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2) Bell Franco Lid. is currently using plantwide (blanket) overhead rate based on the machine hours of 250,000 hours to calculate its absorption rate of manufacturing overheads. The table 1 presents annual overhead costs of Bell Franco Ltd: Description Rent, heating and lighting of factory 400,000 Factory Insurance 200,000 Salary of factory manager and supervisor 100,000 Depreciation of factory machinery 250,000 Cleaning expenses 75,000 Administrative overheads 125,000 Selling overheads 350,000 Table 1: Overhead costs 2/3"d of the cleaning cost is spent for cleaning the factory floor. The rest is used for administrative building. 2 It includes rent of the administrative building, hitting and lighting etc. It includes costs related to the marketing team's salary, share of office rent, conveyance, business trips, advertisement etc. Due to recent expansion and competitive market condition, the company has decided to use the activity-based costing system from the new year. Based on the interviews of relevant personnel, the following activities have been determined. Order Material Planning & Customer Other (%) acquisition preparation layout (%) service (%) (%) (%) Rent, heating 0 40 50 0 10 and lighting of factory Factory 20 30 35 0 15 Insurance Salary of factory 30 25 30 5 10 manager and supervisor Depreciation of 10 20 50 0 20 factory machinery Cleaning 0 0 0 0 100 expenses Administrative 30 20 20 30 0 overheads Selling 40 0 0 50 10 overheads The company has also estimated following measures of activity annually: Activity measures Quantity Number of orders 4.000 Material handling 300,000 hours Machine hours 250,000 hours Number of customers 200Due to recent expansion and competitive market condition, the company has decided to use the activity-based costing system from the new year. Based on the interviews of relevant personnel, the following activities have been determined. Order Material Planning & Customer Other (%) acquisition preparation layout (%) service (%) (%) (%) Rent, heating 0 40 50 0 10 and lighting of factory Factory 20 30 35 0 15 Insurance Salary of factory 30 25 30 5 10 manager and supervisor Depreciation of 10 20 50 0 20 factory machinery Cleaning 0 0 0 0 100 expenses Administrative 30 20 20 30 0 overheads Selling 40 0 0 50 10 overheads The company has also estimated following measures of activity annually: Activity measures Quantity Number of orders 4,000 Material handling 300,000 hours Machine hours 250,000 hours Number of customers 200 Required: a) Using the existing costing system, what would be the company's absorption rate of manufacturing overheads? b) Calculate activity rates using the activity-based costing system and compare the results. Evaluate both costing systems (existing and upcoming). You may refer to the data above and relevant product costing. c) Jane is a regular customer of the company and she placed 3 orders. Compute the product costs of the following job-order using the ABC system: Direct material ($45 per kilo) 2,000 kgs. Direct labour (E10/hour) 300 hours Number of orders 3 Material handling 500 hours Machine hours 600 hours What would be the selling price if the company earns 25% profit on selling price? (40 marks)
