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8. Job Costing Hayes ltd - Leaving Cert Accounting - Question 8 - 2022
Question 8
8. Job Costing Hayes ltd. trades as a manufacturing firm, and has four departments: Production 1, Production 2, Service A and Service B. The following costs relate ... show full transcript
Worked Solution & Example Answer:8. Job Costing Hayes ltd - Leaving Cert Accounting - Question 8 - 2022
Step 1
Calculate the overhead to be absorbed by each department stating clearly the basis of apportionment used.
Answer
To calculate the overhead to be absorbed by each department, we need to categorize the total costs under the appropriate bases of apportionment.
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Indirect Materials
- Total: €420,000
- Production 1: €200,000; Production 2: €120,000; Service A: €50,000; Service B: €50,000
- Basis: Actual costs.
-
Indirect Labour
- Total: €625,000
- Production 1: €300,000; Production 2: €250,000; Service A: €45,000; Service B: €30,000
- Basis: Actual costs.
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Factory Canteen
- Total: €50,000
- Production 1: €25,000; Production 2: €17,500; Service A: €2,500; Service B: €5,000
- Basis: Employees.
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Rent and Rates
- Total: €64,000
- Production 1: €20,000; Production 2: €16,000; Service A: €12,000; Service B: €16,000
- Basis: Floor Space.
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Light and Heat
- Total: €75,000
- Production 1: €37,500; Production 2: €25,000; Service A: €9,375; Service B: €3,125
- Basis: Volume.
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Machine Maintenance
- Total: €28,000
- Production 1: €16,000; Production 2: €12,000
- Basis: Machine Hours (Service A and B have no allocation).
-
Plant Depreciation
- Total: €81,000
- Production 1: €33,750; Production 2: €27,000; Service A: €10,125; Service B: €10,125
- Basis: Plant Valuation.
The aggregate overhead absorbed by each department can then be summarized as follows:
- Total Overheads: €1,343,000
- Production 1: €644,750
- Production 2: €477,100
- Service A: €123,950
- Service B: €97,700
Step 2
Transfer the service department costs to production departments 1 and 2.
Answer
To transfer the service department costs to the production departments, we apply the agreed percentages for apportionment:
-
Calculate the amounts transferred from Service A and Service B:
- Service A:
- To Production 1: 60% of €123,950 = €74,370
- To Production 2: 40% of €123,950 = €49,580
- Service B:
- To Production 1: 35% of €97,700 = €34,195
- To Production 2: 65% of €97,700 = €63,505
- Service A:
-
Total Overhead Costs including Service Departments:
- Production 1: €644,750 + €74,370 + €34,195 = €752,815
- Production 2: €477,100 + €49,580 + €63,505 = €590,185
Step 3
Calculate a suitable overhead absorption rate for each department.
Answer
To calculate the overhead absorption rate for each department, we will divide the total overheads allocated by the total machine or labour hours considered for each department.
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For Production 1:
- Overheads: €752,815
- Machine Hours: 48,000
- Overhead Absorption Rate per Machine Hour:
rac{752,815}{48,000} = €15.68
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For Production 2:
- Overheads: €590,185
- Labour Hours: 74,000
- Overhead Absorption Rate per Labour Hour:
rac{590,185}{74,000} = €7.98
Step 4
Calculate the selling price for Job No. 310.
Answer
The selling price for Job No. 310 is calculated by totaling the direct materials, direct labour, and absorbed overheads.
- Direct Materials: €12,000 + €2,600 = €14,600
- Direct Labour: €2,600 + €7,000 = €9,600
- Overheads:
- Production 1: 55 hours at €15.68 = €862.40
- Production 2: 80 hours at €7.98 = €638.40
- Production Cost:
- Total Cost = Direct Materials + Direct Labour + Overheads
- Total Cost = €14,600 + €9,600 + (€862.40 + €638.40) = €25,000
- Profit: 25% of €25,000 = €6,250
- Selling Price:
- Selling Price = Total Cost + Profit = €25,000 + €6,250 = €31,250
Step 5
Explain, under -absorption of overheads, and how it might arise in a manufacturing firm.
Answer
Under-absorption of Overheads occurs when the overhead costs incurred are higher than the overheads absorbed into the cost of production. This might arise in a manufacturing firm due to various reasons:
- Budgeted Costs vs. Actual Costs: Often, overhead absorption rates are based on estimated budgets rather than actual costs. If actual costs exceed budgeted expectations, under-absorption occurs.
- Incorrect Estimation of Machine or Labour Hours: If the actual machine or labour hours used are significantly lower than those budgeted, this may result in absorbed overheads being lower than costs incurred.
- Variable Overhead Elements: In cases where there are unexpected increases in costs (for instance, energy prices) or external conditions (such as market fluctuations), actual expenses may rise unexpectedly, leading to under-absorption.
Step 6
Explain, under - absorption of overheads, and how it might arise in a manufacturing firm.
Answer
Under-absorption may arise in a manufacturing firm due to:
- Curtailed Production: If production levels drop unexpectedly, the overhead absorption based on production output may not cover the fixed overhead expenses incurred.
- Higher Actual Costs: Unexpected price increases in materials or utilities lead to higher than anticipated costs, but the absorption remains based on prior budgets.
- Operational Inefficiencies: Unforeseen circumstances impacting operational efficiency (e.g., machine breakdowns) affect production levels versus what was projected in costs.