Cost Assignment

Ltd’s budgeted overheads for the forthcoming period applicable to its production departments, are as follows: (£000) 1 2 870 690 The budgeted total costs for the forthcoming period for the service departments, are as follows: (£000) G H 160 82 The use made of each of the services has been estimated as follows.Production department G(%) H(%) 1 60 50 Service department 2 30 30 G — 20 H 10 — Required: Apportion the service department costs to production departments: (i) using the step-wise (elimination) method, starting with G; (ii) using the reciprocal (simultaneous equation) method; (iii) commenting briefly on your figures.(9 marks) (b) Calculate the manufacturing overhead cost per unit of finished product in a batch of 100 units which take 9 direct labour hours in department A and three machine hours in department B to produce.

Ltd’s budgeted overheads for the forthcoming period applicable to its production departments, are as follows: (£000) 1 2 870 690 The budgeted total costs for the forthcoming period for the service departments, are as follows: (£000) G H 160 82 The use made of each of the services has been estimated as follows.

(20 marks) CIMA Cost Accounting 1 Question IM 3.2 Intermediate Critically consider the purpose of calculating production overhead absorption rates.

Question IM 3.3 Intermediate (a) Specify and explain the factors to be considered in determining whether to utilize a single factory-wide recovery rate for all production overheads or a separate rate for each cost centre, production or service department.

Budgeted profit and loss statement for the year ending 31 December (£) (£) Sales Cost: Direct materials Direct wages Prime cost Fixed production overhead Production cost Selling, distribution and administration cost 750 000 100 000 50 000 ––––––– 150 000 300 000 ––––––– 450 000 160 000 ––––––– Profit Budgeted data: Labour hours for the year Machine hours for the year Number of jobs for the year 610 000 –––––––– £140 000 –––––––– –––––––– 25 000 15 000 300 An enquiry has been received, and the production department has produced estimates of the prime cost involved and of the hours required to complete job A57.

(£) Direct materials Direct wages Prime cost Labour hours required Machine hours required 250 200 –––– £450 –––– 80 50 You are required to: (a) calculate by different methods six overhead absorption rates; (6 marks) (b) comment briefly on the suitability of each method calculated in (a); (8 marks) (c) calculate cost estimates for job A57 using in turn each of the six overhead absorption rates calculated in (a).

(6 marks) (b) Outline the reasons for calculating a pre-determined overhead absorption rate.

(2 marks) (c) Select the overhead absorption rate that you think the organization should use giving reasons for your decision.The costs and activity are expected to arise evenly throughout the year, and the budget has been used as the basis of calculating the company’s absorption rates.During March the monthly profit statement reported (i) that the actual hours worked in each department were Machining Hand finishing 6000 hours 9600 hours (ii) that the actual overhead costs incurred were Machining Hand finishing Fixed £ Variable £ 48 500 33 600 36 000 33 500 (iii) that the actual production was 15 000 units.Required: (a) Calculate appropriate pre-determined absorption rates for the year ended 31 December (4 marks) COST ASSIGNMENT 9 (b) (i) Calculate the under/over absorption of overhead for each department of the company for March; (4 marks) (ii) Comment on the problems of using predetermined absorption rates based on the arbitrary apportionment of overhead costs, with regard to comparisons of actual/target performance; (4 marks) (c) State the reasons why absorption costing is used by companies.(3 marks) (Total 15 marks) CIMA Stage 1 Accounting Question IM 3.9 Intermediate: Various overhead absorption rates AC Limited is a small company which undertakes a variety of jobs for its customers.Department C is expected to produce 148 000 units of final product in the budget period.The company will operate for 48 weeks in the budget period.Required: Draft a memo to the Chief Accountant outlining the general characteristics and advantages of employing a successful incentive scheme.(8 marks) (Total 25 marks) AAT Cost Accounting and Budgeting BEC Limited operates an absorption costing system.(8 marks) (Total 20 marks) ACCA Paper 8 Managerial Finance Question IM 3.13 Advanced: Reapportionment of service department costs and comments on apportionment and absorption calculation 12 The Isis Engineering Company operates a job order costing system which includes the use of predetermined overhead absorption rates.The company has two service cost centres and two production cost centres.

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