Question 2

A furniture manufacturer produces quality furniture according to customers orders. It has three production (A, B and C) and two service (X and Y) cost centres. Production cost centres A and B uses mainly machines whereas cost centre C is labour intensive. The overheads budgeted for a month is as follows:

$

Insurance of machinery	10,000
Supervision costs	4,500
Telephone charges	2,000
Depreciation of machinery	18,000
Indirect materials - department A	1,500
department B	2,500
department C	2,000
Power (electricity)	22,000
Lighting (electricity)	12,000
Indirect labour - department A	1,200
department B	1,800
department C	1,500

Other budgeted data available are:

	Production cost centres			Service cost centres
	A	B	C	X	Y
Machine hours	5,000	2,000	3,000
Direct labour hours	2,000	1 800	1,200	-	-
Floor area ( sq. metres)	1,500	2,000	1,500	600	400
Costs of machines ($ 000)	500	300	200
Power usage (000 kwh)	200	150	150
Wage rate per hour	$5	$4	$3
Number of direct workers	10	12	8

The service cost centres provide the following percentage of services:

	Production cost centres
	A	B	C
Servcie department X	50%	25%	25%
Service department Y	30%	20%	50%

1. Prepare a schedule showing the final budgeted overhead costs for each production department A, B and C showing the appropriate basis of apportionments used. (Activity based costing)

2. Two pieces of furniture designated as Job 123 and Job 124 are made for customers for which the following data were recorded:

		Job 123	Job 124
Direct material		$ 300	$ 200
Direct labour hours	Cost centre A	18	15
	Cost centre B	10	8
	Cost centre C	12	12

1. Calculate the total production cost of each job using the results from (a), above.

2. Critically evaluate and recommend which cost is better allocated for Job 123 and Job

124. Briefly explain the reason for your choice. (in comparison with traditional cost allocation method)