.
	(11 Marks)
(ii)	Total Manufacturing costs per unit of Budavax.
	(2.5 Marks)
(iii)	A Profit Statement showing Net Profit / loss.
	(6.5 Marks)
	Prepare a Profit Statement under variable (marginal) costing system showing net profit / loss. Where relevant, show each element of cost separately.
	(5 Marks)
	Contrast the general effect on profit of using absorption and variable (marginal) costing systems, respectively. Discuss your observations (Use the figures calculated in (a) and (b) above to illustrate your answer). (Max word-count: 200)
	(8 Marks)
	Explain how absorption costing can encourage managers to engage in behaviour that is harmful to the organisation? (Max word-count: 150)
	(7 Marks)
	(Total: 40 Marks)