MN1018: MANAGEMENT ACCOUNTING

Seminar 4: Full (absorption) costing

Exercise 1:
Job-order costing vs. process costing:

a. Auto manufacturing
b. Dental services
c. Costume making

For each of the given types of industries, give an example of a firm that would use job-order
costing.

Then, give an example of a firm that would use process costing.

Exercise 2:
1. What is normal costing? How does it differ from actual costing?
2. Why are actual overhead rates seldom used in practice?

Exercise 3:
You have been asked to suggest a method of deducing the full cost of various production
orders of Patel Ltd. This method will be used as a basis for setting prices. The production
orders vary greatly in size and nature from one to the next.

The following information has been taken from the budget for the forthcoming financial year:
Direct labour hours 100,000 hours
Machine hours 90,000 hours

Manufacturing costs: £
Power 40,000
Direct materials 200,000
Machine maintenance and repairs 38,000
Factory heat and light 4,000
Lubricants and cleaning materials 6,000
 Direct labour 600,000
Depreciation: factory buildings 130,000
machinery 402,000
Indirect labour 100,000
1,520,000

The business is not departmentalised for accounting purposes.

All direct labour is paid the same hourly rate.

Required:

(a) Calculate two feasible overhead rates for the year.

(b) Prepare full costings for Order No 101 using each of the rates calculated in (a) (that is,
two separate costings).

The cost sheet for Order No 101 shows the following:

Raw materials £5,000

Direct labour hours 4,000 hours
Machine hours 1,900 hours.

(c) State briefly which of the two bases of overheads you prefer and why.
How might you improve on the two possible costs that you derived in (b) by taking a
slightly different approach?

Exercise 4 (based on ACCA 2014):

A company uses an overhead absorption rate of $3·50 per machine hour, based on 32,000
budgeted machine hours for the period. During the same period the actual total overhead
expenditure amounted to $108,875 and 30,000 machine hours were recorded on actual
production.

By how much was the total overhead under or over absorbed for the period?

A Under absorbed by $3,875

B Under absorbed by $7,000

C Over absorbed by $3,875

D Over absorbed by $7,000

What will happen to Cost of Goods Sold after the overhead is reconciled? Why?
Exercise 5 (Bhimani et al. 2015, exercise 3.21):
Before solving the problem, please read the section “Normal costing” in Bhimani et al. 2015

Giannacopoulos SA uses a job-costing system at its Korinthos plant. The plant has a
Machining Department and an Assembly Department. Its job-costing system has two direct-
cost categories (direct materials and direct manufacturing labour) and two manufacturing
overhead cost pools (the Machining Department, allocated using actual machine hours, and
the Assembly Department, allocated using actual labour cost). The 2015 budget for the plant
is as follows:

Machining Department Assembly Department

Manufacturing overhead €1,800,000 €3,600,000
Direct manufacturing labour €1,400,000 €2,000,000
cost
Direct manufacturing labour- €100,000 €200,000
hours
Machine-hours 50,000 200,000

Required:

1. Present an overview diagram of Giannacopoulos’s job-costing system (analogue to

Exhibit 3.3 in Bhimani et al. 2015). What is the budgeted overhead rate that should be
used in the Machining Department? In the Assembly Department?

2. During the month of February, the cost record for Job 494 shows the following:

Machining Department Assembly Department

Direct material used €45,000 €70,000
Direct manufacturing labour €14,000 €15,000
cost
Direct manufacturing labour- 1,000 1,500
hours
Machine-hours 2,000 1,000

What is the total manufacturing overhead allocated to Job 494?

3. Balances at the end of 2015 are as follows:

Machining Department Assembly Department

Manufacturing overhead €2,100,000 €3,700,000
incurred
Direct manufacturing labour - €2,200,000
cost
Machine-hours 55,000 -
Calculate the under- and over-allocated manufacturing overhead for each department.