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Moran Ltd has two production departments, 1 and 2 and two ancillary Service Departments, A and B - Leaving Cert Accounting - Question 8 - 2016
Question 8
Moran Ltd has two production departments, 1 and 2 and two ancillary Service Departments, A and B. The following costs relate to 2016. Indirect materials €380,000 ... show full transcript
Worked Solution & Example Answer:Moran Ltd has two production departments, 1 and 2 and two ancillary Service Departments, A and B - Leaving Cert Accounting - Question 8 - 2016
Step 1
Calculate the overhead to be absorbed by each department showing clearly the basis of apportionment used.
Answer
To calculate the overhead absorbed by each department, we will start by identifying the overheads and the basis for apportionment:
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Indirect Materials
- Total: €380,000
- Apportioned based on the floor area.
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Indirect Labour
- Total: €300,000
- Apportioned based on the number of employees.
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Machine Maintenance
- Total: €12,000
- Apportioned based on machine hours.
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Depreciation on Factory Buildings
- Total: €30,000
- Apportioned based on the book value of the buildings.
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Factory Light and Heat
- Total: €8,000
- Apportioned based on floor area.
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Factory Cleaning
- Total: €5,000
- Apportioned based on the number of employees.
Now, we calculate how much of each cost goes to each department based on these apportionment factors.
Step 2
Transfer the service department costs to production departments 1 and 2.
Answer
The service department costs need to be transferred to the production departments based on the predefined percentages:
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Service A Cost: €10,400
- Production 1: €10,400 * 70% = €7,280
- Production 2: €10,400 * 30% = €3,120
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Service B Cost: €4,800
- Production 1: €4,800 * 60% = €2,880
- Production 2: €4,800 * 40% = €1,920
The total transfer amounts to be added to the production departments.
Step 3
Calculate a suitable overhead absorption rate for each department.
Answer
To calculate the overhead absorption rates:
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Production 1 - Machine Hours
- Total Overheads Allocated: €572,760
- Machine Hours: 30,000
- Rate: €572,760 / 30,000 = €19.09 per machine hour
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Production 2 - Labour Hours
- Total Overheads Allocated: €280,840
- Labour Hours: 45,000
- Rate: €280,840 / 45,000 = €6.24 per labour hour
Step 4
Explain what is meant by re-apportionment of overheads.
Answer
Re-apportionment of overheads refers to the process of redistributing the costs of service departments (A and B) between the production departments based on a set formula. This is necessary as service departments support the production activities, and their costs need to be shared among production departments for accurate cost analysis.
Step 5
Name three overhead absorption rates and state why they are based on budgeted figures.
Answer
- Per Labour Hour: This rate is calculated based on the expected total labour required, which helps in budgeting for labour costs.
- Per Machine Hour: This absorption rate reflects the anticipated machine utilization that assists in planning machine-related expenses.
- Percentage of Prime Cost: This rate is derived from budgeted figures of direct costs, ensuring that all costs can be forecasted and controlled effectively.