QUESTION 1:
PART A
You are the Cost Accountant of an industrial concern and have been assigned the duty of preparing a cost accounting system. Initially it has been decided to prepare three production cost centers and two service cost centers.
The subsequent data relating to the next accounting period have been estimated as follows:
Production Cost Centres Service Cost Centres Total
|
|
Milling
|
Assembly
|
|
Spraying
|
Stores
|
Maintenance
|
|
|
No. of employees
|
30
|
75
|
|
25
|
6
|
14
|
150
|
|
Labour hours
|
1,510
|
3,320
|
|
950
|
252
|
595
|
6,627
|
|
Plant & Machines values
|
225,000
|
75,000
|
|
45,000
|
17,000
|
85,000
|
447,000
|
|
Area (m2)
|
7,500
|
10,000
|
|
3,500
|
500
|
1,000
|
22,500
|
|
Material requisitions
|
1,400
|
300
|
|
250
|
|
550
|
2,500
|
|
Maintenance hours (minor works)
|
75
|
30
|
|
45
|
|
|
150
|
|
KWH ('000)
|
300
|
70
|
|
50
|
10
|
170
|
600
|
|
Machine hours
|
8,400
|
1,100
|
|
300
|
|
|
9,800
|
During the period the following data were recorded
|
|
Milling
|
Assembly
|
Spraying
|
Stores
|
Maintenance
|
Total
|
|
Indirect materials
Indirect labour
Maintenance works
|
2,500
5,250
18,500
|
1,000
2,500
7,500
|
1,500
2,250
4,500
|
300
4,250
|
1,700
11,750
|
7,000
26,000
30,500
|
The following details were obtained from the accounts relating to the period:
|
Fire Insurance
|
1,250
|
|
Power
|
4,500
|
|
Heating and Lighting
|
2,000
|
|
Rates
|
1,800
|
|
Machine depreciation
|
8,400
|
|
Machine Insurance
|
850
|
|
Canteen deficit
|
4,250
|
|
Balance of maintenance costs (excl. major works)
|
17,500
|
Required:
(a) Prepare an overhead analysis sheet showing how overhead costs should be apportioned between the departments.
(b) Determine suitable overhead absorption rates for the Milling, Spraying and Assembly departments, stating clearly the overhead absorption basis used.
PART B
The daughter of the managing director of ABC Ltd is attending a university degree course in accounting and finance. In the mean while a telephone call to his daughter the managing director asked her to enquire from her lecturers which of the following is correct when considering allocation, apportionment and reapportionment of overheads in an absorption costing situation:
- Only production related costs should be considered.
- Allocation is the situation where part of an overhead is assigned to a cost centre.
- Costs may only be reapportioned from production centres to service centres.
- Any overheads assigned to a single department should be ignored
Required:
Briefly Explain what should be the advice of the lecturers to the Managing Director's daughter.
PART C
Activity Based Costing is a costing model which examines the problem that has faced accountants and accounting technicians for decades - that of the allocation and absorption of overhead. As such Activity Based Costing or ABC offers a workable and more effective insight into overhead
Required:
Briefly describe on three uses and three limitations to the Activity Based Costing system.