Question

ABC Limited is preparing its departmental budgets and product cost estimates for the year ending 31 December 20X1. The company has three manufacturing departments – Machining, Assembly and Finishing – together with a production maintenance department.

The following costs and related data have been estimated for the year to 31 December 20X1:

Costs	Machining	Assembly	Finishing	Maintenance	Total
Direct wages	60	32	72	30	194
Indirect wages	10	6	8	-	24
Direct materials	80	10	4	-	94
Indirect materials	15	4	8	20	47
Power	-	-	-	-	102
Light and heat	-	-	-	-	10
Depreciation	-	-	-	-	7
Rent and rates	-	-	-	-	25
Personnel	-	-	-	-	63
Other data:
Direct labour hours	12 000	8 000	15 000	6 000	42 000
Machine hours	40 000	5 000	6 000	-	51 000
Employees	6	4	8	3	21
Floor area (m2)	1 000	400	300	300	2 000
Net book value of fixed assets	2 000	8 000	3 000	4 000	35 000

The maintenance department is expected to spend 60% of its time working for the machining department, with the remainder of its time being shared equally between assembly and finishing.

1. Prepare an overhead analysis sheet for ABC Limited for its year ending 31 December 20X1.

2. Calculate appropriate overhead absorption rates for the machining, assembly and finishing departments.

3. Briefly discuss why the need for the reallocation of the service department

4. Prepare a cost estimate, based on the following data, for a product which is to be manufactured in January 20X1:         

	Machining	Assembly	Finishing
Direct materials (£)	2500	400	250
Direct labour hours	800	350	140
Machine hours	1400	100	80

Answer 1

Solution to Part 1 & 2: Overhead analysis sheet for ABC Limited for its year ending 31 December 20X1
Particulars	Basis	Production Dept.			Service Dept.	Total
		Machining	Assembly	Finishing	Maintenance
Primary Distribution
Direct Material		80	10	4	-	94
Direct wages		60	32	72	30	194
Overheads:
Indirect materials	Allocated overheads	15	4	8	20	47
Indirect wages	Allocated overheads	10	6	8	-	24
Un-allocated Overheads
Power	Machine hours	80	10	12	-	102
Light and heat	Floor area (m 2)	5	2	2	2	10
Depreciation	Net book value of fixed assets	1	3	1	2	7
Rent and rates	Floor area (m 2)	13	5	4	4	25
Personnel	Employees	18	12	24	9	63
Total Cost of Service Department					66
Secondary Distribution	60:20:20-Given	40	13	13	(66)
Total Fixed Overheads of production department		181	55	72	-
Machine hours		40,000	5,000	6,000
Overheads Absorption rate on the basis of Machine hours rate(Most appropriate)		0.0045	0.0111	0.0119
Solution to Part 3
Reallocation of overheads of service departments are required to calculate because service departments are not directly involved in production process but it supports the production departments for manufacturing, Hence cost allocated to service departments are required to reallocate for the purpose of calculating correct measurement of cost of product.
Solution to Part 4
Estimation of cost of Product
Particulars	Machining	Assembly	Finishing
Direct materials (£)	2,500	400	250
Direct wages[Labour Hours* Labour hour Rate]	4	1	1
Overheads Absorbed [Machine hours*Machine Hour Rate]	6	1	1
Total	2,510	403	252
Working Calculation
Machine Hours	1,400	100	80
Machine hours Rate	0.0045	0.0111	0.0119
labour hours required	800	350	140
Direct wages-Given	60	32	72
Direct labour hours	12,000	8,000	15,000
Direct Wage Rate	0.0050	0.0040	0.0048
Working Notes
Un-allocated Overheads	Basis	Machining	Assembly	Finishing	Maintenance	Total
Power	Machine hours	40,000	5,000	6,000	-	51,000
Light and heat	Floor area (m 2)	1,000	400	300	300	2,000
Depreciation	Net book value of fixed assets	2,000	8,000	3,000	4,000	17,000
Rent and rates	Floor area (m 2)	1,000	400	300	300	2,000
Personnel	Employees	6	4	8	3	21