Cost Assignment

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Budgeted profit and loss statement for the year ending 31 December (£) (£) Sales Cost: Direct materials Direct wages Prime cost Fixed production overhead Production cost Selling, distribution and administration cost 750 000 100 000 50 000 ––––––– 150 000 300 000 ––––––– 450 000 160 000 ––––––– Profit Budgeted data: Labour hours for the year Machine hours for the year Number of jobs for the year 610 000 –––––––– £140 000 –––––––– –––––––– 25 000 15 000 300 An enquiry has been received, and the production department has produced estimates of the prime cost involved and of the hours required to complete job A57.

(£) Direct materials Direct wages Prime cost Labour hours required Machine hours required 250 200 –––– £450 –––– 80 50 You are required to: (a) calculate by different methods six overhead absorption rates; (6 marks) (b) comment briefly on the suitability of each method calculated in (a); (8 marks) (c) calculate cost estimates for job A57 using in turn each of the six overhead absorption rates calculated in (a).

If the standard cost assignment in one of these infotypes is maintained, this cost assignment is used instead of the assignment in the Organizational Assignment (0001) and Cost Distribution L'affectation de cots standard gre dans un de ces infotypes remplace l'affectation des cots dfinie dans les infotypes Affectation (0001) et Ventilation des cots (0027); cette dernire aurait t utilise si les comptes The cost assignment specification per miles/kilometers (per trip segment) makes it possible for you to specify, for a trip segment, a percentage cost assignment that differs from the travel expenses assignment guideline.

Cost assignment Question IM 3.1 Intermediate (a) Explain why predetermined overhead absorption rates are preferred to overhead absorption rates calculated from factual information after the end of a financial period.

(6 marks) (Total 20 marks) CIMA Foundation Cost Accounting 1 10 COST ASSIGNMENT (b) Calculate, for the year ended 31 March 2001, the overhead absorption rates (to three decimal places of a £) to be applied to: (i) senior professional staff hours; (ii) junior professional staff hours.

(4 marks) (c) How is the change in method of charging overheads likely to improve the firm’s job costing system?The costs and activity are expected to arise evenly throughout the year, and the budget has been used as the basis of calculating the company’s absorption rates.During March the monthly profit statement reported (i) that the actual hours worked in each department were Machining Hand finishing 6000 hours 9600 hours (ii) that the actual overhead costs incurred were Machining Hand finishing Fixed £ Variable £ 48 500 33 600 36 000 33 500 (iii) that the actual production was 15 000 units.Its budget for the year ended 31 December shows that it expects its production overhead expenditure to be as follows: Machining department Hand finishing department Fixed £ Variable £ 600 000 360 000 480 000 400 000 Question IM 3.8 Intermediate: Calculation of overhead absorption rates and under/overrecovery of overheads During the year it expects to make 200 000 units of its product.This is expected to take 80 000 machine hours in the machining department and 120 000 labour hours in the hand finishing department.(8 marks) (Total 20 marks) ACCA Paper 8 Managerial Finance Question IM 3.13 Advanced: Reapportionment of service department costs and comments on apportionment and absorption calculation 12 The Isis Engineering Company operates a job order costing system which includes the use of predetermined overhead absorption rates.The company has two service cost centres and two production cost centres.Department A has 10 direct employees, who each work 37 hours per week.Department B has five machines, each or which is operated for 24 hours per week.Budgeted overheads incurred directly by each department are: Production department A Production department B Production department C Service department £261 745 £226 120 £93 890 £53 305 The balance of budgeted overheads are apportioned to departments as follows: Production department A Production department B Production department C Service department 6 40% 35% 20% 5% COST ASSIGNMENT Service department overheads are apportioned equally to each production department.You are required to: (a) Calculate an appropriate predetermined overhead absorption rate in each production department.

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