Question

Custom Clothing Ltd is a manufacturer of pieces of clothing ordered by customers in their own design. The minimum number of pieces to accept an order is 80 pieces. The following information for the year 2019 is provided by this company:  

Total production and sales (number of pieces)	80,000 pieces
Total direct labour hours	100,000
Total machine hours	60,000
Costs:
Marketing	$2,400,000
Machine and maintenance repairs	$860,000
Depreciation of sewing machines	$32,000
Depreciation of factory building	$18,000
Depreciation of administration equipment	$8,000
Total cost of direct materials	$720,000
Cleaning materials factory	$6,000
Interest	$2,100
Total cost of direct labour	$1,800,000
Indirect labour	$1,400,000
Factory electricity	$650,000
Administration	$1,800,000
Other indirect costs	$520,000

1. Calculation of OH rates

Calculate the total overhead rates (round to 2 decimal places) using:

1. Direct labour hours as the cost driver
2. Number of pieces produced as the cost driver

Rate based on direct labour hours	Rate based on number of pieces produced

2. Calculation of cost and price charged for an order of 200 pieces

The company has received an order for 200 pieces of clothing designed by the customer. It is estimated the order will take 240 direct labour hours (DLH) and 140 machine hours (MH). The company applies 60% mark-up on cost.

1. Calculate the cost and price of the order separating the cost into direct materials, direct labour and overhead cost (round to 2 decimal places), assuming the company used direct labour hours as the cost driver and the estimated cost of materials for this order is $2,400.

2. Calculate the cost and price of the order separating the cost into direct materials, direct labour and overhead cost (round to 2 decimal places), assuming the company used the number of pieces produced as the cost driver and the estimated cost of materials is the number of pieces multiplied by the average cost of materials per piece for the year 2019.

Direct labour hours as the cost driver	Number of pieces produced as the cost driver
Price =	Price =

Answer 1

1)

2)

Direct labour= 240 hours x 1800000/100000= 240 x 18 = 4320

Materials Cost for option B = 720000/80000 units x 240 = 9 x 240 = 2160

Overhead option A = Overhead rate x labours hours = 240 *76.96 = 25190.4

Overhead option B = Overhead rate x units sold = 240 *96.20 = 29568

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