Question

Orion Limited had total overheads for a month of £24,000. The total monthly budgeted labour hours were 1,200 and the total budgeted material usage was 1,600 kg. During the month the company gives a quotation for a job which requires 60 kg of materials at £7.50 per kg and 12 direct labour hours at £25 per hour. Overheads are recovered on the basis of direct labour hours. The profit is 25% based on selling price.

(i) if the actual direct labour hours worked on the job were 15, what would be the new profit, assuming that the quoted selling price could not be renegotiated?

(ii) if overheads were instead recovered based on material usage rather than labour hours, would that have changed your answer to part (i) above, if so what would be the new profit?

(c) “Managing costs is very important given the competitive environment in which modern businesses operate “. Discuss this statement including in your discussion some of the recent approaches to costing which have emerged to help businesses manage their costs (maximum 600 words).

Answer 1

Note 1 :

Recovery Rate of overheads :

Based on Labour Hours = Total Ovhds / Total Labor hrs = 24000 / 1200 hrs = £ 20 / hr

Based on Direct material = Total Ovhds / Direct material = 24000 / 1600 kg = £ 15 / kg

Note 2 :

Calculation of Standard Job quotation
Particulars	Details	£
D. MAt	60 kg * £7.50 per kg	450
D.Labor	12 hours * £25 per hour	300
Prime Cost		750
Overheads (on the basis of direct labour hours)	12 hours *   £ 20 / hr ( NOte 1)	240
Total Cost		990
Add: Profit (25 % on S.P. or 33.33333 % on Cost )	990 * 1/3	330
Selling Price		1320

Ans (i)

Calculation of Job quotation if Labour hours were 15 instead of 12
Particulars	Details	£
D. MAt	60 kg * £7.50 per kg	450
D.Labor	15 hours * £25 per hour	375
Prime Cost		825
Overheads (on the basis of direct labour hours)	15 hours *   £ 20 / hr ( NOte 1)	300
Total Cost		1125
Add: Profit	Balancing figure	195
Selling Price( Note 2 )		1320

So , the new profit would be £ 195

Ans (ii)

Calculation of Job quotation if Ovhds were recovered on material usage
Particulars	Details	£
D. MAt	60 kg * £7.50 per kg	450
D.Labor	15 hours * £25 per hour	375
Prime Cost		825
Overheads (on the basis of direct material )	60 kg * £ 15 per kg ( NOte 1)	900
Total Cost		1725
Less : Loss	Balancing figure	(405)
Selling Price( Note 2 )		1320

So , in this case it would have resulted in a loss instead of profit of £ (405)

c) “Managing costs is very important given the competitive environment in which modern businesses operate “. Discuss

Ans : This is very true in terms of present competitive scenario shared world wide . The world is a Global village. Hence , Costing is of Utmost importance in Today's context . The living example is Growing economy of China and world's dependence on it , knowing what China is up to .

The management should move on to more recent techniques of costing like Marginal and ABC costing rather than traditional costing.