QUESTION 2: CHERYL LTD (CHAPTER 4- FULL COSTING)

You have been asked to suggest a method of deducing the full cost of various production orders of Cheryl Ltd. This method will be used as a basis for setting prices.

The production orders vary greatly in size and nature from one to the next.

The following information has been taken from the budget for the forthcoming financial year:

Direct labour hours 40,000 hours Direct Materials kg 10,000 kg Machine hours 60,000 hours Manufacturing costs:
Power	60,000
Direct materials	500,000
Machine maintenance and repairs	55,000
Factory heat and light	6,000
Lubricants and cleaning materials	8,000
Direct labour	640,000
Depreciation: factory buildings	150,000
machinery	301,000
Indirect labour	80,000

The business is not departmentalized for accounting purposes. All direct labor is paid the same hourly rate.

The cost sheet for Order No 101 shows the following:

Direct materials 850 kg

Direct labor hours 1,800 hours

Machine hours 1,200 hours.

Required:

A. Calculate overhead absorption rate (OAR) using direct labor and machine hour basis.

B. Prepare full costing for Order No 101 using overhead rate under machine hour basis and direct labor hour basis of allocation.