Question 1

McQueen Co has incurred the following overhead costs.

Cost	000
Depreciation of factory premises	120,000
Supervisors wages Production 1	13,600
Supervisors wages Production 2	14,400
Factory premises repairs and maintenance	75,000
Factory office costs (treat as production overheads)	100,000
Depreciation of equipment	90,000
Insurance of equipment	18,000
Lighting	20,000
Canteen	120,000
	571,000

Information relating to the production and service department in the factory is as follows:

	Departments
	Production 1	Production 2	Service 1	Service 2
Floor space (SqM)	1,700	1,800	800	700
Number of employees	40	40	10	10
Book value of equipment	30,000	30,000	20,000	10,000

The service departments do not make use of each others services. Both services departments provide 60 and 40 percent of their work to Production 1 and Production 2 respectfully.

Required:

1. Apportion and allocate (where possible) the above overhead costs using the best possible basis of apportionment to both production and service cost centres. Then reapportion the cost from service to production cost centres

(19 marks).

1. Using your own words, explain fist stage and second stage of the overhead appointment? (120 words maximum)

(6 marks)

(Total marks: 25)

Question 2

The following data is related to two investment projects, and only one project may be selected:

	Project (A) ()	Project (B) ()
Initial capital expenditure	25,000	25,000
Profit (loss) year 1	17,500	10,000
2	15,000	10,000
3	12,500	12,000
4	10,000	18,000
Estimated resale value at end of year 4	5,000	5,000

Notes:

1. Profit is calculated after deducting straight-line depreciation
2. The cost of capital is 10%

Required:

(a) Calculate for each project:

(i) Payback period

(ii) Net present value (NPV)

(17 marks)

(b) Explain which project you would recommend for acceptance.

(2 marks)

(c) Briefly discuss the relative merits of using NPV and payback period for making capital budgeting decisions.

(6 marks)

(Total marks: 25)