Question 5 (Traditional Costing)

The Aungier Manufacturing Company Ltd. has three production and three service departments.

The primary analysis work relating to factory overhead expenses (such as power, rent and rates etc.) has already been done on the overhead analysis sheet which is in preparation for the imminently commencing financial year. This yields the following sub-totals for each department;

Service dept 1 3,800

2 4,500

3. 5,300

Production dept A 20,800

B 15,200

C 11,400

61,000

It is now necessary to complete the sheet and compute predetermined absorption rates to be used for the year ahead. A technical assessment for apportioning the costs of the service departments (reduced to percentage terms) gives the following figures:

Dept	1	2	3	A	B	C	TOTAL
1	-	9	6	38	27	20	100%
2	10	-	5	34	29	22	100%
3	7	11	-	40	24	18	100%

Dept A Dept B Dept C

Labour hours 8,000 5,000 200

Machine hours are 1,000 600 800

Requirement (see c, d & e on following page)

a. Show the remaining work to be done on the overhead analysis sheet by using the continuous allotment/ repeated distribution method of reallocating service department costs.

b. Calculate appropriate overhead absorption rates for each department.

)

A regular product of the company is article Zed, whose prime cost per unit in the most recently concluded monthly accounting period was as follows:

Direct material

10kg. Raw Material X @ 12.25 122.50

5kg. Raw Material Y @ 13.44 67.20 189.70

Direct labour

3hrs Dept A @ 10 30.00

1.5 hrs Dept B @ 8 12.00

1hr Dept C @ 6 6.00 48.00

237.70

Machine utilisation is expected to be :

Dept A 4 hours

Dept B 1 hour

Dept C 2 hours

Administration and selling and distribution overhead came to 50 per unit.

Requirement

c. Compute an expected production cost per unit in the upcoming year using the absorption rates you have selected in part (b) above.

Assume at the end of the period that actual overheads in Dept B were 20,438 and actual labour hours were 4,820 and actual machine hours were 1,110.

d. Prepare and overhead control account for Dept B clearly explaining the reason for any under or over absorption

e. Your CEO has been reading about traditional costing and other costing measures. You have been asked to write a memo outlining whether traditional costing is the correct costing approach for the company. You are also asked to explain the reasons for preparing pre-determined overhead absorption rates based on budgeted information rather than actual overhead figures.