- 20 Marks
Question
a) Services are the non-physical, intangible parts of the Ghanaian economy, as opposed to goods, which we can touch or handle. Services, such as banking, education, medical treatment, and transportation make up a significant percentage of the economy.
Required: State and explain THREE (3) features of a service. (6 marks)
b) Edwin Ltd manufactures aviation components and parts to order, and the following are budgeted overheads for the year based on normal activity levels:
| Department | Budgeted overhead | Labour hours |
|---|---|---|
| Welding | GH¢12,000 | 3,000 |
| Assembly | GH¢20,000 | 2,000 |
Selling and administration overheads are 25% of factory cost.
An order for 350 units of engine parts, Job X 01, incurred the following cost:
- Material cost: GH¢24,000
- Labour:
- Welding: 200 hours @ GH¢5 per hour
- Assembly: 400 hours @ GH¢2 per hour
- GH¢1,000 was paid for the hiring of a special x-ray machine for testing the welds.
Required: i) Calculate the overhead absorption rate for each department. (2 marks)
ii) Calculate the production cost for Job X01. (10 marks)
iii) Calculate the total cost of Job X01. (2 marks)
Answer
a) Features of a service:
- Simultaneity: Production and consumption of a service occur simultaneously, e.g., a haircut service is used immediately as provided.
- Heterogeneity: Services provided can vary from one provider to another, making each service unique despite its nature.
- Intangibility: Services cannot be touched or felt unlike physical goods, e.g., banking services.
- Perishability: Services cannot be stored for later use; they must be consumed when offered, e.g., a consultation. (3 points @ 2 marks each = 6 marks)
b) i) Overhead absorption rate:
- Welding: GH¢12,000 / 3,000 hours = GH¢4 per hour
- Assembly: GH¢20,000 / 2,000 hours = GH¢10 per hour (2 marks)
ii) Production cost for Job X01:
| Cost Centre | GH¢ |
|---|---|
| Direct materials | 24,000 |
| Direct labour: | |
| Welding: 200 hrs x GH¢5 | 1,000 |
| Assembly: 400 hrs x GH¢2 | 800 |
| Direct expenses | 1,000 |
| Prime cost | 26,800 |
| Production overheads: | |
| Welding: 200 hrs x GH¢4 | 800 |
| Assembly: 400 hrs x GH¢10 | 4,000 |
| Total production cost | 31,600 |
| (10 marks) |
iii) Total cost of Job X01:
| Description | GH¢ |
|---|---|
| Production cost | 31,600 |
| Selling & administration (25% of factory cost) | 7,900 |
| Total cost | 39,500 |
| (2 marks) |
- Topic: Budgeting, Marginal Costing and Absorption Costing
- Series: DEC 2022
- Uploader: Joseph