Question Tag: Overhead Absorption

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  • 15 Marks

MA – Aug 2022 – L2 – Q2a – Activity-based costing

This question asks for the calculation of activity rates and the cost per unit of product X using activity-based costing.

The details of unit cost of products X, Y, and Z have been provided below:

Product X Y Z
Demand (units) 1,200 2,800 3,000
GH¢ GH¢ GH¢ GH¢
Direct Material 70 55 40
Direct Labour 65 60 38
Variable Overheads 11 8 7
Fixed Overhead 32 24 20

Additional information:

  • The fixed overheads were absorbed at the rate of GH¢8 per machine hour.
  • The budgeted fixed overheads of GH¢165,600 can be analysed into the following cost pools with their respective percentages for apportionment:
    Cost Pool Percentages (%)
    Batch 20
    Machinery 45
    Customer service 25
    Deliveries 10
  • The following also relates to the activities of the company:
Product X Y Z
Units in a batch 120 140 200
Quantities per delivery 100 280 250
Number of customers 50 180 220

Required:
i) Calculate the activity rates per batch, machine hour, customer service, and delivery.
(12 marks)

ii) Calculate the total cost of a unit of product X.
(3 marks)

a) Workings:

Apportionment of Overheads (GH¢165,600):

Cost Pool Percentage (%) Overhead (GH¢)
Batch 20 33,120
Machinery 45 74,520
Customer Service 25 41,400
Deliveries 10 16,560

Machine hours:

  • X = 1,200 units × 4 hours = 4,800
  • Y = 2,800 units × 3 hours = 8,400
  • Z = 3,000 units × 2.5 hours = 7,500
    Total = 20,700

Number of batches:

  • X = 1,200 ÷ 120 = 10
  • Y = 2,800 ÷ 140 = 20
  • Z = 3,000 ÷ 200 = 15
    Total = 45

Number of deliveries:

  • X = 1,200 ÷ 100 = 12
  • Y = 2,800 ÷ 280 = 10
  • Z = 3,000 ÷ 250 = 12
    Total = 34

Number of customers:

  • Total = 450

Statement showing calculation of activity rates:

Activity Base Overhead (GH¢) Number of Activities Rate (GH¢)
Machine related 74,520 20,700 hours 3.6 per hour
Batch related 33,120 45 batches 736 per batch
Delivery related 16,560 34 deliveries 487 per delivery
Customer Service 41,400 450 customers 92 per customer

(12 marks)

ii) Cost per unit of Product X (1,200 units):

Description GH¢
Prime cost GH¢146 × 1,200 175,200
Overheads:
Machine-related (4,800 × 3.6) 17,280
Batch-related (10 × 736) 7,360
Delivery-related (12 × 487) 5,844
Customer service (50 × 92) 4,600
Total 210,284

Cost per unit = 210,284 ÷ 1,200 = GH¢175.24
(3 marks)

  • 10 Marks

MA – May 2018 – L2 – Q3c – Activity-Based Costing

Calculate the total overhead absorbed per unit using Activity-Based Costing and identify three types of cost controls.

Dunning Limited has recently introduced an Activity Based Costing System and has
provided the following details for the month of January:

During the month, 500 units of Product Y were produced. This production run required
100 parts and 150 maintenance hours; 5 material requisitions were made and 10
employees worked on the units.
Required:
i) Using Activity Based Costing, calculate the total amount of overhead absorbed by each
unit of Product Y. (7 marks)
ii) Identify THREE different types of controls and explain how activity based costing assists
in the control of costs?

i) Product Y – Overhead Absorption

Cost Pool Workings GH¢
Parts 100 parts x GH¢20 per part 2,000
Maintenance 150 hours x GH¢30 per hour 4,500
Stores 5 requisitions x GH¢500 per requisition 2,500
Administration 10 employees x GH¢50 per employee 500
Total Overhead Absorbed 9,500
Per unit 9,500 / 500 units 19

ii) Three Types of Controls and Activity-Based Costing

Control Type Description How ABC Assists
Action or Behavioral Controls Observing individual actions to ensure they align with cost control measures, such as work studies or quality controls. ABC provides detailed information on cost drivers, which helps in identifying areas needing corrective actions.
Personnel and Cultural Controls Establishing values and norms to influence employee performance and cost efficiency. ABC helps in understanding the cost implications of various activities, which can guide training and cultural alignment.
Results and Output Controls Collection and analysis of performance data to assess the outcomes of work efforts. ABC provides accurate cost data on outputs, which helps in evaluating performance and ensuring results meet expectations.
  • 2 Marks

MA – May 2018 – L2 – Q3b – Activity-Based Costing

Identify three disadvantages of a standard costing system.

Identify THREE disadvantages of a standard costing system.

 

Disadvantage Description
Historical Reporting Reports are prepared after the event, providing information based on historical data rather than current conditions.
Demotivational Impact Inappropriate standards or a focus on negative variances can demotivate employees by emphasizing errors or shortcomings.
Assumptions in Efficiency Variances Efficiency variances often assume labor is variable and that production is solely a function of labor, which may not reflect actual conditions.
  • 15 Marks

MA – May 2019 – L2 – Q3a – Relevant cost and revenue

Discuss blanket overhead rate and prepare an overhead analysis sheet, including re-apportionment of service department costs.

Bobich Ltd manufactures plastic containers for the pharmaceutical industry. The factory, in which the company undertakes all its production, has two production departments, namely: Cutting and Shaping, and two service departments, namely: Stores and Maintenance.

The information below was extracted from the company’s budget for its financial year ended 31 March 2019:

Allocated Overhead Costs GH¢
Cutting Department (Cutting) 14,000
Shaping Department (Shaping) 16,000
Stores Department (Stores) 3,500
Maintenance Department (Maintenance) 2,800
Other Production Overheads GH¢
Factory rent 525,000
Factory building insurance 70,000
Plant & machinery insurance 39,000
Plant & machinery depreciation 58,500
Canteen subsidy 150,000
Direct Costs GH¢
Cutting Department 144,000
Shaping Department 210,000

The following additional information is also provided:

Cutting Shaping Stores Maintenance
Floor area (square meters) 18,000 12,000 3,000 2,000
Value of Plant & Machinery (GH¢) 300,000 50,000 25,000 15,000
Number of stores requisitions 1,000 500 – –
Maintenance hours required 2,700 2,000 300 –
Number of employees 34 60 4 2
Machine hours 12,000 2,200 – –
Labour hours 9,000 15,000 – –

Required:
i) Explain what is meant by the term “blanket overhead rate.” (2 marks)
ii) Prepare an overhead analysis sheet based on the above information. You must clearly state the basis used for any apportionments. (7 marks)
iii) Re-apportion the service department costs and calculate the most appropriate overhead rate for each department. (Rate should be calculated to two decimal places). (3 marks)
iv) State THREE (3) reasons why companies calculate pre-determined overhead absorption rates. (3 marks)

i) Blanket Overhead Rate:

A blanket overhead rate is where a company calculates one overhead rate for the entire company, as opposed to calculating separate rates for each department or cost center. For example, if a company budgets that its total production overheads will be GH¢200,000 for the forthcoming year and the total budgeted machine hours are 50,000, the company’s pre-determined overhead rate would be GH¢4 per machine hour if overheads are absorbed based on machine hours. This method, however, may not be as accurate as using departmental overhead rates, as it assumes that all departments use resources at the same rate.

(2 marks)

ii) Overhead Analysis Sheet:

Nature of Cost Basis of Apportionment Total (GH¢) Cutting (GH¢) Shaping (GH¢) Stores (GH¢) Maintenance (GH¢)
Allocated Overhead N/A 36,300 14,000 16,000 3,500 2,800
Rent Floor area 525,000 270,000 180,000 45,000 30,000
Building insurance Floor area 70,000 36,000 24,000 6,000 4,000
Plant & machinery insurance Value of P&M 39,000 30,000 5,000 2,500 1,500
Plant & machinery depreciation Value of P&M 58,500 45,000 7,500 3,750 2,250
Canteen subsidy No. of employees 150,000 51,000 90,000 6,000 3,000
Total 878,800 446,000 322,500 66,750 43,550

(7 marks evenly spread using ticks)

iii) Re-apportionment of Service Department Costs:

Using the Step-down method (all other applicable methods are also allowed):

Total (GH¢) Cutting (GH¢) Shaping (GH¢) Stores (GH¢) Maintenance (GH¢)
Total Overheads 878,000 446,000 322,500 66,750 43,550
Maintenance Dept Maintenance hours 23,517 17,420 2,613 –
Stores Dept Stores Requisitions 46,242 23,121 (69,363) –
Re-apportioned Total 515,759 363,041 – –
  • Overhead Absorption Rate for Cutting Dept:
    GH¢515,759 / 12,000 machine hours = GH¢42.90 per machine hour
  • Overhead Absorption Rate for Shaping Dept:
    GH¢363,041 / 15,000 labour hours = GH¢24.20 per labour hour

(3 marks)

iv) Reasons for Calculating Pre-determined Overhead Rates:

  • To establish selling prices.
  • For inventory valuation purposes.
  • To facilitate the control process within an organisation.
  • 15 Marks

MA – May 2017 – L2 – Q3a – Standard costing and variance analysis

Calculate the budgeted fixed production overhead costs and prepare profit statements using marginal and absorption costing.

Bosco Ltd makes and sells one product. Currently, it uses absorption costing to measure profits and inventory values. The budgeted production cost per unit is as follows:

Item Cost (GH¢)
Direct labour (3 hours at GH¢6 per hour) 18
Direct materials (4 kilograms at GH¢7 per kilo) 28
Production Overhead (Fixed cost) 20
Total Cost per Unit 66

Normal output volume is 16,000 units per year, and this volume is used to establish the fixed overhead absorption rate for each year. Costs relating to sales, distribution, and administration are:

  • Variable: 20% of sales value
  • Fixed: GH¢180,000 per year

There were no units of finished goods inventory on 1st October 2015. The fixed overhead expenditure is spread evenly throughout the year. The selling price per unit is GH¢140. For the two six-monthly periods detailed below, the number of units to be produced and sold are budgeted as follows:

Period Production (units) Sales (units)
Six months ending 31st March 2016 8,500 7,000
Six months ending 30th September 2016 7,000 8,000

The entity is considering whether to abandon absorption costing and use marginal costing instead for profit reporting and inventory valuation.

Required:

i) Calculate the budgeted fixed production overhead costs for each of the six-monthly periods. (3 marks)

ii) Prepare profit statements for management using:

  • Marginal costing
  • Absorption costing

(9 marks)

iii) Prepare an explanatory statement reconciling the profits under marginal costing with those of absorption costing.

(3 marks)

i) Budgeted Fixed Production Overhead Costs:

The budgeted fixed production overhead expenditure is calculated based on the normal output volume.

  • Normal production volume: 16,000 units per year
  • Fixed production overhead rate per unit: GH¢20
  • Total annual overhead cost: 16,000 units × GH¢20 = GH¢320,000
  • Fixed overhead per six-month period: GH¢320,000 / 2 = GH¢160,000

(3 marks)

ii) Profit Statements Using Marginal and Absorption Costing:

Marginal Costing Profit Statement:

Description Six months ending 31 March 2016 (GH¢) Six months ending 30 September 2016 (GH¢)
Sales (7,000 units @ GH¢140) 980,000 1,120,000
Less: Marginal Cost of Sales (7,000 units @ GH¢74) 518,000 592,000
Contribution 462,000 528,000
Less: Fixed Production Overheads 160,000 160,000
Less: Other Fixed Costs (Sales, Distribution, Admin) 90,000 90,000
Profit 212,000 278,000

Absorption Costing Profit Statement:

Description Six months ending 31 March 2016 (GH¢) Six months ending 30 September 2016 (GH¢)
Sales (7,000 units @ GH¢140) 980,000 1,120,000
Less: Cost of Sales (using absorption)
– Direct Costs (7,000 units @ GH¢66) 462,000 528,000
– Fixed Overhead Absorbed (Production) 170,000 (8,500 units @ GH¢20) 140,000 (7,000 units @ GH¢20)
Less: Under/(Over) Absorbed Overheads 10,000 (over-absorbed) (20,000) (under-absorbed)
Cost of Sales 518,000 572,000
Gross Profit 462,000 548,000
Less: Fixed Costs (Sales, Distribution, Admin) 286,000 314,000
Profit 242,000 258,000

(9 marks)

iii) Reconciliation of Profits Under Marginal and Absorption Costing:

The differences in reported profits between marginal costing and absorption costing arise from the treatment of fixed production overheads and changes in inventory levels.

Period Difference
Six months ending 31 March 2016 Increase in inventory (1,500 units × GH¢20) = GH¢30,000
Six months ending 30 September 2016 Decrease in inventory (1,000 units × GH¢20) = (GH¢20,000)

Reconciliation:

  • 31 March 2016: Absorption costing profit higher by GH¢30,000
  • 30 September 2016: Absorption costing profit lower by GH¢20,000

(3 marks)

  • 20 Marks

IMAC – MAR 2024 – L1 – Q1 – Cost and Cost Behaviour

Calculate total cost, unit cost, and profit per unit for a batch of 5,000 units and determine real fixed and variable costs after adjusting for inflation.

a) Atimbila Ltd manufactures a product that goes through various workshops. The following budgeted overheads for the year 2023, based on normal activity levels, have been provided:

Workshop Budgeted Overheads (GH¢) Overhead Absorption Base
Forming 360,000 30,000 labour hours
Machining 860,000 50,000 machine hours
Welding 400,000 36,000 labour hours
Assembly 300,000 20,000 labour hours

Selling and administrative overheads are 25% of factory cost.

An order for 5,000 units of the product (Batch 3391) incurred the following costs on 31 August 2023:

  • Materials: GH¢62,140
  • Labour:
    • 1,280 hours forming shop at GH¢10.50 per hour
    • 4,520 hours machining shop at GH¢11 per hour
    • 900 hours welding shop at GH¢10.50 per hour
    • 1,750 hours assembly shop at GH¢9.60 per hour
  • An amount of GH¢1,050 was paid for the hire of a special X-ray equipment for testing the welds. The time booking in the machine shop was 6,430 machine hours. Selling price was GH¢150 per product.

Required:
i) Compute the total cost of the batch. (10 marks)
ii) Calculate the unit cost per product. (1 mark)
iii) Determine the profit per product. (1 mark)

b) The following cost and production data relates to the operations of Mawuga Ltd over a two-year period:

Year Production (units) Total Costs (GH¢)
2022 50,000 1,700,000
2023 54,000 1,835,400

Between 2022 and 2023, there has been a 5% cost inflation.

Required:
i) Calculate the real fixed and variable costs. (6 marks)
ii) Estimate what the total costs will be in 2024 if it is expected that there will be 4% cost inflation and output will be 56,000 units. (2 marks)

 

  • 20 Marks

IMAC – NOV 2019 – L1 – Q1 – Job Costing

Calculate overhead absorption rates and estimate the costs and invoice price for a job.

You have just been appointed the full-time Management Accountant for Genuine Jobbers Limited, a company based in the North Industrial Area in Accra that produces cartons to meet customers’ specific requirements. You have been tasked to determine the cost and invoice price per job for the forthcoming period and have been provided with the following:

Budgeted statement of profit or loss for the financial year ended 31 March, 2020:

The sales department is currently negotiating a price for an enquiry for job number 45A/2020 and the following information has been provided for that purpose:

Direct costs estimates:

GH¢
Direct material 18,000
Direct labour: Grinding department 400 hours @ GH¢10 each 4,000
Finishing department 300 hours @ GH¢12 each 3,600

Note:

  • It is recommended that production overheads are charged to jobs on the basis of direct labour hours worked.
  • Selling and administrative expenses are charged at 10% of production cost.
  • It is a policy of the company to make a profit margin as budgeted on each job.

Required:
a) Compute the overheads absorption rates for each of the production departments. (4 marks)
b) As the Management Accountant, estimate the costs of Job 45A/2020 in the light of the information provided, and hence an invoice price for the Sales Manager’s use. (16 marks)

b) JOB 45A/2020
JOB COST SHEET

GH¢ GH¢
Direct materials 18,000
Direct labour:
Grinding (400 x GH¢10) 4,000
Finishing (300 x GH¢12) 3,600 7,600
Prime costs
Production overheads:
Grinding (400 x GH¢35) 14,000
Finishing (300 x GH¢40) 12,000 26,000
Production costs 51,600
Selling & Administration overheads (10%x GH¢51,600) 5,160
Total costs 56,760
Profit mark-up (20/80 x GH¢56,760) 14,190
Selling price of Job 70,950

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