QUESTION 1

Torota Motors is a truck manufacturing company and it is developing a cost accounting system for all its branches. It has decided to create 4 cost centers those are Department 1 and Department 2 that deals directly with production while Department 3 and Department 4 are service cost centers.

The following overhead details have been estimated

DEPT 1 DEPT 2 DEPT 3 DEPT 4

Indirect Materials ($) 50,000 60,000 40,000 30,000

Indirect labour ($) 40,000 55,000 30,000 30,000

Indirect expenses ($) 20,000 15,000 11,000 6,500

The following costs are indirectly related to the entire manufacturing company

Miscellaneous costs 200,000 (30%, 25% 35% and 10% respectively for the cost centres)

Rent 200,000

Electricity 100,000

Machine depreciation 50,000

Welfare of staff 40,000

Insurance of machines 25,000

Insurance of premises 30,000

The following information is also available

DEPT 1 DEPT 2 DEPT 3 DEPT 4

Number of radiators 2,000 4,000 6,000 1,000

Book value of machines 80,000 60,000 40,000 20,000

Area 1,000 2,500 1,000 500

Number of employees 50 70 40 40

Number of labour hours 2,500 1,500 1,500 500

Total overheads of Department 3 are re-apportioned to the other 3 cost centres on the basis of number of employees

Total overheads of Department 4 is reapportioned to the other 2 departments on the following basis:

Department 1 60%

Department 2 40%

You are required to:

You are required to:

a) Prepare an Overhead Analysis Sheet to calculate the total overheads of each department

(35 marks)

b) Explain why departments 3 and 4 further give their overheads to department 1 and 2?

(5 marks)