Question

Question 4 Brown Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are listed below: N$ Maintenance 200 000 Materials handling 32 000 Setups 100 000 Inspection 120 000 Currently, overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours. For next year, 50 000 direct labour hours are budgeted. The company has accepted a new job and the sales manager wanted to have a cost estimate. The production department provided the following information for the new job: Direct materials N$6 000 Direct labour (1 000 hours) N$10 000 Machine hours 500 Number of material moves 12 Number of setups 2 Number of inspections 10 In the past, full manufacturing cost has been calculated by allocating overhead using a volume-based cost driver (direct labour hours). With the information supplied by the production department, the bookkeeper requested you to assist them with the introduction of an activity based costing system. You collected the following expected activity for the four activity based cost drivers: Machine hours 20 000 Material moves 1 600 Setups 2 500 Quality inspections 4 000 Required: 4.1 Determine the amount of overhead that would be allocated to the proposed job if a plant wide rate with direct labours is used. 4 4.2 Determine the total cost of the proposed job. 3 4.3 Determine the amount of overhead that would be applied to the proposed project if activity based drivers are used. 4 4.4 Determine the total cost of the proposed job if activity based costing is used. 7

Answer 1

Answer 4.1

Step 1. Calculation of direct labour over head absorption rate

Direct Labour cost Absorbtion rate= N$ 10000 / 1000 labour hours = N$ 10 per hour

Step 2. Allocation of Over head based on direct labour hours absorption rate

Over Head	Calculation	Allocation to plant
Maintenance	=500 machine hrs * 10 N$ per Direct labour Hr	5,000
Material Handeling	=12 Material ovements* 10 N$ per Direct labour Hr	120
Setup	=2 setup * 10 N$ per Direct labour Hr	20
Inspection	=10 inspection * 10 N$ per Direct labour Hr	100
		5,240

ANSWER 4.2 TOTAL COST OF THE PROPOSED JOB

Direct Material	6,000
Direct Labour cost	1,00,000
Prime Cost	1,06,000
Add Over Head as per step 2	5,240
TOTAL COST	1,11,240

ANSWER TO 4.3  the amount of overhead that would be applied to the proposed project if activity based drivers are used

Overhead	Cost N$	Cost drivers		Cost per activity Driver
Maintenance	200000	20000	hrs	10	N$ per machine hr
Marteral Handeling	32000	1600	material moves	20	N$ per material Movement
setup	100000	2500	No of Set up	40	N$ per set up
Inspection	120000	4000	Qualit Inspection	30	N$ per inspection
	452000

Allocation of overhead to plant

Over Head	Calculation	Allocation to plant
Maintenance	=500 machine hrs * 10 N$ per Machine Hr	5000
Material Handeling	=12 Material ovements * N$20per movement	240
Setup	=2 setup * N$40per setup	80
Inspection	=10 inspection * 30 N$ per inspecion	300
		5,620

ANSWER TO 4.4 TOTAL COST AS PER ABC

Direct Material	6,000
Direct Labour cost	1,00,000
Prime Cost	1,06,000
Add Over Head as per step 2	5,620
TOTAL COST	1,11,620