Question

Question 2 – Integrated Scenario (Units 4 & 5) Class Engagement

Imagine that you are a newly appointed manager of Vintage Coffee Shop, Windhoek. In spite of good sales, the owner is worried about declining profits. The highly competitive coffee shop market around the city restricts any price increase. Vintage coffee shop is well known for its delicious Pizza and Burger.

Budgeted data for the month of June 2017 is as follows:

? Direct material costs

? Direct labour costs

? Manufacturing overheads

N$ 4 500 N$ 2 500 N$ 3 500

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Our Theme for the day is: Seeing Is Believing!

? Direct labour hours 160

? Machine hours 200

Your appointment was prompted by the resignation of the former manager whom the owner felt had very little knowledge/understanding of costing which resulted indecline of the coffee shop’s profits over the past two years. The former manager wasforced to resign as she failed to advise the coffee shop owner on the appropriate suitable basis in absorbing overheads.

I would prefer a manager who could advise me on the appropriate overhead allocation suitable basis provided that the recommended suitable basis yields a lower production cost per unit – the coffee shop owner narrates.

During the same month, 200 pizzas and 150 burgers were produced and eighty percent of each product was sold. No other expenses or income were reported during the month of June apart from what has been mentioned above. It is thecompany’s policy to add a mark-up of twenty five percent to production cost per unit in determining the selling price of each product of the two products.

Details about the two products that were produced out during June 2017 are as follows:
Product	Material costs	Labour costs	Machine hours	Labour hours
Pizza	N$ 1 575	N$ 900	84	68
Burger	1 500	850	63	51

REQUIRED: Each of the following questions should be answered in the context in which it has been asked. Any assumptions made should be clearly stated as such.		MARKS
2.1	Compute the manufacturing absorption overhead rate based on: a) Prime cost b) Direct labour hours c) Direct labour cost	1 1 1
2.2	With the help of your answers in ( SE 1.1.) determine the production cost per unit for product Pizza and Burger: a) using prime cost as the suitable basis for allocating overheads b) using direct labour hours as the suitable basis for allocating overheads c) using direct labour cost as the suitable basis for allocating overheads	6 5 5
2.3	Using your answers obtained in (SE 1.2. (a) to (c), for each product, which suitable basis would you recommend to the coffee shop owner and why? (Hint: Keep the coffee shop owner’s expectation in mind).
TOTAL MARKS FOR QUESTION SE		19

... The End ...

Answer 1

	Requirement 2.1
		Computation of manufacturing overhead rate based on
			Overhead rate	Pizza	Burger	Total Overhead
		Prime cost		2475	2350
		=3500/(4500+2500)	0.5	1237.5	1175	2412.5
		Direct labor hours		68	51
		=3500/160	21.875	1487.5	1115.625	2603.125
		Direct labor cost		900	850
		=3500/2500	1.4	1260	1190	2450
Requirement 2.2
	Production cost per unit using		Prime cost
				Pizza	Burger
		Materials		1575	1500
		Labor		900	850
		Overhead		1237.5	1175
		Total cost		3712.5	3525
		Units		200	150
		Production cost per unit		18.5625	23.5
	Production cost per unit using		Labor hours
				Pizza	Burger
		Materials		1575	1500
		Labor		900	850
		Overhead		1487.5	1115.625
		Total cost		3962.5	3465.625
		Units		200	150
		Production cost per unit		19.8125	23.10416667
	Production cost per unit using		Labor cost
				Pizza	Burger
		Materials		1575	1500
		Labor		900	850
		Overhead		1260	1190
		Total cost		3735	3540
		Units		200	150
		Production cost per unit		18.675	23.6
Requirement 3
	Based on above analysis, we recommend the prime cost as suitable basis for allocation of overhead,
	as it gives the lowest allocation of overhead to products.