Quaid -I-Azam University, Islamabad

Assignment 2: Case Study

Submitted to: Mam Mehnaz

Submitted by: Ayesha Khan
Haris Toor
Course: Cost Accounting
Batch: BSBA-III -A
Tracking ID: UF 21-20860

Quaid -I- Azam School of Management Sciences

 Case Study 2

Part A
Total manufacturing cost per unit:

Total budgeted overhead for the year

$200,000 +$100,000 +$500,000 = $800,000

The total expected direct labor hours for the year

50000 + 10000 = 60000.

Overhead rate is $800,000 / 60000 = $13.33 per direct labor hour.

For job no. 110:

Direct materials cost = $20000

Direct labor cost is $30000 + $6000 = $36000

Projected overhead cost is (2000 * $13.33) + (500 *$13.33) = $33325.

The total projected manufacturing cost per unit

($20000 + $36000 + $33325) / 10000

= $8.93 per unit.

Part B
Manufacturing cost per unit under separate overhead rates
Plant wide:

Total budgeted plant-wide overhead for the year =$200,000.

The total expected machine-hours for the year is 10000 + 50000 = 60000.

] plant-wide overhead rate is

$200,000 / 60000 = $3.33 per machine-hour.

Department overhead rate:

For department A

Budgeted department overhead = $100,000

Expected machine-hours are 10000

Overhead rate is $100,000 / 10000 =$10 per machine-hour.

For department B

The budgeted department overhead =is $500,000

Expected machine-hours = 50000

Overhead rate is $500,000 / 50000 = $10 per machine-hour.

For job no. 110,

Direct materials cost = $20000

Direct labor cost is $30000 + $6000 = $36000,

Projected overhead cost is (1300*3.33) + (1300*10) =$17329.

The total projected manufacturing cost per unit is ($20000 + $36000 + $17329) / 10000 = $7.33 per unit .
Part C
New manufacturing cost after adding 30% cost to total cost under different overhead rate
Overhead rate from part a

Initial total cost $89325

New total cost:

$89325+30% of $89325=$116122.5

Cost per unit = $11.61

Overhead rate from part b is:

Initial total cost $73329

New total cost:

$73329+30% of $73329=$95327.7

Cost per unit = $9.53

The bids differ because in part a the overhead cost rate consists of a single plant-wide rate while in part
overhead cost is calculated through separate overhead rates depending upon plant-wide and
departments. I would recommend using the overhead method allocation in part b as the overhead rates
are different and it is likely to result in more accurate cost estimates for the job.

Part D
Under or Over-applied overhead cost and its impact on net-income:

The total actual overhead is $190,000 + $110000 +$520000 = $831,000.

The applied overhead is:

Plant-wide:

$3.33*62500=$208125

Department A and B:

($10*10500) + ($10*52000) =$625000

Total over-head applied: =$833125

The overhead cost is over-applied by $2125.

If under-applied or over-applied overhead is assigned to cost of goods sold, it will affect the net income
for the year. If the overhead is under-applied, net income will be under-stated. If the overhead is over-
applied, net income will be over-stated. In this case, net income will be under-stated by $2125.

Part E
Production offer:

To determine whether St. Falls should buy the parts for job no. 110 from the subcontractor or continue
to make the parts itself, we need to compare the cost of buying the parts from the subcontractor to the
cost of making the parts in-house.

The cost of buying the parts from the subcontractor is $8 per unit. The cost of making the parts in-house
is calculated by adding the direct materials cost, direct labor cost, and overhead cost per unit. For job
no. 110, the cost of making the parts in-house is $20000 / 10000 =$2 per unit for direct materials,
$36000 / 10000 = $3.60 per unit for direct labor, and $1.73 per unit for overhead. The total cost of
making the parts in-house is $2 + $3.60+ $1.73 = $7.33 per unit.

Since the cost of buying the parts from the subcontractor is higher than the cost of making the parts in-
house, St. Falls should not buy the parts from the subcontractor. The cost of buying the parts from the
subcontractor is $8 per unit, while the cost of making the parts in-house is$7.33 per unit, so St. Falls
would save $8-$7.33 = $0.67 per unit by making the parts itself so it should continue to make the parts
of job 110 itself.

Part F
Incremental analysis:

We compare the cost of producing the parts itself and the cost of purchasing them from the other party.

Produce itself

If it produces the parts itself, it will cost $7.33 * 10000 =$73,300

Add: opportunity cost of $15000,

Total cost =$88300

Purchase from others:

If it purchases the parts from the other party, it will cost$8 * 10000 = $80,000

So incremental profit of $15000.

So considering both the costs, the company can save$8300 by purchasing the parts from the
subcontractor so it should then purchase the parts from the subcontractor

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