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8. Costing and Stock Valuation Nevis Ltd has two Production Departments, 1 and 2 and two ancillary Service Departments, A and B - Leaving Cert Accounting - Question 8 - 2007
Question 8
8. Costing and Stock Valuation Nevis Ltd has two Production Departments, 1 and 2 and two ancillary Service Departments, A and B. The following are the expected over... show full transcript
Worked Solution & Example Answer:8. Costing and Stock Valuation Nevis Ltd has two Production Departments, 1 and 2 and two ancillary Service Departments, A and B - Leaving Cert Accounting - Question 8 - 2007
Step 1
Calculate the overhead to be absorbed by each Department stating clearly the basis of apportionment.
Answer
To calculate the overhead to be absorbed by each department, we first need to determine the basis of apportionment for each overhead type. We will allocate the total overhead costs based on the following criteria:
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Depreciation of Equipment - Based on the book value of equipment:
- Dept 1: ( \frac{15,000}{58,400} \times 16,000 = 4,100 )
- Dept 2: ( \frac{8,000}{58,400} \times 16,000 = 4,900 )
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Depreciation of Factory Buildings - Based on floor area:
- Dept 1: ( \frac{800}{1,400} \times 20,000 = 11,429 )
- Dept 2: ( \frac{600}{1,400} \times 20,000 = 8,571 )
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Factory Heating - Based on volume in cubic meters:
- Dept 1: ( \frac{1,500}{2,500} \times 2,900 = 1,740 )
- Dept 2: ( \frac{1,000}{2,500} \times 2,900 = 1,160 )
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Factory Cleaning - Based on number of employees:
- Dept 1: ( \frac{80}{140} \times 2,600 = 1,490 )
- Dept 2: ( \frac{60}{140} \times 2,600 = 1,110 )
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Canteen - Based on number of employees:
- Dept 1: ( \frac{80}{140} \times 10,800 = 6,171 )
- Dept 2: ( \frac{60}{140} \times 10,800 = 4,629 )
By summing the apportionments for each department, total overheads absorbed are:
- Dept 1 Total: 35,340
- Dept 2 Total: 27,660
Step 2
Transfer the Service Department costs to Production Departments 1 and 2 on the basis of machine hours.
Answer
To transfer the service department costs to the production departments, we first allocate the costs based on the machine hours:
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Service Dept A costs will be allocated to Dept 1 and Dept 2:
- Total hours: 3,000 + 1,000 = 4,000 hours
- Dept 1: ( \frac{3,000}{4,000} \times 9,800 = 7,350 )
- Dept 2: ( \frac{1,000}{4,000} \times 9,800 = 2,450 )
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Service Dept B costs will be allocated similarly:
- Dept 1: ( \frac{3,000}{4,000} \times 8,800 = 6,600 )
- Dept 2: ( \frac{1,000}{4,000} \times 8,800 = 2,200 )
Step 3
Calculate machine hour overhead absorption rates for Departments 1 and 2.
Answer
The machine hour absorption rate is calculated using the formula: ( \text{Absorption Rate} = \frac{\text{Total Overhead}}{\text{Machine Hours}} )
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For Dept 1:
- Total Absorption: 32,550
- Machine Hours: 3,000
- Absorption Rate: ( \frac{32,550}{3,000} = €10.85 ) per machine hour
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For Dept 2:
- Total Absorption: 28,850
- Machine Hours: 1,000
- Absorption Rate: ( \frac{28,850}{1,000} = €28.85 ) per machine hour
Step 4
Explain what is meant by 're-apportionment' of overheads.
Answer
Re-apportionment refers to the redistribution of service department costs among production departments. This is done because service department costs can only be absorbed as part of the production costs. It ensures that all departments bear a fair share of the overhead costs, allowing for a more accurate calculation of departmental profitability and efficiency.
Step 5
Illustrate and explain 'over-absorption' of overheads.
Answer
Over-absorption occurs when the budgeted overhead costs allocated to a department exceed the actual overhead costs incurred. This situation can arise if a department operates more efficiently or reduces its overheads significantly. For instance, if the budgeted overheads for a department are €20,000 but the actual costs only amount to €15,000, the department is said to have over-absorbed €5,000. This could indicate effective cost control or under-utilization of resources.
Step 6
Calculate the value of closing stock using the 'first in first out' (FIFO) method.
Answer
To calculate the value of closing stock using the FIFO method, we account for the earliest purchases first up until we reach the closing stock requirement:
- Opening Stock: 3,500 units @ €5 = €17,500
- Purchases:
- 2,000 units @ €7 = €14,000
- 1,200 units @ €12 = €14,400
Using FIFO, we take:
- 2,400 units from the last purchase (1,400 @ €9 + 1,000 @ €12) totaling €12,600
- 300 units from the opening stock totaling €1,500
Thus, the total closing stock value is: €12,600 + €1,500 = €14,100.
Step 7