Absorption Costing Fastpac Ltd, a manufacturing company has two departments Production and Packing. The budgeted overheads for the two departments for the coming year are as follows: Department € Fixed € Production 30,000 Packing 7,000 Department € Variable € Production 18,000 Packing 9,000 Fastpac Ltd estimates (budgets) Direct Labour Hours for each Department for the coming year as follows: Direct Labour Hours Department Hours Production 5,000 Packing 2,000 (a) Calculate the overhead absorption rate (both Fixed and Variable) for each Department based on Direct Labour Hours. (b) The details of customer’s Job No. 671 are as follows: Direct Materials €1,250 Direct Labour €460 Hours in Production 3 Hours in Packing 2 Calculate the total cost of Job No. 671. (c) Calculate the selling price of Job No. 671 if the mark up on cost is 20%. (d) State two reasons why a business needs to calculate the cost price of a product.

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Absorption Costing Fastpac Ltd, a manufacturing company has two departments Production and Packing - Leaving Cert Accounting - Question 8 - 2015

Question 8

Absorption Costing Fastpac Ltd, a manufacturing company has two departments Production and Packing. The budgeted overheads for the two departments for the coming ye... show full transcript

Worked Solution & Example Answer:Absorption Costing Fastpac Ltd, a manufacturing company has two departments Production and Packing - Leaving Cert Accounting - Question 8 - 2015

Step 1

Calculate the overhead absorption rate (both Fixed and Variable) for each Department based on Direct Labour Hours

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Answer

To determine the overhead absorption rates for both the Production and Packing departments, we need to divide the budgeted overheads by the total direct labour hours.

Production Department:

Fixed Overhead Rate: $\text{Fixed Rate} = \frac{\text{Fixed Overhead}}{\text{Direct Labour Hours}} = \frac{30,000}{5,000} = €6 \text{ per hour}$
Variable Overhead Rate: $\text{Variable Rate} = \frac{\text{Variable Overhead}}{\text{Direct Labour Hours}} = \frac{18,000}{5,000} = €3.60 \text{ per hour}$

Packing Department:

Fixed Overhead Rate: $\text{Fixed Rate} = \frac{7,000}{2,000} = €3.50 \text{ per hour}$
Variable Overhead Rate: $\text{Variable Rate} = \frac{9,000}{2,000} = €4.50 \text{ per hour}$

Step 2

Calculate the total cost of Job No. 671.

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Answer

To calculate the total cost of Job No. 671, we need to sum the costs of direct materials, direct labour, and overhead costs.

Direct Costs:
- Direct Materials: €1,250
- Direct Labour: €460
Overhead Costs:
- Production Overheads:
  - Fixed: $3 \text{ hours} \times €6 = €18$
  - Variable: $3 \text{ hours} \times €3.60 = €10.80$
  - Total Production Overheads: €18 + €10.80 = €28.80
- Packing Overheads:
  - Fixed: $2 \text{ hours} \times €3.50 = €7$
  - Variable: $2 \text{ hours} \times €4.50 = €9$
  - Total Packing Overheads: €7 + €9 = €16
Total Overhead Costs:
- Total Overhead = €28.80 + €16 = €44.80
Total Cost of Job No. 671: $\text{Total Cost} = \text{Direct Materials} + \text{Direct Labour} + \text{Total Overheads} = €1,250 + €460 + €44.80 = €1,754.80$

Step 3

Calculate the selling price of Job No. 671 if the mark-up on cost is 20%.

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Answer

To calculate the selling price of Job No. 671, we apply a mark-up of 20% on the total cost.

Total Cost of Job No. 671: €1,754.80
Calculate the Mark-up: $\text{Mark-up} = 20\% \times \text{Total Cost} = 0.20 \times 1,754.80 = €350.96$
Selling Price: $\text{Selling Price} = \text{Total Cost} + \text{Mark-up} = 1,754.80 + 350.96 = €2,105.76$

Step 4

State two reasons why a business needs to calculate the cost price of a product.

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Answer

To be able to calculate a selling price: Knowing the cost price allows a business to set a selling price that ensures profitability by covering costs and adding a profit margin.
To see if it will be possible to make a profit producing the product: Understanding the cost price helps a business assess whether it can produce a product at a price that is lower than its selling price, thereby ensuring profitability.

Absorption Costing Fastpac Ltd, a manufacturing company has two departments Production and Packing - Leaving Cert Accounting - Question 8 - 2015

Worked Solution & Example Answer:Absorption Costing Fastpac Ltd, a manufacturing company has two departments Production and Packing - Leaving Cert Accounting - Question 8 - 2015

Calculate the overhead absorption rate (both Fixed and Variable) for each Department based on Direct Labour Hours

Calculate the total cost of Job No. 671.

Calculate the selling price of Job No. 671 if the mark-up on cost is 20%.

State two reasons why a business needs to calculate the cost price of a product.

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