QUESTION 5 (40 MARKS) Bino Ltd produces suits in three separate production departments (viz. Cutting, Sewing and Finishing). Production is serviced by three service centres (viz. Material store, Canteen and Maintenance). The Material store cost centres costs are apportioned to other departments using the direct method while the reciprocal method based on simultaneous equations is used to apportion Canteen and Maintenance centres costs. The Maintenance costs are apportioned based on floor area. It is Binos policy to set selling prices to ensure a profit margin of 30% on sales. The company received a new order for 1 000 suits which will require the following costs: Cost Quantity and price Material- fabric 1 500 metres costing N$20 per metre Direct labour 2 000 hours at a rate of N$30 per hour Administration and selling costs 10% of production costs The following hours will also be needed for the 1 000 suits. Cutting Sewing Finishing Direct Labour Hours 1 000 300 700 Machine hours 700 500 200 Budgeted expenses and other details for the year ended 28 February 2020 were as follows: Table 1: Budgeted manufacturing costs and overhead allocation bases. Total Cutting Sewing Finishing Material store Canteen Maintenance N$ N$ N$ N$ N$ N$ N$ Direct wages (N$) 120 000 50 000 30 000 40 000 - - - Indirect wages (N$) 100 000 10 000 20 000 20 000 32 000 10 000 8 000 Consumables (N$) 50 000 5 000 4 000 20 000 - 15 000 6 000 Depreciation Equip. (N$) 90 000 ? ? ? ? ? ? Fuel (N$) 30 000 ? ? ? ? ? ? Heat and light (N$) 15 000 ? ? ? ? ? ? Rental and prop. Taxes (N$) 45 000 ? ? ? ? ? ? Equipment Value (N$) 300 000 100 000 60 000 100 000 10 000 10 000 20 000 Number of Employees 250 25 100 100 10 10 5 Floor space used (m2) 30 000 9 000 9 000 8 000 2 000 1 000 1 000 Fuel usage (%) 100 30 10 40 10 5 5 Page 21 of 27 Direct labour hours 100 000 8 000 50 000 42 000 - - - Machine hours 90 000 15 000 45 000 30 000 - - - Material issues (%) 100 60 15 15 - - 10 It is company policy to allocate/(absorb) manufacturing overheads in the cutting department based on direct labour hours while the manufacturing overheads in the sewing and finishing departments are allocated/(absorbed) based on machine hours. Required: Mark 5.1 Using examples that relate to this question, explain the difference between apportionment of overheads and allocation (or absorption) of overheads. 2 5.2 Perform a primary apportionment of production overheads to respective departments clearly showing the basis of apportionment. Answers without bases of apportionment will be regarded as guesswork and will not get any mark. 10 Now assume that the primary apportionment has been correctly done for you as follows: Table 2: Primary allocation of production overheads Total Cutting Sewing Finishing Material store Canteen Maintenance N$ N$ N$ N$ N$ N$ N$ Total overheads 330 000 72 000 63 000 98 000 42 000 31 500 23 500 Required: Mark 5.3 Using the primary apportioned overheads in Table 2, and any relevant information from the question including Table 1, perform a secondary overhead apportionment of service departmental overheads to production departments using (i) appropriate basis of apportionment and (ii) applicable method(s) of apportioning service departmental overheads to production departments. 10 5.4 Calculate the predetermined overhead rates to be used in each of the three production departments. 6 5.6 Determine the sales value of the 1 000 suits ordered. 6 5.7 Assuming that for the year ended 28 February 2019 the actual manufacturing overheads for the sewing department were N$110 000, actual machine hours were 14 000 hours and actual direct labour hours were 9 000 hours, calculate the over/under absorption of manufacturing overheads in the sewing departments. 2 Page 22 of 27 5.8 Explain how under/over recoveries of overheads arise and why predetermined overhead rates are used. 4 Total 40