- 15 Marks
Question
Bobich Ltd manufactures plastic containers for the pharmaceutical industry. The factory, in which the company undertakes all its production, has two production departments, namely: Cutting and Shaping, and two service departments, namely: Stores and Maintenance.
The information below was extracted from the company’s budget for its financial year ended 31 March 2019:
| Allocated Overhead Costs | GH¢ |
|---|---|
| Cutting Department (Cutting) | 14,000 |
| Shaping Department (Shaping) | 16,000 |
| Stores Department (Stores) | 3,500 |
| Maintenance Department (Maintenance) | 2,800 |
| Other Production Overheads | GH¢ |
|---|---|
| Factory rent | 525,000 |
| Factory building insurance | 70,000 |
| Plant & machinery insurance | 39,000 |
| Plant & machinery depreciation | 58,500 |
| Canteen subsidy | 150,000 |
| Direct Costs | GH¢ |
|---|---|
| Cutting Department | 144,000 |
| Shaping Department | 210,000 |
The following additional information is also provided:
| Cutting | Shaping | Stores | Maintenance | |
|---|---|---|---|---|
| Floor area (square meters) | 18,000 | 12,000 | 3,000 | 2,000 |
| Value of Plant & Machinery (GH¢) | 300,000 | 50,000 | 25,000 | 15,000 |
| Number of stores requisitions | 1,000 | 500 | – | – |
| Maintenance hours required | 2,700 | 2,000 | 300 | – |
| Number of employees | 34 | 60 | 4 | 2 |
| Machine hours | 12,000 | 2,200 | – | – |
| Labour hours | 9,000 | 15,000 | – | – |
Required:
i) Explain what is meant by the term “blanket overhead rate.” (2 marks)
ii) Prepare an overhead analysis sheet based on the above information. You must clearly state the basis used for any apportionments. (7 marks)
iii) Re-apportion the service department costs and calculate the most appropriate overhead rate for each department. (Rate should be calculated to two decimal places). (3 marks)
iv) State THREE (3) reasons why companies calculate pre-determined overhead absorption rates. (3 marks)
Answer
i) Blanket Overhead Rate:
A blanket overhead rate is where a company calculates one overhead rate for the entire company, as opposed to calculating separate rates for each department or cost center. For example, if a company budgets that its total production overheads will be GH¢200,000 for the forthcoming year and the total budgeted machine hours are 50,000, the company’s pre-determined overhead rate would be GH¢4 per machine hour if overheads are absorbed based on machine hours. This method, however, may not be as accurate as using departmental overhead rates, as it assumes that all departments use resources at the same rate.
(2 marks)
ii) Overhead Analysis Sheet:
| Nature of Cost | Basis of Apportionment | Total (GH¢) | Cutting (GH¢) | Shaping (GH¢) | Stores (GH¢) | Maintenance (GH¢) |
|---|---|---|---|---|---|---|
| Allocated Overhead | N/A | 36,300 | 14,000 | 16,000 | 3,500 | 2,800 |
| Rent | Floor area | 525,000 | 270,000 | 180,000 | 45,000 | 30,000 |
| Building insurance | Floor area | 70,000 | 36,000 | 24,000 | 6,000 | 4,000 |
| Plant & machinery insurance | Value of P&M | 39,000 | 30,000 | 5,000 | 2,500 | 1,500 |
| Plant & machinery depreciation | Value of P&M | 58,500 | 45,000 | 7,500 | 3,750 | 2,250 |
| Canteen subsidy | No. of employees | 150,000 | 51,000 | 90,000 | 6,000 | 3,000 |
| Total | 878,800 | 446,000 | 322,500 | 66,750 | 43,550 |
(7 marks evenly spread using ticks)
iii) Re-apportionment of Service Department Costs:
Using the Step-down method (all other applicable methods are also allowed):
| Total (GH¢) | Cutting (GH¢) | Shaping (GH¢) | Stores (GH¢) | Maintenance (GH¢) | |
|---|---|---|---|---|---|
| Total Overheads | 878,000 | 446,000 | 322,500 | 66,750 | 43,550 |
| Maintenance Dept | Maintenance hours | 23,517 | 17,420 | 2,613 | – |
| Stores Dept | Stores Requisitions | 46,242 | 23,121 | (69,363) | – |
| Re-apportioned Total | 515,759 | 363,041 | – | – |
- Overhead Absorption Rate for Cutting Dept:
GH¢515,759 / 12,000 machine hours = GH¢42.90 per machine hour - Overhead Absorption Rate for Shaping Dept:
GH¢363,041 / 15,000 labour hours = GH¢24.20 per labour hour
(3 marks)
iv) Reasons for Calculating Pre-determined Overhead Rates:
- To establish selling prices.
- For inventory valuation purposes.
- To facilitate the control process within an organisation.
- Topic: Relevant Cost and Revenue
- Series: MAY 2019
- Uploader: Kwame Aikins