Question

Question 21

Brick by Brick (BBB) is a building business that provides a range of building services to the public. Recently they have been asked to quote for garage conversions (GC) and extensions to properties (EX) and have found that they are winning fewer GC contracts than expected. BBB has a policy to price all jobs at budgeted total cost plus 50%. Overheads are currently absorbed on a labour hour basis. BBB thinks that a switch to activity based costing (ABC) to absorb overheads would reduce the cost associated to GC and hence make them more competitive. You are provided with the following data:

Overhead category                Annual overheads              Activity driver               Total number of activity per                            

                                                        GHS                                                                                                    Year

Supervisors                               90,000                                  site visits                                       500

Planners                                     70,000                                  planning documents                   250

Property related                      240,000                                 labour hours                           40,000

                                                    400,000

A typical GC costs GHS3,500 in materials and takes 300 labour hours to complete. A GC requires only one site visit by a supervisor and needs only one planning document to be raised. The typical EX costs GHS8,000 in materials and takes 500 hours to complete. An EX requires six site visits and five planning documents. In all cases labour is paid GHS15 per hour.

Required:

1. Calculate the cost and quoted price of a GC and an EX using labour hours to absorb the overheads.
2. Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the overheads.

Answer 1

(a)Calculate the cost and quoted price of a GC and an EX using labour hours to absorb the overheads

Overhead Rate = Annual overhead/Total labor hours

= 400000/40000 hours = 10 per hour

	GC	EX
Materials	3500	8000
Overheads
(300 hours * 10)	3000
(500 hours * 10)		5000
Total Cost	6500	13000
Plus Profit (@ 50%)	3250	6500
Quoted Price	9750	19500

(b) Calculate the cost and the quoted price of a GC and of an EX using ABC to absorb the overheads

	GC	EX
Materials	3500	8000
Overheads	2260	5480
Total Cost	5760	13480
Plus Profit (@ 50%)	2880	6740
Quoted Price	8640	20220

Explanations :-

Overhead Category	Annual Overhead (A)	Activity (B)	Rate (C)=(A)÷(B)	Activities for GC (D)	Overhead allocated to GC (C)X(D)	Activities for EX (E)	Overhead allocated to EX (C)X(E)
Supervisors	90000	500	180	1	180	6	1080
Planners	70000	250	280	1	280	5	1400
Property related	240000	40000	6	300	1800	500	3000
	400000				2260		5480