Toronto Ltd is a manufacturing company making specialist computers for large organisations. It has 3 main departments,
Question:
Toronto Ltd is a manufacturing company making specialist computers for large organisations. It has 3 main departments, moulding, assembly and packaging. Recently the company has been losing market share. They believe this is due to their pricing policy.
The company currently allocates manufacturing overheads to jobs on a factory wide basis on the basis of labour hours. A mark up of 25% is added to the manufacturing cost to determine the selling price.
The company management are considering moving to a departmental overhead allocation basis using the dominant activity in each department. The 2020 overhead allocation rate was based on the budgeted figures as follows:
| Moulding | Assembly | Packaging | |
| Direct labour Hours | 20,000 | 30,000 | 30,000 |
| Labour Rates per Hour | €12 | €10 | €8 |
| Machine Hours | 50,000 | 40,000 | 20,000 |
| Manufacturing Overheads | €800,000 | €1,000,000 | €600,000 |
One of the jobs taken on by Toronto Limited during 2020 was Job no. 400, the
details of which are as follows:
| Moulding | Assembly | Packaging | |
| Direct Labour Hours | 250 | 200 | 325 |
| Machine Hours | 500 | 175 | 250 |
| Material Cost | €1,000 | 0 | €200 |
In early 2021 the company determined that the actual 2020 levels of activity and costs in the three main departments were as follows:
| Moulding | Assembly | Packaging | |
| Direct Labour Hours | 18,000 | 28,500 | 38,000 |
| Machine Hours | 50,000 | 35,000 | 20,000 |
| Manufacturing Overheads | €900,000 | €1,000,000 | €600,000 |
The labour pay rate remained at the budgeted rates.
Required:
(a) Calculate the price charged for job 400 under the factory-wide basis.
(8 marks)
(b) Calculate the price which would have been charged for job 400 if the departmental basis had been used.
(10 marks)
(c) Calculate the total under or over absorption of overheads for 2020 on the basis of the factory-wide overhead allocation.
(8 marks)
(d) Calculate the under or over absorption of overheads in the moulding department using the departmental overhead allocation.
(6 marks)
(e) Explain, using examples, what is meant by the following terms;
i. Prime Cost
ii. Indirect Costs
iii. Cost Object
iv. Price taker
Expert Answer:
a Price charged for Job four hundred below factoryextensive basis Direct labour cost 250 12 200 10 325 8 4850 Manufacturing overheads allotted 20000 30000 30000 25 consistent with labour hour 2500000 ... View the full answer
International Financial Reporting A Practical Guide
ISBN: 978-1292200743
6th edition
Authors: Alan Melville
