COSTING - leavingcertbusiness.files.wordpress.com · Closing Stock in Units= Opening Stock 3,500 +...
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COSTING
Transcript of COSTING - leavingcertbusiness.files.wordpress.com · Closing Stock in Units= Opening Stock 3,500 +...
COSTING
PRODUCT COSTING
Reasons for product costing
► Fixing selling prices
► To control costs
► To value stock
Each individual product consists of the following
Direct Materials +
Direct Labour + Variable Overheads + Fixed Overheads =
. Factory Cost
We must absorb (include) all overheads in the cost of the product.
Valuation of Closing stock
First in first out means that the first items received into stock are the first to be used up or issued to customers.
In the 2003 LCHL question we put the purchases in ascending order as follows
Purchases 4200@ 7 =29400 3200@ 7 = 22400 2700@8 = 21600 2300@9 = 20700
12400 94100
Our sales are as follows
1300@ 12 = 15600 1200 @ 11 = 13200 1350@ 12 = 16200 1500@ 12 = 18000 1400@ 13 = 18200 1200 @ 11 = 13200 1600 @ 13 = 20800 900 @ 13 = 11700 10450 126900
We had opening stock of 4400 + Purchases 12400
16800 Sales 10450
6350
The closing stock is the most recent 6350 units that have been purchased
2300 @ 9 = 20700 2700@ 8 = 21600 1350@ 7 = 9450
51750
Now prepare a trading account
See LCHL 2000 Question
Overhead Absorption
This means that an appropriate portion of fixed overhead is included as a cost for the individual product .e.g similar to the way that we calculated the closing stock part of production budgets.
The usual overhead absorption rates are Rate per unit Rate per direct labour hour Rate per machine hour Overhead costs as a percentage of prime cost Overhead costs as a percentage of direct materials.
Remember, we always work off budgeted costs and not actual costs.
Overhead analysis In real life examples, we will use absorption costing whereby overheads can be apportioned in an equitable manner between different departments and then absorbed (included) in the total cost of the product.
Procedure Overheads are apportioned to different cost centers, using an equitable basis of apportionment Cost centre A cost centre is an area of activity within the company which attracts costs and which is under the control of a manager who is accountable for these costs Bases of apportionment Overheads must be apportioned fairly between different cost centres. Because of the many different types of overheads, it would be impossible to have just one basis for doing this. The following are examples of some of the more usual bases used for overheads apportionment.
Bases of apportionment Cost or book value of equipment Floor area
Number of employees
Volume of space occupied
Type of overhead Depreciation I insurance of equipment Rent, rates, repairs, depreciation of buildings Canteen, factory administration costs, health and safety costs Heating etc.
Apportionment of production overheads to departments The budgeted overhead costs of Furniture Ltd for the next financial year are expected to be as follows:
Depreciation of equipment Depreciation of factory buildings Insurance of equipment Factory repairs Factory administration cost Canteen Factory heating Factory lighting
Eur 8,000
10,000 5,200
6,600
9,000 5,400 4,800
1,000
50,000
The following information relates to the production and service departments of the factory
Floor area ( sq metres) Volume ( cubic metres) Number of employees
Production DeptA DeptB
1,200 1,600
3,000 6,000
30 30
Service DeptX
800 2,000
15
DeptY 400
1,000
15
Book value of equipment Machine hours
You are required to: Analyse the overheads by department
30,000 2,000
20,000 1,000
10,000 20,000
Calculate a machine hour overhead absorption rate for department A and department B
Cost item Basis of Total Production Service
apportionment cost Dept A DeptB DeptX DeptY
Equipment: depr
Factory: depr
lnsurance:equip
Factory repairs
Factory admin
Canteen
Heating
Lighting
We now have to re-apportion the services sections as we can only recover overheads through production. We use an equitable manner i.e. machine hours
Production Service Dept A DeptB DeptX DeptY
Eur Eur Eur Eur Total cost 16,230 17,540 8,370 7,860
Apportion Dept X to production 5,580 2,790 (8,370)
Apportion Dept Y to production 5,240 2,620 (7,860)
Total overhead for each department 27,050 22,950 -- --
8. Costing and Stock Valuation
(a) Overhead Apportionment
Nevis Ltd has two Production Departments, 1 and 2 and two ancillary Service Departments, A and B.The following are the expected overhead costs for the next period.
Overhead
Depreciation of equipment Depreciation of factory buildings Factory heating Factory cleaning Factory canteen
Total €
16,000 20,000 9,600 2,000
10,800
The following information relates to the Production and Service Departments of the factory.
Volume in cubic metres Floor area in square metres Number of employees Book value of equipment Machine hours
You are required to:
Production Dept. I Dept. 2
1,500 3,000 600 800 60 60
€15,000 €10,000 3,000 1,000
Service Dept. A Dept. B
1,000 500 400 200 30 30
€5,000 €10,000
(i) Calculate the overhead to be absorbed by each Department stating clearly the basis of apportionmentused.
(ii) Transfer the Service Department costs to Production Departments l and 2 on the basis of machinehours.
(iii) Calculate machine hour overhead absorption rates for Departments 1 and 2.(iv) Explain what is meant by 're-apportionment' of overheads.(v) Illustrate and explain 'over-absorption' of overheads.
(b) Stock Valuation
Cape Ltd. is a retail store that buys and sells one commodity. The following information relates to thepurchases and sales of the firm for the year 2006.
Period 01/01/2006 to 31/03/2006 01/04/2006 to 30/06/2006 01/07/2006 to 30/09/2006 01/10/2006 to 31/12/2006
Purchases on credit 3,200 @ €5 each 2,100 @ €7 each 2,000 @ €8 each 1,400 @ €9 each
Credit Sales 800@€10 each
1,000 @€11 each 1,200 @€11 each 1,100@€13 each
On 1/1/2006 there was opening stock of 3,500 units @ €5 each.
You are required to:
Cash Sales 1,000 @€11 each 1,200 @ €10 each 1,200 @ €12 each 1,000@€13 each
(i) Calculate the value of closing stock using the 'first in first out (FIFO) method.(ii) Prepare a Trading Account for the year ended 31/12/2006.
(80 marks)
Question 8 - Solution
(a)
(i)
Overhead Basis Dep of Equipment Book value
1••Dep of Factory Floor area Factory heating Volume Factory cleaning Floor area Canteen No. employees
(ii) I
Total Cost Apportion Dept A to Production Apportion Dept B to Production
(iii) I Machine hour absorption rate
Dept l
Dept2
(iv) I Re-apportionment:
Total 16,000 20,000
9,600 2,000 10,800 58,400
Production Service
Dept 1 De t2 6,000 6,00 2,40
60 3 60
18,600
Production Dept2 21,200 2,450 2200
25,850
32,550 3 ,000
25,850 1,000
Dept A 9,800
(9,800)
Service DeptB
8,800
(8,800)
€ I 0.85 per machine hour■
€25.85 per machine hour■
This is the term used where Service Department costs are re-apportioned between production departments because overheads can only be recovered by being included as part of the cost of production.
Over-absorption: Over-absorption is when costs are over recovered - budgeted costs are greater than actual costs. The cost of fuel/power reduced
(b)
(i)
Purchases in units 3,200
2,100
2,000
1,400
8,700 Total
Credit Sales
Units
800 @ IO 1,000 @ 11 1,200 @ 11 1,100 @ 13 4,100
Credit Sales
€ 8,000
11,000
13,200
14,300
46,500
Cost
@€5
@€7 @€8 @€9
Cash Sales
Units 1,000 @ 11 1,200 @ IO 1,200@ 12 1,000 @ 13 4,400
Purchases at cost 16,000
14,700
16,000
12,600
€59,300 Total
Cash Sales
€ 11,000
12,000
14,400
13,000
50,400
Total Sales
Units 1,800
2,200
2,400
2,IO0
8,500
Total sales
€ 19,000
23,000
27,600
27.300
96,900
Closing Stock in Units = Opening Stock 3,500 + Purchases 8,700 - Sales 8,500 = 3,700 units■
Closing Stock in€ 1,400@€9
(ii)
2,000 @€8 300@€7
UQQ
12,600
116,000
2,100
JQ.lQQ
Trading account for the year ending 31/12/2006
Sales Less cost of Sales
Opening StockPurchases
Closing StockGross Profit
€
17,500 159,300
76,800
30,700 ■
€ 96,900 ■
46 100
50,800
8. Job Costing
Mc Cormack Ltd has three departments Processing, Assembly and Finishing. The followingcosts relate to 2008.
Indirect Materials Indirect Labour Machine Maintenance Plant Depreciation Light and Heat Rent and Rates Factory Canteen
Total €
360,000 500,000 28,000 80,000 70,000 64,000 50,000
Processing €
170,000 300,000
The following information relates to the three departments.
Floor space in m2
Volume in m3
Plant valuation at book value Machine hours Number of employees Labour hours
Total 16,000 42,000
€500,000 80,000
100 140,000
Processing 8,000
24,000 €300,000
40,000 60
80,000
Job No. 510 has just been completed. The details are:
Direct Materials
€ Processing 10,000 Assembly 2,400 Finishing
The company budgets for a profit margin of 25%.
You are required to:
Direct
Labour €
2,000 4,600
800
Assembly €
100,000 120,000
Assembly 5,000
12,000 €150,000
30,000 30
35,000
Machine Hours
60 30 6
Finishing €
90,000 80,000
Finishing 3,000 6,000
€50,000 10,000
IO 25,000
Labour Hours
50 90 12
(a) Calculate the overhead to be absorbed by each department stating clearly the basis ofapportionment used.
(b) Calculate a suitable overhead absorption rate for each department.
(c) Compute the selling price of Job No. 510.
(d) (i) Explain what is meant by a step fixed cost and give an example.(ii) Outline two differences in focus between Management and Financial accounting.
(80 marks)
Question 8
(a)
Overhead Analysis
(b)
Overhead Basis Indirect Material Actual Indirect Labour Actual Machine Maintenance Machine hours Plant Depreciation Plant valuation Light and Heat Volume Rent and Rates Aoor Space Factory Canteen Employees
Overhead recovery (absorption) per
Budgeted Overheads Budgeted hours
Overhead absorption rate per machine hour
Overhead absorption rate per labour hour
Total Processin Assembl Finish 360,000 170,000 100,000 90,000 500,000 300,000 120,000 80,000 28,000 14,000 10,500 3,500 80,000 48,000 24,000 8,000 70,000 40,000 20,000 10,000 64,000 32,000 20,oooti· 12,000 50,000 30,000 15,000 5.000
1,152,000 634,000 309,500 208,500
Machine Hours Direct Labour Hours
Processing Assembly Finishing (machine hours) (labour hours) (labour hours)
634,000 309.500 208,500 40,000 35,000 25,000
€15.8511'
€8.84. €8.3411
(c)
(d)
Selling Price of Job No. 510 €
MaterialsLabour Overheads:
(10,000 + 2,400) (2,000 + 4,600 + 800)
1;:�:gg{I
ProcessingAssembly Finishing
Production Cost Profit Selling Price
Step Fixed Cost rl
(60 X 15.85) (90 X 8.84) (12 X 8.34)75% 25% 100%
��!:�g-100.08[JJ
21,646.68 7,215.56
28.862.24■
Step fixed costs are costs that are fixed within a certain range of activity but changes outside ofthat range. E.g. Rent could be fixed up to a certain level of production. However, if production increases and results in the rental of more factory space, then the rent would increase to a new level. Thus the fixed costs would increase in steps.
Management Accounting/Financial Accounting II
Mana2ement Accountin2 Financial Accountin2
Is concerned with planning for the future Is concerned with recording past events. Information is and provides information for planning provided in the form of a profit and loss account, balanceand budgeting sheet and cash flow statement
Has an internal focus and furnishes Has both internal and external focus and furnishesinformation to aid planning and information to stakeholders such as managers, decision making shareholders and creditors
Is not governed or restricted by legislation Is governed and regulated by both legislation andor legal requirements accounting standards such as FRS's.
Reports are prepared as often as the Reports are prepared usually once a year managers require them
Reports are prepared for cost-centres/ Reports are prepared about the whole business departments
8. Stock Valuation and Costing
(a) Stock Control
Rose Ltd is a retail store that buys and sells one product. The following information relates to thepurchases and sales of the firm for the year 2009:
Period Purchases on credit 3,000 @ €4 each 2,200 @ €6 each 1,500 @ €7 each
Credit Sales 900@€9 each
1,100 @€10 each 1,200 @€10 each
Cash Sales 0l/01/2009 - 30/04/2009 01/05/2009 31/08/2009 01/09/2009 31/12/2009
1,200 @€11 each 1,300 @€12 each 1,200 @ €13 each
On 01/01/2009 there was opening stock of 4,000 units @€4 each.
You are required to: {i) Calculate the value of closing stock using 'First in/First out' (FIFO) method. (ii) Prepare a trading account for the year ending 31/12/2009
(b) Product Costing
Dwyer Ltd is a small company with three departments. The following are the company's budgetedcosts for the coming year:
Department Variable Costs A €15 per hour B €17 per hour C €22 per hour
Fixed Costs €6 per hour €5 per hour €4 per hour
Wage rate per hour €13 €15 €10
General Administration overhead absorption rate per hour is budgeted to be €5.50.
The following are the specifications for a quotation for Job No. 209: Material Costs €7,350 Labour hours required in each department:
Department Hours A 95
B 185 C 60
You are required to: Calculate the selling price of Job No. 209 if the profit is set at 20% of the selling price.
{c) Under and over absorption of costs
The information set out below refers to the budgeted and actual costs of Hennigan Manufacturing Ltd:
Budgeted
Department X Department Y Department Z
Actual
Department X Department Y Department Z
You are required to:
Direct Labour Hours
8,000 45,000 20,000
Direct Labour Hours
10,000 37,000 25,000
Machine Hours 35,000 10,000
Machine Hours 40,000 15,000
Total Overhead €140,000 € 36,000 € 40,000
Total Overhead €155,000 € 30,000 € 45,000
(i) Calculate departmental overhead absorption rates for Departments X, Y and Z.(ii) Show the under/over absorption by department and in total for the period. Explain what these figures mean.
Question 8
(a)
Stock Valuation
Purchases in units 3,000 2,200 1,500
6,700
Unit cost € @€4
@ €6@ €7
Credit Sales Credit Sales Units € 900 @ €9 8,100
1,100 @ €10 11,000
1,200 @ € IO 12,000
3,200 31,100
Purchases at cost 12,000 13,200 10.500
35,700
Cash Sales Cash Sales Units €
1,200 @ €11 13,2001,300 @ €12 15,600
1,200 @ €13 15,600
3,700 44,400
Total Sales Units 2,100 2,400 2,400
6,900
Total sales € 21,30026,60027,600
75,500
Closing Stock in Units Opening Stock 4,000 + Purchases 6,700 - Sales 6,900 = 3,800 units [I
Closing Stock in € 1,500 @ €7 2,200 @ €6 100 @ €4 3,800
1 0,500
113,200 400 24,100
Trading account for the year ending 31/12/2009
Sales Less cost of SalesOpening Stock Purchases Closing StockGross Profit
16,000 135,700 51,700 (24.IOO}■
75,soo■
(27,600) �-
(c)
(b)
Calculation of Product Cost and Selling Price
Direct materials Direct wages
Dept A (95 x 13) Dept B (185 x 15) Dept C (60 x 10)
Variable overheads Dept A (95 x 15) Dept B (185 x 17) Dept C (60 x 22)
Fixed overheads Dept A (95 x 6) Dept B (185 x 5) Dept C (60 x 4)
General Administration overhead (340 x 5.50) Total Cost (80% of selling price) Profit (20% of selling price) Selling Price I 00%
Under and over absorption of costs
DeptX
140,000
35,000
DeptY
36.000
45,000
€
1,235
1 2,775
600
1,425
1
· 3,145 1,320
570
1 925 240 :
€4 perM.HII €0.80 per L.H II
Actual overhead incurred Absorbed overhead Over/Under absorption
DeptX 155,000 1 160,000
5.000
DeptY 30,000 129,600
(400)
Dept X Actual machine hours x M.H. rate = 40,000 x €4 Dept Y Actual labour hours x L.H. rate 37,000 x €0 .80
Dept Z Actual labour hours x L.H. rate = 25,000 x €2
7,350.00 fffl
4,610.00
5,890 .00
1,735.00
1,810.00 11 21,455.00 11 5,363.75
26.818.75 Ill
DeptZ
40.000
20,000
€2 perL.H.II
DeptZ 45,000 1 50,000
5,000
Total 230,000
239,600
9,600
160,000
29,600
50,000
Costs incurred were €5,000 less than expected/budgeted and therefore profits are €5,000 greater than expected. Costs incurred were €400 more than expected/budgeted and therefore profits are €400 less than expected Costs incurred were €5,000 less than expected/budgeted and therefore profits are €5,000 greater than expected Overall costs incurred were €9,600 less than expected/budgeted and therefore profits are €9,600 greater than expected. ■
8. Overhead Apportionment and Flexible Budgeting
(a) Heron Ltd has two Production Departments 1 and 2 and two ancillary Service Departments X and Y.The following are the expected overhead costs for the next 6 months:
Overhead
Depreciation of equipment Depreciation of factory buildings Factory heating Factory cleaning Factory canteen
Total €
20,000 24,000 8,000 4,000 5,400
The following information relates to the Production and Service Departments of the Factory:
Volume in cubic metres Floor area in square metres Number of employees Book value of equipment Machine hours
You are required to:
Production Dept. I Dept. 2
1,000 2,000 800 600 140 100
€10,000 €15,000 4,000 1,000
Service Dept. X Dept. Y
600 400 400 200
70 50 €9,000 €6,000
(i) Calculate the overhead to be absorbed by each Department stating clearly the basis ofapportionment used.
(ii) Transfer the Service Department costs to Production Departments 1 and 2 on the basis ofmachine hours.
(iii) Calculate a machine hour overhead absorption rate for Departments I and 2.(iv) Explain why it is necessary to transfer Service Department costs to Production Departments I and 2.
(b) Mixed costs can be separated into their fixed and variable elements by using records of costs fromprevious periods. Edant pie manufactures a single component for the motor industry. The followingproduction costs and output levels have been recorded during March, April and May 2011:
Output Levels 60% 80% 90% Units 12,000 16,000 18,000 Costs € € €
Direct materials 156,000 208,000 234,000 Direct Labour 108,000 144,000 162,000 Production Overheads 79,200 102,000 113,400 Other overhead costs 64,800 85,200 95,400 Administration expenses 30,000 30,000 30,000
438.000 569.200 634,800
Profit is budgeted to be 20% of sales. Other overhead costs can be separated into their fixed and variable elements as follows: Variable cost per unit is €5.10 and Fixed Cost €3,600.
You are required to:
(i) Separate production overheads into fixed and variable elements.(ii) Prepare a Flexible Budget for 95% Activity Level using Marginal Costing principles and show
the contribution.(iii) Explain, with examples, 'controllable' and 'uncontrollable' costs.
(80 marks)
Question 8
(a)
(i)
(ii)
(iii)
Production Service
Overhead Dep of equipment Dep of buildings Factory heating Factory cleaning Canteen
Total Cost
Basis Total
I Book value 20,000
Floor area 24,000
Volume 8,000 Floor area 4,000
No.Employees 5,400
61,400
Dept 1 5,000
9,600
2,000
1,600
2,1 00
�
Production Dept 1 Dept 2 20,300 21,400
Dept2 DeptX 7,500 4,500
7,200 4,800
4,000 1,200
1,200 800
1,500 l,050
2LiQQ �
DeptY 3,000
2,400
800
400
750
�
Service DeptY
7,350
Apportion Dept X to Production Apportion Dept Y to Production
9,880 I 2,470I 5,880 1,470
DeptX 12,350
(12,350) (7,350)
Machine hour absorption rate Dept I
Dept 2
36.060 �
36,060
4,000
25,340
1,000
€9.015 per machine hour■
€25.34 per machine hour ■
(iv) ■Service departments can't recover costs. Service departments are secondary to productiondepartments and as a result, service department costs must be transferred to production departmentson an equitable basis e.g. machine hours. Overheads can only be recovered through production i.e.they are included as a cost of production.
(b)
(i)
(ii)
Production overheads
High Low Difference
Units
18,000 12,000
�
Total Cost €
113,400 79,200
�
The variable cost of 6,000 units is 34,200, therefore the variable cost per unit is €5.7011
Total production overhead cost Less variable costs Therefore, Fixed cost
79,200 (68,400)
10.800
102,000 (91,200)
�
Flexible Budget in Marginal Costing format
Sales €
Less: Variable Costs Direct Materials (19,000 x 13) Direct Labour (19,000 x 9) Production overheads (19,000 x 5. 70) Other overhead costs (19,000 x 5.10)
Contribution Less Fixed Costs
Production overheads Other overheads Administration
Profit
Total cost is 80% of sales. Total cost is 623,200 + 44,400 80% of sales 100%
247,000 1 171,000 108,300 96,900
10,800 1 3,600
30,000
667,600 667,600 834,500
€
113,400 (102,600)
�-
834,500■
(44,400) 166!200 ■
(iii) ■
Controllable Costs: Are costs that can be controlled by the manager of a cost centre. She/hewill make the decision about the amount of the cost or if the cost should be incurred andcan be held responsible for variances in these costs. E.g.- all variable costs are controllable.Commission to sales personnel can be controlled by the sales manager.
Uncontrollable Costs: Are costs over which the manager of a cost centre has no controland therefore cannot be held responsible for variances in these costs. E.g.- rates to the localauthority are uncontrollable.
8. Stock Valuation, Product Costing, Under and Over Absorption
(a) Stock Valuation
(b)
Blue Ltd is a retail store that buys and sells one product. The following information relates to thepurchases and sales of the firm for the year 2012.
Period Purchases on credit Credit Sales
0 l/01/2012-30/04/2012 4,000 @ €5 each 1,000 @ €9 each
0 l/05/2012-31/08/2012 2,500 @ €6 each l,200@€1 l each
01/09/2012-3 l/12/2012 1,700@€8 each 1,400@ €11 each
On 1/1/2012 there was opening stock of 4,500 units @€5 each.
Required: (i) Calculate the value of closing stock using •First in/First out' (FIFO) method.(ii) Prepare a trading account for the year ending 31/12/2012.
Product Costing
Cash Sales
1,500 @€12 each
1,300 @€13 each
1,200@€14 each
The following is the budgeted yearly overhead details of Grace Ltd, manufacturers of computer equipment which has three production departments. Production departments Budgeted
Manufacturing Assembly Finishing
Overheads €180,000 €99,000 €36,000
Budgeted Labour Hours
36,000 hours 18,000 hours 4,500 hours
Budgeted general administration costs for the year€ l, 170,000
Details of Job Number 666 Direct Material 30 kgs at €10.20 per kg
Direct Labour Hours Manufacturing Assembly Finishing
All orders are priced using a profit margin of 25%.
Required:
20 hours 6 hours 4 hours
(i) Calculate the overhead absorption rates for each department.(ii) Calculate the selling price of Job Number 666.
Wage Rate per hour
€4 €2 .50 €3.75
(c) Under and Over Absorption
The information set out below refers to the budgeted and actual costs of Hake Manufacturing Ltd.
Budgeted Direct Labour Hours Machine Hours Total Overhead Department A 7,000 32,000 €160,000 Department B 48,000 7,000 €33,600 Department C 22,000 €46,200
Actual Direct_Labour Hours Machine Hours Total Overhead Department A 9,000 37,000 €175,000 Department B 40,000 12,000 €29,000 Department C 27,000 €50,000
Required: (i) Calculate departmental overhead absorption rates for Departments A, B and C.(ii) Show the under/over absorption by department and in total for the period. Explain what these
figures mean.(80 marks)
Question 8
(a) Stock Valuation
Purchases in units 4,000
2,500
1,700
8,200
Credit Sales Units € 1,000 @ €9 9,000
1,200 @ €11 13,200
1,400 @ €11 15,400
3,600 �
Unit Cost
€5
€6
€8
Cash Sales Units 1,500 @ 1,300 @ 1,200 @ 4,000
12 13
14
€ 18,000
1 6,900
16,800 �
Purchases at cost €
20,000
15,000 13,600
48,600
Total Sales Units € 2,500 27,000
2,500 30,100 2,600 32,200
7,600 �
Closing Stock in Units = Opening Stock 4,500 + Purchases 8,200 Sales 7,600 = 5,1 00 units Ill
Closing Stock Valuation: Units 1,700
2,500
900
5_,lQ_Q
@ @ @
Trading account for the year ending 31/12/2012 Sales Less Cost of sales
Opening Stock Add Purchases
Less Closing Stock Gross Profit
€8 €6
€5
€ 13,600 I.•. 15,000
4,500
�
22,500
I 48,600
71,100 33,1 00 ■
€ 89,300 ■
(b) (i)
Manufacturing Budgeted Overheads €180,000
Direct Labour Hours 36,000
€5perDLH ■
Assembly €99,000 18,000
Finishing €36,000
4,500
€5.50 per DLH ■ €8.00 per DLH II
(c)
(ii)
(i)
Selling Price of Job Number 666 € €
Direct materials Direct Labour
Manufacturing Assembly Finishing
(30 X 10.20) 306.00
Budgeted Overheads
(20 X 4.00) (6 X 2.50) (4 X 3.75)
Manufacturing (20 x 5.00) Assembly (6 x 5.50) Finishing (4 x 8.00)
General Administration overhead (30 x 20) Total Cost [75%] Profit [25% of selling price] Net Selling Price I 00%
Under and over absorption of costs
Dept A
€160,000
32,000
= €5 perM.H ■ =
80.00
I !;:: · ... ·100 .00
33.00
32.00
DeptB
€33,600
48,000
110.00
165.00
600.00
I1,181.00 •393.67
I 574.67
€0. 70 per L.H ■ =
(ii) Dept A DeptB DeptC
€ € €
DeptC
46,200
22,000
€2.10 per LH ■
Total €
Actual overhead incurred 175,000
I 29,000
I 50,000
I 254,000
Absorbed overhead 185,000 28,000 56,700 269,700
Over/Under absorption �
Actual Absorbed Overheads Dept A Actual machine hours x Machine Hour rate Dept B Actual labour hours x Labour Hour rate Dept C Actual labour hours x Labour Hour rate
■
�
= 37,000 X €5.00
= 40,000 X €0.70
= 27,000 X €2.10
� ll.1rul
€185,000
€28,000
€56,700
In department A, the costs incurred were €10,000 less than expected/budgeted and therefore profits are €10,000 greater than expected. ln department B, the costs incurred were €1,000 more than expected/budgeted and therefore profits are €1,000 less than expected. In department C, the costs incurred were €6,700 less than expected/budgeted and therefore profits are €6,700 greater than expected. Overall, the costs incurred were €15,700 less than expected/budgeted and therefore profits are €15,700
greater than expected.
Page 9 of 10
SECTION 3 (80 marks) Answer ONE question
8. Stock Valuation and Flexible Budgeting
(a) Stock Valuation
Jones Ltd is a retail store that buys and sells one product. The following information relates to thepurchases and sales of the firm for the year 2014.
Period Purchases on credit Credit Sales Cash Sales
01/01/2014 – 31/03/2014 4,500 @ €6 each 1,200 @ €10 each 1,100 @ €11 each
01/04/2014 – 30/06/2014 2,400 @ €7 each 2,200 @ €11 each 1,400 @ €12 each
01/07/2014 – 30/09/2014 1,400 @ €6 each 1,400 @ €10 each 1,600 @ €13 each
01/10/2014 – 31/12/2014 2,600 @ €8 each 1,600 @ €11 each 1,100 @ €13 each
On 01/01/2014 there was an opening stock of 5,200 units @ €6 each.
Required: (i) Calculate the value of closing stock using ‘First in/First out’ (FIFO) method.(ii) Prepare a trading account for the year ending 31/12/2014.(iii) Outline the implications of an incorrect stock valuation.
(b) Boland Ltd manufactures a single component for the aviation industry. The following production costs andoutput levels have been recorded during July, August and September 2014:
Output Levels 70% 85% 95% Units 21,000 25,500 28,500 Costs € € €Direct materials 315,000 382,500 427,500 Direct Labour 231,000 280,500 313,500 Production Overheads 106,800 126,960 140,400 Other overhead costs 71,800 86,200 95,800 Administration expenses 35,000 35,000 35,000
759,600 911,160 1,012,200
Profit is budgeted to be 20% of sales.
Required: (i) Separate production overheads and other overheads into fixed and variable elements.(ii) Prepare a Flexible Budget for 90% Activity Level using Marginal Costing principles and show the
contribution.(iii) Explain, with examples, ‘controllable’ and ‘uncontrollable’ costs.
(80 marks)
Question 8
(a) Stock Valuation
(i) Purchases Unit Cost Purchases at cost in units €
4,500 €6 27,000 2,400 €7 16,800 1,400 €6 8,400
2,600 €8 20,800 10,900 73,000
Credit Sales Cash Sales Total Sales Units € Units € Units € 1,200 @ €10 12,000 1,100 @ €11 12,100 2,300 24,100 2,200 @ €11 24,200 1,400 @ €12 16,800 3,600 41,000 1,400 @ €10 14,000 1,600 @ €13 20,800 3,000 34,800 1,600 @ €11 17,600 1,100 @ €13 14,300 2,700 31,900 6,400 67,800 5,200 64,000 11,600 131,800
Closing Stock in Units = Opening Stock 5,200 + Purchases 10,900 – Sales 11,600 = 4,500 units [7]
Closing Stock Valuation: Units € 2,600 @ €8 = 20,800 [3] 1,400 @ €6 = 8,400 [3]
500 @ €7 = 3,500 [3] 4,500 32,700 [4]
(ii) Trading Account for the year ended 31/12/2014
Sales 131,800 [3] Less Cost of sales
Opening Stock 31,200 [2] Add Purchases 73,000 [3]
104,200Less Closing Stock (32,700) [2] (71,500)
Gross Profit 60,300 [4]
(iii) [4]
Implications of an incorrect stock valuation
Incorrect valuation of stock affects: The Financial Statements of two years or two accounting periods ie. the closing stock of one accounting period and the opening stock of the next accounting period. The figures for cost of sales, gross profit, net profit and subsequently figures in the balance sheet In the balance sheet it will affect the figures for current assets and working capital/net assets In carrying out ratio analysis the figure for stock will affect the stock turnover, percentage mark-up on cost, gross profit percentage, net profit percentage and the current ratio The opinion of the firm in financial circles, its tax liability, its ability to borrow, public opinion and consequently its share price
The mark-up on cost in an industry provides a valuable measure for any firm in that industry. A mark-up that is out of line with the norm is a cause for concern and should lead to immediate investigation to locate the reason and take remedial action
Stock turnover determines the total volume of profit. Therefore, the higher the better.
(b)
(i)
Production overheads Units Total Cost €
High 28,500 140,400Low 21,000 106,800 Difference 7,500 33,600
The variable cost of 7,500 units is 33,600 therefore the variable cost per unit is €4.48 [4]
Total production overhead cost 106,800 126,960 140,400 Less variable costs [units × €4.48] (94,080) (114,240) (127,680) Therefore, Fixed cost 12,720 12,720 12,720 [4]
Other overheads Units Total Cost €
High 28,500 95,800Low 21,000 71,800 Difference 7,500 24,000
The variable cost of 7,500 units is 24,600 therefore the variable cost per unit is €3.20 [4]
Total other overhead cost 71,800 86,200 95,800Less variable costs [units × €3.20] (67,200) (81,600) (91,200) Therefore, Fixed cost 4,600 4,600 4,600 [4]
19
(ii) Flexible Budget in Marginal Costing format
€ €Sales 1,202,100 [3] Less: Variable Costs
Direct Materials [27,000 × 15.00] 405,000 [2] Direct Labour [27,000 × 11.00] 297,000 [2] Production overheads [27,000 × 4.48] 120,960 [2] Other overhead costs [27,000 × 3.20] 86,400 [2] (909,360)
Contribution 292,740 [4] Less Fixed Costs
Production overheads 12,720 [1] Other overheads 4,600 [1] Administration 35,000 [1] (52,320)
Profit 240,420 [2]
Total cost is 80% of sales. Total cost is [909,360 + 52,320] = 961,680 80% of sales = 961,680 100% = 1,202,100
(iii) [6]
Controllable Costs: Are costs that can be controlled by the manager of a cost centre. She/he will make the decision about the amount of the cost or if the cost should be incurred and can be held responsible for variances in these costs. E.g. - all variable costs are controllable. Commission to sales personnel can be controlled bythe sales manager.
Uncontrollable Costs: Are costs over which the manager of a cost centre has no control and therefore cannot be held responsible for variances in these costs. e.g. - rates to the local authority are uncontrollable.
8. Overhead Apportionment/Job Costing
Moran Ltd has two production departments, 1 and 2 and two ancillary Service Departments, A and B.The following costs relate to 2016.
Total Production 1 Production 2 Service A Service B € € € € €
Indirect materials 380,000 245,000 135,000 -------- -------- Indirect labour 400,000 280,000 120,000 Machine maintenance 12,000 Depreciation on factory buildings 30,000 Factory light and heat 18,000 Factory cleaning 8,000 Factory canteen 5,600
The following information relates to the production and service departments:
Total Production 1 Production 2 Service A Service B Volume in cubic metres 6,000 3,000 1,500 1,000 500 Floor area in square metres 1,000 400 300 200 100 Number of employees 490 280 140 70 -------- Book value of buildings 600,000 300,000 150,000 100,000 50,000 Machine hours 50,000 30,000 20,000 -------- -------- Labour hours 60,000 15,000 45,000 -------- ---------
Service departments are to be transferred to the Production Departments on the following percentage basis:
Production 1 Production 2 Service A 70% 30% Service B 60% 40%
Job No. 650 has just been completed, the details are:
Direct Materials Direct Labour Machine Hours Labour Hours
€ €Production 1 7,500 4,000 120 50 Production 2 2,800 3,900 80 100
The company budgets for a profit margin of 20%.
Required:
(a) Calculate the overhead to be absorbed by each department showing clearly the basis ofapportionment used.
(b) Transfer the service department costs to production departments 1 and 2.(c) Calculate a suitable overhead absorption rate for each department.(d) Compute the selling price of Job No. 650.(e) (i) Explain what is meant by reapportionment of overheads.
(ii) Name three overhead absorption rates and state why they are based on budgeted figures.
(80 Marks)
Question 8
80(a)
Overhead Basis Total Prod 1 Prod 2 Service A
Service B
Indirect materials
Given 380,000 245,000 135,000
Indirect labour
Given 400,000 280,000 120,000
Machine maintenance
[1] Machine hours
12,000 7,200 [1] 4,800 [1]
Dep. – buildings
[1] Book value 30,000 15,000 [1] 7,500 [1] 5,000 [1] 2,500 [1]
Factory L & H
[1] Volume 18,000 9,000 [1] 4,500 [1] 3,000 [1] 1,500 [1]
Factory cleaning
[1] Floor area 8,000 3,200 [1] 2,400 [1] 1,600 [1] 800 [1]
Canteen [1] No. of employees
5,600 3,200 [1] 1,600 [1] 800 [1] -----
853,600 562,600 [1] 275,800 [1] 10,400 [1] 4,800 [1]
(b)
Production 1 Production 2 Service A Service B Overhead costs 562,600 275,800 10,400 4,800 Apportion Service A [70%/30%]
7,280 [2] 3,120 [2] (10,400)
Apportion Service B [60%/40%]
2,880 [2] 1,920 [2] (4,800)
572,760 280,840
(c)
Overhead Rate Production 1 - (Machine Hours)
572,760 = €19.09 per machine hour [6] 30,000 hours
Overhead Rate Production 2 - (Labour Hours)
280,840 = €6.24 per labour hour [6] 45,000 hours
(d)
Selling price of Job 650 € Direct materials (7,500 + 2,800) 10,300.00 [4] Direct labour (4,000 + 3,900) 7,900.00 [4] Prime cost 18,200.00 OverheadsProduction 1 (120 machine hours × €19.09) 2,290.80 [4] Production 2 (100 labour hours × €6.24) 624.00 [4] Cost of Job 650 21,114.80 Margin of 20% 5,278.70 [2] Selling price of Job 650 26,393.50 [6]
17
(e) [10]
(i) Re apportionment of costs This is the term used where service department costs are reapportioned/divided between production departments because overheads can only be recovered by being included in the cost of production.
(ii)
Absorption rates Per labour hour Per machine hour Per unit Percentage of prime cost
Overhead absorption rates are based on budgeted rather than actual costs because actual costs may not be known until the end of the year and the business cannot wait until then to decide the cost of the product as they need to decide on the selling price to charge for tendering purposes.
Leaving Certificate 2018 Accounting – Higher Level
SECTION 3 (80 marks) Answer ONE question
8. Stock Valuation and Product Costing
(a) Stock Valuation
Weston Ltd is a retail store that buys and sells one product. The following informationrelates to the purchases and sales of the firm for the year 2017:
Period Purchases on Credit
Credit Sales Cash Sales
01/01/2017 ‐ 31/03/2017 4,500 @ €8 each 1,000 @ €10 each 1,200 @ €12 each
01/04/2017 ‐ 30/06/2017 2,500 @ €7 each 2,000 @ €11 each 1,400 @ €13 each
01/07/2017 ‐ 30/09/2017 3,000 @ €6 each 1,500 @ €13 each 1,800 @ €10 each
01/10/2017 ‐ 31/12/2017 1,500 @ €5 each 1,000 @ €12 each 1,200 @ €11 each
On 01/01/2017 there was an opening stock of 5,000 units @ €6 each.
Required: (i) Calculate the value of closing stock using ‘First in/First out’ (FIFO) method.(ii) Prepare a trading account for the year ending 31/12/2017.(iii) Explain how the concept of prudence applies to the valuation of closing stock.
(b) Product Costing
The following are the specifications for a job quotation received from Tully Ltd:
Direct Materials 70 kg @ €16 per kg
Direct labour hours spent in each department:
Department Hours
A 50
B 120
C 24
The monthly budgeted figures are as follows:
Budgeted overheads
Department Variable Fixed Wage Rate per hour Labour Hours
€ € €
A 20,000 22,000 15 500
B 18,000 23,000 26 1,000
C 21,000 42,000 34 1,400
General administration overheads are expected to be €55,100 for the month.
Required:
(i) Calculate the variable and fixed overhead absorption rates for each department indirect labour hours.
(ii) Calculate the administration overhead absorption rate in direct labour hours.
(iii) Calculate the selling price of the job if the profit is set at 25% of selling price.
(iv) Outline the role of the management accountant within an organisation.
(80 marks)
22
Q.8 Stock Valuation and Product Costing
(a) 50
(i) Purchases
Units Price Cost
4,500 €8 €36,000
2,500 €7 €17,500
3,000 €6 €18,000
1,500 €5 €7,500
11,500 €79,000
Sales
Units Selling Price Sales Revenue
2,800 (1,800 + 1,000) €10 €28,000
3,200 (2,000 + 1,200) €11 €35,200
2,200 (1,000 + 1,200) €12 €26,400
2,900 (1,500 + 1,400) €13 €37,700
11,100 €127,300
Closing stock in units = opening stock (units) + purchases (units) – sales (units) = 5,000 + 11,500 – 11,100 = 5,400 [21]
Value of closing stock (FIFO)
Units Cost Value €
1,500 €5 7,500 [3]
3,000 €6 18,000 [3]
900 €7 6,300 [3]
5,400 31,800 [4]
(ii) Trading a/c for Weston Ltd year ended 31/12/2017
€ €
Sales 127,300 [4]
Less cost of sales
Opening stock 30,000 [2]
Purchases 79,000 [3]
Less closing stock (31,800) [2] (77,200)
Gross profit 50,100 [4]
23
(iii) Prudence concept and valuation of stock [1]
The prudence concept states caution should be exercised when preparing financial
statements. Therefore, only realised profits should be included in the accounts.
However, provision should be made for all expected expenses and losses. The
prudence concept ensures that profits are not overstated and losses not understated.
If closing stock was overvalued then profits would be overstated. Therefore stocks
should be valued at the lower of cost or net realisable value.
(b) Product Costing 30
(i) Budgeted Overheads
Department A
Variable Fixed
€ €
Budgeted Overhead Costs 20,000 22,000
Budgeted Hours 500 500
Overhead Absorption Rates €40 per LH [1] €44 per LH [1]
Department B
Variable Fixed
€ €
Budgeted Overhead Costs 18,000 23,000
Budgeted Hours 1,000 1,000
Overhead Absorption Rates €18 per LH [1] €23 per LH [1]
Department C
Variable Fixed
€ €
Budgeted Overhead Costs 21,000 42,000
Budgeted Hours 1,400 1,400
Overhead Absorption Rates €15 per LH [1] €30 per LH [1]
(ii)
Administration Overhead
€
Administration Overhead 55,100
Total Budgeted Hours 2,900
Overhead Absorption Rates €19 per LH [2]
(iii)
Calculation of Product Cost and Selling Price
€ €
Direct Materials (70 × 16) 1,120 [1]
Direct Labour/Wages
Department A (50 × 15) 750 [1]
Department B (120 × 26) 3,120 [1]
Department C (24 × 34) 816 [1] 4,686
Variable Overhead
Department A (50 × 40) 2,000 [1]
Department B (120 × 18) 2,160 [1]
Department C (24 × 15) 360 [1] 4,520
Fixed Overheads
Department A (50 × 44) 2,200 [1]
Department B (120 × 23) 2,760 [1]
Department C (24 × 30) 720 [1] 5,680
General administration overhead (194 × 19) 3,686 [2]
Total cost = 75% of selling price 19,692
Profit = 25% of selling price 6,564 [2]
Selling price 26,256 [2]
Due to possible confusion caused by the € symbol in the ‘labour hours’ column, award full marks to all candidates for Q.8 (b) (i), (ii) and (iii).
Leaving Certificate 2019 14Accounting – Higher Level
SECTION 3 (80 marks) Answer ONE question
8. Overhead Apportionment/Job Costing
Rooney Ltd has two production departments, X and Y and two ancillary service departments, 1 and 2.
The following costs relate to 2019.
Total Production X Production Y Service 1 Service 2
€ € € € €
Indirect materials 480,000 265,000 215,000 ‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐
Indirect labour 420,000 280,000 140,000 ‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐
Machine maintenance 18,000
Depreciation on factory buildings
36,000
Factory light and heat 24,000
Factory cleaning 10,000
Factory canteen 8,750
The following information relates to the production and service departments:
Total Production X Production Y Service 1 Service 2
Volume in cubic metres 9,000 4,500 2,250 1,500 750
Floor area in square metres
2,000 1,000 600 200 200
Number of employees 700 300 300 100 ‐‐‐‐‐‐‐‐
Book value of buildings (€) 900,000 450,000 225,000 150,000 75,000
Machine hours 80,000 48,000 32,000 ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐
Labour hours 40,000 10,000 30,000 ‐‐‐‐‐‐‐‐‐‐ ‐‐‐‐‐‐‐‐‐
Service departments are to be transferred to the production departments on the following percentage basis:
Production X Production Y
Service 1 60% 40%
Service 2 55% 45%
Job No. 925 has just been completed, the details are:
Direct Materials Direct Labour Machine Hours Labour Hours
€ €
Production X 8,500 3,000 100 50
Production Y 3,800 4,900 120 200
The company budgets for a profit margin of 20%.
Leaving Certificate 2019 15Accounting – Higher Level
Required:
(a) Calculate the overhead to be absorbed by each department showing clearly the basis ofapportionment used.
(b) Transfer the service department costs to production departments X and Y.
(c) Calculate a suitable overhead absorption rate for each department.
(d) Calculate the selling price of Job No. 925.
(e) (i) Explain why it is necessary to transfer service department overheads to productiondepartments.
(ii) Distinguish between the allocation, apportionment and absorption of costs.
(80 marks)
21
Q.8 Overhead Apportionment/Job Costing
(a)
Overhead BasisTotal Prod X Prod Y
Service 1
Service 2
Indirect materials Given 480,000 265,000 215,000
Indirect labour Given 420,000 280,000 140,000
Machine maintenance Machine hours [1] 18,000 10,800 [1] 7,200 [1]
Dep ‐ buildings Book value [1] 36,000 18,000 [1] 9,000 [1] 6,000 [1] 3,000 [1]
Factory L & H Volume [1] 24,000 12,000 [1] 6,000 [1] 4,000 [1] 2,000 [1]
Factory cleaning Floor area [1] 10,000 5,000 [1] 3,000 [1] 1,000 [1] 1,000 [1]
Canteen No. of employees [1] 8,750 3,750 [1] 3,750 [1] 1,250 [1] ‐‐‐‐‐
996,750 594,550 [1] 383,950 [1] 12,250 [1] 6,000 [1]
(b)
Production X Production Y Service 1 Service 2
Overhead Costs 594,550 383,950 12,250 6,000
Apportion Service 1 [60%/40%] 7,350 [2] 4,900 [2] (12,250)
Apportion Service 2 [55%/45%] 3,300 [2] 2,700 [2] (6,000)
605,200 391,550
80
26
8
22
(c)
Overhead Rate Production X ‐ (Machine Hours)
605,200 = €12.61 per machine hour [6] 48,000 hours
Overhead Rate Production Y ‐ (Labour Hours)
391,550 = €13.05 per labour hour [6] 30,000 hours
Or based on Machine Hours
391,550 32,000 hours = €12.24 per machine hour
(d)
Selling price of Job No. 925 € €
Direct materials (8,500 + 3,800) 12,300.00 [3]
Direct labour (3,000 + 4,900) 7,900.00 [3]
Prime cost 20,200.00
Overheads:
Production X (100 machine hours × €12.61) 1,261.00 [4]
Production Y (200 labour hours × €13.05) 2,610.00 [4]
Cost of job no. 925 24,071.00
Margin of 20% 6,017.75 [2]
Selling price of job no. 925 30,088.75 [6]
12
22
23
Selling price of Job No. 925 € €
Direct materials (8,500 + 3,800) 12,300.00 [3]
Direct labour (3,000 + 4,900) 7,900.00 [3]
Prime cost 20,200.00
Overheads:
Production X (100 machine hours × €12.61) 1,261.00 [4]
Production Y (120 machine hours × €12.24) 1,468.80 [4]
Cost of job no. 925 22,929.80
Margin of 20% 5,732.45 [2]
Selling price of job no. 925 28,662.25 [6]
