Reference no: EM133040773
Question 1 - Delcom Ltd. specializes in the production of laptop computers. The company has only 9 000 machine hours whereas skilled labour hors for the quarter are limited to 7 500 for the quarter. Fixed costs are budgeted at Shs 43.2 million. The data below relates to the projections for the last quarter of 2009.
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Model 1
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Model 2
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Model 3
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Selling price per unit [Shs 000]
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42
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54
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36
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Projected demand [units]
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1,600
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1,250
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2,400
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Machine hours required per unit
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2.5
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4
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1.5
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Labour hours per unit
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1.5
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2
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1
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Variable cost per unit [Shs 000]
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24
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34
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21
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Required -
a) Determine the scarce resource between machine hours and skilled labour, and compute the shortfall for the quarter in hours.
b) Advise Delcom on the optimal production mix and the maximum profits that the company can earn from this production mix.
c) Eighty percent (80%) of projected demand for Model 2 represents an order by the government for senior civil servants and departmental heads in various government departments. Delcom Ltd won the bid to supply the computers. Determine the effect on the profits if the company honours the order.
d) Outline the assumptions made in the analysis in a-c above.
e) In an effort to satisfy the market demand, Delcom Ltd can outsource both machine hours as well as acquire additional hours of skilled labour. Each machine hour can be outsourced at Shs 3 600 whereas labour hours can be outsourced at Shs 2 400 per hour. Advise Delcom Ltd on whether it is worthwhile to outsource.
Question 2 - Ukunda Ltd produces 3 products, P, Q and R. Given below are details on the three products for the last quarter of 2009.
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PRODUCTS
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P
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Q
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R
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Budgeted production/sales
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12,000
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7,500
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6,000
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Prime cost (per unit)
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50
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24
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64
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Direct labour hours per unit
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3
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2
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4
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Machine hours per unit
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2
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2
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2
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Floor area Square [mtrs]
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15
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75
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30
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Percentage of advertising budget
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20%
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50%
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30%
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No. of sales orders
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800
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200
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250
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Machine set-ups
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24
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-
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16
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No. of suppliers' orders
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400
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1,600
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500
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The company currently uses absorption costing in determining the costs per unit, based on direct labour hours used in the assembling department. A uniform mark up of 40% is added to the production costs determined on this basis in determining the desirable selling price. This margin is added in order to cover for administrative, selling and distribution overheads. Production overheads for the quarter are budgeted at Shs 600,000. Admin overheads are budgeted at Shs 150,000 while selling and distribution costs were Shs 90,000.
Required -
a) Compute the fixed production overheads absorption rate per direct labour hour and explain why the company may have selected that as the basis of absorbing overheads.
b) Determine the desired selling price per unit for each of the product.
c) You have ascertained the following with respect to the production overheads according to cost pools, together with the related cost drivers
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Cost pool
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Overheads [000]
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Cost driver
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Assembly department
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240
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Assembling labour hours
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Machining department
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153
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Machining hours
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Sales order processing
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50
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No. of sales orders
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Set-up costs
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75
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No of set-ups
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Procurement costs
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82
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No. of suppliers' orders
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In addition, admin expenses are to be allocated on the basis floor area used whereas selling and distribution costs will be allocated according to the proportion of the advertising budgets used by each of the products selling. Determine the total cost per unit of each of the products using Activity Based Costing method.
d) Based on your answer in (c) above, advise the management of Ukunda Ltd on the prices set using absorption costing approach . Show relevant computations.
Question 3 - Malindi limited makes a single product, EX. The standard selling price per unit of product EX, together with the standard cost per unit is detailed as below:
Shs
Selling price 3,200
Cost:
Direct material [4 kgs @Shs 200] 800
Direct labour [3 hrs @ Shs 360] 1,080
Variable overheads 300
Fixed overheads 450 2,630
Standard profit 570
The company budgeted to produce and sell 6 000 units of EX in the year to 31 December 2008. Overheads are absorbed on a machine hour basis. It requires 2 machine hours to produce a unit of EX. The budgeted variable overheads amounted to shs 1.8 million, whereas fixed overheads were budgeted at Shs 2.7 million.
The company produced and sold 4 800 units of EX. The summarized income statement for the period is given below:
Shs 000
Sales 16,800
Costs:
Material [21 600 kgs] 4,860
Labour [13 200 hrs] 6,336
Variable overheads 1,440
Fixed overheads 1,935 14,571
2,229
There were a total of 9 000 machine hours recorded in the year to 31 December 2008.
Required -
a) Compute the variable overhead absorption rate per machine hour.
b) Determine the fixed overhead absorption rate per machine hour.
c) Determine the budgeted profit and compute the profit variance.
d) Analyze the profit variance by its components in order to show:
i) Material price and usage variance
ii) Labour rate and efficiency variance
iii) Variable overheads expenditure and efficiency variances
iv) Fixed overhead expenditure and volume variances
e) Prepare a statement reconciling the actual profits to the budgeted profits.