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MGT102 Revision Questions

1.   Cost Accountant – Industrial Concern

You are the Cost Accountant of an industrial concern and have been given the following budgeted information regarding the four cost centres within your organisation:

Department Department Maintenance Canteen Total

     1     2 Department

     £     £                         £                    £                     £

Indirect labour   60,000 70,000 25,000 15,000 170,000

Consumables   12,000 16,000  3,000 10,000   41,000

Heating &

  Lighting   12,000

Rent & Rates   18,000

Depreciation   30,000

Supervision   24,000

Power   20,000

315,000

You are also given the following information:

Department Department Maintenance Canteen Total

1 2

Floor space in

  Square metres    10,000   12,000   5,000   3,000   30,000

Book value of

  Machinery in £ 150,000 120,000 20,000 10,000 300,000

Number of

   Employees 40          30       10                   80

Kilowatt hours        4,500     4,000  1,000    500   10,000

You are also told:

(i)  The canteen staff are outside contractors.

(ii) Departments 1 and 2 are production cost centres and the maintenance department and canteen are service cost centres.

(iii) The maintenance department provides 4,000 service hours to Department 1 and 3,000 service hours to Department 2.

(iv)  That Department 1 is machine intensive and Department 2 is labour intensive.

(v)  That 6,320 machine hours and 7,850 labour hours are budgeted for Departments 1 and 2 respectively for 20X7.

Task 1    Prepare an overhead cost statement showing the allocation and apportionment of overhead to the four cost centres for 20X7, clearly showing the basis of apportionment is required.

Task 2 Calculate the overhead absorption rates for Department 1 on the basis of machine hours and Department 2 on the basis of labour hours.

Task 3  On the basis that for 20X7 actual overheads for Department 1 turn out to be £155,000 and machine hours worked 6,000, whilst actual overheads for Department 2 turn out to be £156,000 and labour hours worked 7,900, calculate the under or over recovery of overheads for each department.

Task 4 The Managing Director of your organisation suggests to you that one blanket rate rather than separate overhead absorption rates for Department 1 and 2 based on machine hours and labour hours respectively would be more beneficial for future years.

Draft a reply to this assertion.

2. Overhead absorption costing

Finetech plc is engaged in precision engineering, using expensive machinery to produce components to specific orders.  Prices are quoted on the basis of estimated total factory cost for each job plus a mark-up of 100% to cover all administration and selling costs, together with profit.

The production budget for the current year includes the following data:

The following estimates have been made regarding Job 654:

Required

(a) Calculate TWO possible price quotations for Job 654, using a different basis for factory overhead absorption in each case.

(b) State which basis should be used in these circumstances, giving reasons for your choice.

3.  CFT Productions operates an overhead absorption costing system for dealing with production overheads. The following estimated information for the forthcoming year is provided:

Required:

(a) Calculate an appropriate overhead absorption rate for the Assembly department, the Machining department and the Finishing department of CFT Productions

(b) Calculate the Finishing department’s production overhead for product X, if this takes 8 machine hours and 14 labour hours in this department

4.  A firm has sufficient spare capacity to make a product (X) that is currently bought in at £48 each.  Manufacturing costs would be:

Materials £20 per unit

Labour £16 per unit

Variable exp’s £7 per unit 

The fixed costs allocated to the department are £9,000 per month.  

(a) Should the company make or buy the 500 components? 

(b)  Now suppose that the firm had been operating at full capacity producing product Z whose selling price is £15 per unit and variable cost £9 per unit.  To produce the 500 components of X would involve cutting back production (and therefore sales) of Z by 600 units.  Should the component be made or bought?

(c) Outline three factors to be considered if a company decides to outsource some of its products.