Question

An engineering company which uses job costing to attribute costs to individual products and services provided to its customers has began the preparation of its fixed production overhead cost budget for 2017.

Cost has been identified as follows:

Machining Assembly Finishing Stores Maintenance

K’000 K’000 K’000 K’000 K’000

Apportioned cost 6,000 2,500 1,500 1,000 800

The stores and maintenance departments are production department and provide services as follows:

Machining Assembly Finishing Stores Maintenance Stores 40% 30% 20% - 10%

Maintenance 55% 20% 20% 5% - T

he number of machine and labour hours budgeted for 2018 is:

Machining Assembly Finishing

Machine 50,000 4,000 5,000

Labour hours 10,000 30,000 20,000

Required: (a) Calculate appropriate overhead absorption rates for each production department for 2017.

(b) Prepare a quotation for job K34 to be commenced early in 2017 assuming it has:

Direct materials Costing K24,000

Direct labour Costing K15,000

And requires:

Machine Labour

Machining department 45 10

Asembly 5 15

Finishing department 4 12

Add that profit is 20% of selling price

Answer 1

a)

repeated distribution method

	Machining K’000	Assembly K’000	Finishing K’000	Stores K’000	Maintenance K’000
apportioned cost	6000	2500	1500	1000	800
reapportion store	400	300	200	-1000	100
subtotal	6400	2800	1700	0	900
reapportion maintenance	495	180	180	45	-900
subtotal	6895	2980	1880	45	0
reapportion store	18	13.5	9	-45	4.5
sub total	6913	2993.5	1889	0	4.5
reapportion maintenance	2.48	1	1	0	-4.5
total apportioned cost	6915.48	2994.5	1890	0	0

note: we reapportion cost of store and maintenance as cost of store/ maintenance and multiply with percentage of each other departments for example reapportion store is deducting amount from store and proportionate to other department on the basis of percentage of cost attributable to those departments.

now we have to find oar, oar are based on machine hour for some department and labour hour for some other department. we look whichever is higher, machine hour or labour hour for each department and take that as budgeted hour.

for machining department:

oar=budgeted overhead/budgeted hours

machine hours=50000 hours

labour hours=10000 hours

budgeted overhead =K 6915480

oar= 6915480/50000= K138.31 per machine

for assembly department:

oar=budgeted overhead/budgeted hours

machine hours=4000 hours

labour hours=30000 hours

budgeted overhead =K 2994500

oar= 2994500/30000=K 99.82 per labour hour

for finishing department:

oar=budgeted overhead/budgeted hours

machine hours=5000 hours

labour hours=20000 hours

budgeted overhead = K1890000

oar= 1890000/20000= K94.5 per labour hour

note: if a department use more on labour hours/ machine hours it will take as budgeted hours, we assume production overhead do more in that.

b)   

job quotation for job k34

K

direct materials 24000

direct labours 15000

prime cost 39000

production overhead:

machining department 4510

assembly department 515

finishing department 412

total cost of job k34 44437

profit margin 20% 11109.25   

selling price 55546.25

workings:

calculations of profit margin and selling price

if profit margin is 20%, sp is 100 % and cost is 80%

selling price=100%* cost /80%

=K44437*100%/80%

selling price=K55546.25

profit =K55546.25*20%=K11109.25