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Aristo Ltd uses a system of absorption costing. The product passes through a machining department and an assembly department before it is completed. The assembly department is labour intensive and machining department is capital intensive;.
The company's cost accountant has calculated the following overhead costs for the financial year ended 31 May 2010.
Rs
Electricity :
Power
62,000
Heating and lighting
14,000
Supervisory wages
54,000
Rent and rates
21,000
Insurance :
Machinery
16,740
Premises
7,000
Depreciation of machinery
41,850
The given information should be used to evaluate the appropriate basis of apportionment for the year.
Production Departments
Service Departments
Machining
Assembly
Maintenance
Canteen
Cost of machinery
Rs 810,000
Rs 27,000
Machine hours
30000
6000
Power (kilowatt hours)
75000
25000
Direct labour hours
35000
105000
Number of employees
20
60
5
Floor area (square metres)
11000
8000
200
800
The proportion of work done by the service departments is estimated to be:
%
65
25
10
75
It is the company policy to apportion the maintenance department's costs between the other three departments to remove those costs before apportioning the canteen costs between the production departments.
Required:
a) Create a statement to show the total production overheads for each production department, showing the basis of apportionment selected.
b) Determine an overhead absorption rate for each production department, using the most suitable basis of absorption.
c) What is activity Based Costing and how does it differ from traditional absorption costing?
d) Describe four differences between financial and management accounting.
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