AS LEVEL COST ACCOUNTING WORK SHEET 3

Question 1
Dev manufactures two products, Aye and Bee. He operates a system of marginal
costing.

(a) Explain one difference between marginal costing and absorption costing.
(b) Explain one difference between a direct cost and an indirect cost.
(c) State the meaning of the following terms:

(i) break-even point

(ii) margin of safety.
(d) State three situations where marginal costing can help in decision-making.
Dev’s business operates from one rented factory.

Additional Information
The forecast data for the year ending 31 December 2024 is as follows:

Aye Bee
$ $
Revenue (60 000 units at $11.00) 660 000
Revenue (80 000 units at $8.50) 680 000
Direct materials (192 000) (256 000)
Direct labour (156 000) (208 000)
Supervisor fixed salaries (60 000) (35 000)
Variable overheads (114 000) (152 000)
Fixed factory overheads (33 000) (44 000)
Profit / (loss) 105 000 (15 000)

The fixed factory overheads are allocated on the basis of units produced.
(e) Calculate the break-even point in units for Aye.
(f) Calculate the break-even point in units for Bee.

Additional information

Dev is concerned about the forecast loss for Bee. He is considering two

options. Option 1

Replace the current model Bee with an upgraded model Bee. Increase the

selling price of Bee by 10%.

Increase the direct material price by $0.45 per unit using an upgraded material.

Pay $18 000 for an advertising campaign to announce the upgraded model.

Dev believes that this will result in a 20% increase in units of

Bee sold. Option 2

Discontinue production of Bee.

Make the supervisor of Bee redundant thereby incurring redundancy costs of

$6000. Increase the advertising budget for Aye initially by $8000.

Reduce the selling price of Aye by $0.44 per unit.

Dev believes that this will result in a 50% increase in units of Aye sold.

(g) Calculate the revised total profit of the business if option 1 is adopted.
(h) Calculate the revised total profit of the business if option 2 is adopted.
 (i) Advise Dev which option he should choose. Justify your answer.

Question 2
D Limited has two production departments and two service departments at
one of its factories where absorption costing is used. Some forecast factory
overheads have already been allocated and apportioned as follows:

Production departments Service departments

Cutting Assembly Maintenance Canteen
$ $ $ $
Factory overheads 223 480 217 980 45 270 36 260

The following forecast factory overheads are still to be apportioned.

$
Depreciation of
machinery
Power 40 200

Canteen department overheads should be reapportioned on the basis of the

number of employees. Maintenance department overheads should be
reapportioned on the basis of the number of machines in production
departments.

The following data is available.

Production departments Service departments
Cutting Assembly Maintenance Canteen
Machinery at carrying value $90 000 $66 000 $18 000 $6 000
Number of machines 43 27
Kilowatt hours 1 800 1 500 100 200
Number of employees 27 18 5
Budgeted machine hours 40 000 33 500
Budgeted direct labour hours 23 000 62 500

REQUIRED
(a) Complete the following table to show the apportionment of factory
overheads and the reapportionment of service department overheads.

Production departments Service departments

Cutting Assembly Maintenance Canteen
$ $ $ $
Factory overheads 223 480 217 980 45 270 36 260
Depreciation of
machinery
Power
Total overheads
Reapportionment
Subtotal
Reapportionment
Total overheads

(b) Calculate, to two decimal places, an overhead absorption rate for

each production department, using a suitable basis.

Additional Information
The following information is available.
 Cutting department Assembly
department
Direct labour rate per hour $10.90 $8.20
Machine hours per unit 8 6
Labour hours per unit 3 4

Direct materials cost $6.95 per unit.

Selling prices are set to achieve a profit margin of 25%. A customer has placed

an order for 40 units.

REQUIRED

(c) Calculate the selling price to be quoted for this order of 40 units.
(d) State two causes of under absorption of overheads.

Additional information

At the other factory a single product, Product Exe, is currently being made.
Marginal costing is used at this factory.

The following information is available.

Selling price per unit $48

Contribution per unit $13
Direct labour 2.5 hours per unit at $10 per
hour
Fixed costs $96 000 per annum
Factory capacity 28 000 labour hours per year
Current production level 80% of factory capacity

All units produced are sold.

REQUIRED

(e) Calculate the profit made each year from Product Exe.

Additional Information

The directors plan to make a new product, Product Wye, at this factory at
the request of an important customer. The following details are available.

1 The factory will be able to operate at full capacity.

2 All units produced will be sold.

3 Product Wye will have a selling price of $64 per unit and a contribution of
$8 per unit.

4 Product Wye will require direct labour at $10 per hour for 1.5 hours per
unit.

5 The customer requires 10 000 units of Product Wye each year. The
customer will only accept this quantity each year.

6 In order to complete the customer’s order, production of Product Exe will

be reduced.

7 Some new machinery will be required costing $36 000. Machinery is

depreciated by 20% per annum.

8 A loan of $20 000 at 5% per annum interest will be required to finance

the purchase of the new machinery.
 (f) Calculate the total profit from both products which will be made in the
first year if this plan is put into operation.
(g) Advise the directors whether this plan should be put into operation.
Justify your answer by considering both financial and non-financial
factors.

Question 3
K Limited is a manufacturing company which has two production departments
and one service department at one of its factories. At this factory absorption
costing is used.

REQUIRED

(a) Define each of the following terms:

(i) cost centre

(ii) allocation of overheads
(iii) apportionment of overheads.

Additional information

The following budgeted information is available for the year ended 31 August
2022.

Production
departments
Cutting Finishing Service
$ $ department
$
Factory overheads 273 820 189 240 31 350

The service department’s overheads are reapportioned on the basis of the

number of employees in each production department.

Cutting department Finishing department

Number of 125 84
employees

REQUIRED

(b) Reapportion the service department’s overheads to the production

departments.

Cutting department Finishing department Service department

$ $ $
Factory 273 820 189 240 31 350
overheads
Reapportionment
Total overheads
[2]

Additional information

The following forecast information is available for the year ended 31 August
2022.

Cutting Finishing
department department
 Direct labour hours per 9 400 7 420
annum
Machine hours per annum 17 900 3 840

REQUIRED

(c) Calculate an appropriate overhead absorption rate, correct to two decimal

places, for each production department:

(i) Cutting department

(ii) Finishing department.
Additional information

The actual results for the year ended 31 August 2022 were as follows:

Cutting Finishing
department department
Factory overheads $312 600 $193 400
Direct labour 9 800 7 210
hours
Machine hours 17 200 4 220

(d) Calculate the under-absorption or over-absorption of factory overheads

for each production department for the year ended 31 August 2022.

(i) Cutting department

(ii) Finishing department

Additional information

At a second factory marginal costing is used.

A single product, Product X, is manufactured. However, demand for this

product has fallen recently due to increased competition.

The following information is available for Product X.

Per unit $
Direct materials 22
Direct labour 18
Contribution 20

Normal capacity is 14 000 units per month. The factory is currently

operating at 75% of normal capacity. All the units produced are sold. Fixed
costs per month are $56 000.

(e) Calculate the profit for one month.

Additional information

The directors are considering two options to

increase profits. Option A:

1 Reduce the selling price per unit by 5%.

2 Run a six-month advertising campaign at a cost of $1100 per month.

3 Monthly sales are forecast to increase by 25% on current levels.

Option B

1 Discontinue manufacture of Product X.

2 Produce a different product, Product Y, with a selling price of $58 per unit.
3 It is forecast that demand will be such that the factory can operate at
110% normal capacity.

4 Direct material cost will increase by 10% per unit.

5 Direct labour costs will remain unchanged. However, workers will be

paid an overtime premium of 50% for all work over normal capacity.

6 Machinery will need some alterations which will cost $54 000. Non-
current assets are depreciated by 25% per annum.

7 The company will need to borrow $30 000 to finance the cost of the
machinery alterations. Interest at 6% per annum will be charged on this
loan.

(f) Calculate the profit to be made on each option in the first month of
production.
(g) Advise the directors which option they should choose. Justify your
answer by considering both financial and non-financial factors.