ACOF 014

Introduction to Costing
Semester 2 2008 / 2009

TUTORIAL TOPIC 4: COSTING FOR OVERHEAD

Text book: Q 4.23 (a)

Q1- A manufacturing company has prepared the following budgeted information for
the forthcoming year:
RM
Direct material 800 000
Direct labour 200 000
Direct expenses 40 000
Production overhead 600 000
Administrative overhead 328 000
Budgeted activity levels include:
Budgeted production units 600 000
Machine hours 50 000
Labour hours 40 000

It has recently spent heavily on advanced technological machinery and reduced its
workforce. As a consequence it is thinking about changing its basis for overhead
absorption from a percentage of direct labour cost to either a machine hour or labour
hour basis. The administrative overhead is to be absorbed as a percentage of factory
cost.
Required:

(a) Prepare predetermined overhead absorption rates for production overheads based
upon the three different bases for absorption mentioned above.

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

(c) Select the overhead absorption rate that you think the organization should use
giving reasons for your decision.

Q2- PTS Limited is a manufacturing company which uses three production departments
to make its product. It has the following factory costs which are expected to be
incurred in the year to 31 December:

(RM)
Direct wages Machining 234 980
Assembly 345 900
Finishing 134 525
RM
Indirect wages and salaries Machining 120 354
Assembly 238 970

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 Finishing 89 700

RM
Factory rent 12 685 500
Business rates 3 450 900
Heat and lighting 985 350
Machinery power 2 890 600
Depreciation 600 000
Canteen subsidy 256 000
Other information is available as follows:

Machining Assembly Finishing

Number of employees 50 60 18
Floor space occupied (m2) 1 800 1 400 800
Horse power of machinery 13 000 500 6 500
Value of machinery (RM000) 250 30 120
Number of labour hours 100 000 140 000 35 000
Number of machine hours 200 000 36 000 90 000
You are required:

(a) to prepare the company’s overhead analysis sheet for the year to 31 December;

(b) to calculate appropriate overhead absorption rates (to two decimal places) for
each department.

Q3- The Selayang Berhad has prepared part of it overhead analysis sheet and has
allocated and apportioned its budgeted overhead to each of its five departments.
Three of them are production departments and the other two are service
departments. Details are as follow:

Production Departments Service Departments

Departments Machining Assembly Finishing Stores Engineering
Services
Overhead Allocated/ 360,000 320,000 260,000 168,000 104,000
Apportioned (RM)

In the process of manufacturing, each production department spends time in each

service department. Statistics are as follows:

Engineering Service Hours No. of Material Orders

Machining 18,000 180
Assembly 12,000 135
Finishing 10,000 90

Production hours for each production department are budgeted as:

Machine Hours Labor Hours Direct Labor Cost (RM)

Machining 9,200 8,300 49,800

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Assembly 8,100 11,250 86,250
Finishing 6,600 9,000 49,500

Required:

a) Complete the overhead analysis sheet to show the total overhead to be

absorbed in each production department – after reapportionment of service
department cost using the most appropriate basis.
(Round up your answer to zero decimal points)

b) Calculate the overhead absorption rates, using machine hours in

Machining, direct labor hours in Assembly, and direct labor cost in Finishing.
(Round up your answer to two decimal points)

Text book: Q 4.24 (a)

Q4- Sekayu Products has two production departments: cutting and assembly. The
company has been using a single predetermined cost driver rate based on plant-wide
direct labour hours. That is, the plant-wide cost driver rate is computed by dividing
plant-wide support costs by total plant-wide direct labour hours. The estimates for
normal costs and normal cost driver levels for 2007 follow:

CUTTING ASSEMBLY TOTAL

Manufacturing support RM25,000 RM35,000 RM60,000
Direct labour hours 1000 3000 4000
Machine hours 4000 2000 6000

Required:

(a) What was the single plant-wide cost driver rate for 2003?
(b) Determine departmental cost driver rates based on direct labour hours
for assembly and machine hours for cutting.
(c) Provide reasons why Sekayu might use the method in (a) or in (b).

Q5- The Triang Hotel is developing a cost accounting system. Initially it has been
decided to create three (3) cost centres: Residential and Catering deal directly with
customers whilst Maintenance is an internal service cost centre.

The following overhead details have been estimated for the next period:

Residential Catering Maintenance Total

Overhead costs (RM) :
Indirect expenses 30,500 36,000 14,500 81,000
Insurance on equipment 14,000
Air-conditioning & lighting 18,500
Depreciation on equipment 37,500
151,000

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Other data :
Floor area (m2) 2,750 1,350 300 4,400
Value of equipment (RM) 350,000 250,000 75,000 675,000

In the period it is estimated that there will be 2,800 guest-nights and 16,000 meals
will be served. Maintenance works 20 % for Catering and 80% for Residential.

Required:

a) Prepare an overhead analysis sheet for Triang Hotel showing clearly allocations
and apportionments to each cost centre. (round up your figures to zero decimal
point)

b) Calculate the appropriate overhead absorption rates for Residential and Catering.
(round up your figures to two decimal points)

c) Calculate the under-/over-absorption of overheads if actual results were as

follows:

Residential: 3,050 guest-nights with overheads of RM114,600

Catering: 5,250 meals with overheads of RM59,700

Q6- There are two production cost centres (Machining and Assembly) and two service
cost centers (Materials Store and Maintenance) in a factory. Estimated overhead costs
for the factory for a period, requiring apportionment to cost centers, are:

Overhead Costs RM
Buildings depreciation and insurance 42,000
Management salaries 27,000
Power to operate machinery 12,600
Other utilities 9,400

In addition, the following overheads have been allocated to cost centers:

Cost Centers
Machining Assembly Materials Store Maintenance
RM107,000 RM89,000 RM68,000 RM84,000

Further information:

Cost Centers Total

Machining Assembly Materials Maintenance
Store
Floor area (m )
2
4,560 5,640 720 1,080 12,000
Number of employees 18 24 6 6 54
Share of other utilities 35% 45% 10% 10% 100%

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overhead
Machine hours 6,200 5,800 12,000
Direct labour hours 4,500 7,500 12,000
Share of Materials Store 40% 60% 100%
overheads

Required:

a. Calculate the sub total overhead by allocating and apportioning the factory
overhead costs to each cost centre using the following basis:

Building depreciation and insurance: Floor space occupied

Management salaries: Number of employees
Power to operate machinery: Machine hours
Other utilities: Percentage of share utilities

(Round up your answer to zero decimal points)

b. Calculate the total overhead for each production cost centers by re-apportioning
the service cost centre overheads using the most appropriate basis.
(Round up your answer to zero decimal points)

c. Calculate overhead absorption rates for the two production cost centers based
upon machine hours for Machining and direct labour hours for Assembly.
(Round up your answer to two decimal points)

d. The company has been asked to price job 703, this job requires the following:

Machining Assembly
Direct material RM1560 RM3,788
Direct labour RM1100 RM2,650
Direct expenses RM500 RM422
Machine hours 120 hours 80 hours
Labour hours 140 hours 220 hours

Required:

Compute the price for this job using the absorption rate selected in (c) above, given
that the company profit margin is equal to 10% of the production costs.
(Round up your answer to zero decimal points)