Question 1

Hull sandwich Ltd makes sandwiches and the company produces this sandwich in batches of 30 packs. The production and sales data for the last two years are given below:

Year ended 31^st October 2019

Year ended 31^st October 2018

Production

32,500 batches

31,000 batches

Sales

32,000 batches

30,000 batches

There was no opening inventory on 1^st November 2017. The company ensured variable cost is 30% of sales in both 2018 and 2019, and the variable costs of making one batch of sandwiches before 31^st October 2018 were as follows:

Categories

Cost per batch ()

Direct materials

60

Direct labour

6

Machine hour

15

Variable manufacturing overhead

4

Variable marketing and administrative overhead

7

The fixed manufacturing and marketing and administrative overheads were 600,000 and 500,000 respectively in 2018.

From 1st November 2018, the company has made the following changes to its cost structure:

1.The direct labour, variable manufacturing overhead and variable marketing and administrative overhead costs are to increase by 2%. Besides, a new supply chain reduces the cost of direct materials by 15%.

2.Full-time staff will be paid 3% higher based on the amount in 2018. One-third of the fixed manufacturing cost and one-fifth of the fixed marketing and administrative cost in 2018 represented the salary of full-time staff. No other changes have been made of full-time staff salary.

3.The company has rented a new van for 12,000 per year.

4.The company has recruited a new production manager to supervise the production process. The firm pays salary of 15,000 per year.

Required:

a)Calculate the sales price of the sandwich per batch and per pack in 2019.(5 marks)

b)Prepare the income statement for Hull Sandwich Ltd for the year ended on 31^st October 2019 using the absorption costing approach. (10 marks)

c)Evaluate the differences between marginal costing and absorption costing approach.(4 marks)

D) In addition to absorption and marginal costing, there are some other costing methods, like Activity Based Costing (ABC). The firm can use ABC to allocate the overhead cost based on business activities. Briefly discuss the importance of choosing an appropriate cost driver for allocating overhead cost.