Moriarty Ltd is a small manufacturing company producing two products, W and D. Details for the products are as follows:
Sales forecast for the year to 31st December 2021
|Product W(units)||Product D(units)|
Due to the seasonal nature of the company’s business 30% of the sales are expected to be made in the first six months of the year and the remaining sales in the second half of the year.
The selling price at the beginning of the year is €96 for product W and €108 for product D
Due to increasing costs, the company anticipates that it will have to increase the selling price of both products by 5% from July 1st.
The following information is also available:
|Product W||Product D|
|Raw material A (cost of €1.20 per kilo)||5 kilos||4 kilos|
|Raw material B (cost of €4.30 per kilo)||6 kilos||7 kilos|
|Labour grade 1 (cost of €10 per hour)||1 hour||1 ½ hour|
|Labour grade 2 (cost of €11 per hour)||1 ½ hour||½ hour|
Even though sales are seasonal in nature, production of the company’s products and purchase of materials is spread evenly throughout the year.
It is expected that Raw material B will increase in price by 10% on 1st September 2021 and an €0.80 per hour pay increase for grade 2 labor will come into effect on 1st July 2021.
Planned closing inventory on 31st December 2020 was:
Product W 2,800 units
Product D 1,600 units
Raw material A 42,400 kilos
Raw material B 38,500 kilos
Management plan to reduce all closing inventory by 15% by the end of 2021.
Online Computer Gaming Ltd has developed new gaming software which is sold online at €45 per unit. Variable labor costs are €25 per unit, variable overheads are €7 per unit and fixed overheads for the year are budgeted at €195,000.
Molloghan Ltd currently uses absorption costing. The following costs have been prepared using direct labor hours as a base for recovering overhead.
The management is currently reviewing the cost accounting policy in relation to overheads and is considering the implementation of an activity-based costing system.
The management accountant has done an activity analysis and divided the overhead cost into the following cost pools and drivers:
Cost Pools Cost drivers
Raw material handling €28,025 number of material requisitions
Machine set-up costs €34,400 number of set up hours
Machine related costs €203,298 number of machine hours
Quality checks €70,488 number of inspections
Finishing and dispatch costs €51,510 number of items
The following information is also available;
|Number of units per batch||2,000||900||900||650|
|Material requisitions per batch||4||4||4||3|
|*Hours per machine set-up||4 hours||3 hours||2 hours||5 hours|
|Machine hours per batch||15 hours||12 hours||14 hours||17 hours|
|Quality tests per batch||7 tests||4 tests||5 tests||6 tests|
*You can assume that the machinery is set up for each batch.
Your CEO (not a management accountant) is not sure and has asked you to write a brief business memo where you compare the costs and profits for the four products with absorption costing giving possible reasons for the differences between both systems and critically comment on the production managers’ statement.
Aungier Manufacturing Company Ltd. has three production and three service departments.
The primary analysis work relating to factory overhead expenses (such as power, rent, and rates, etc.) has already been done on the overhead analysis sheet which is in preparation for the imminently commencing financial year. This yields the following sub-totals for each department;
Service dept €
Production dept €
C 11,400 61,000
It is now necessary to complete the sheet and compute predetermined absorption rates to be used for the year ahead. A technical assessment for apportioning the costs of the service departments (reduced to percentage terms) gives the following figures:
Dept A Dept B Dept C
Labour hours 8,000 5,000 200
Machine hours are 1,000 600 800
Requirement (see c, d & e on the following page)
A regular product of the company is article Zed, whose prime cost per unit in the most recently concluded monthly accounting period was as follows:
10kg. Raw Material X @ €12.25 122.50
5kg. Raw Material Y @ €13.44 67.20 189.70
3hrs Dept A @ €10 30.00
1.5 hrs Dept B @ €8 12.00
1hr Dept C @ €6 6.00 48.00
Machine utilization is expected to be :
Dept A 4 hours
Dept B 1 hour
Dept C 2 hours
Administration and selling and distribution overhead came to €50 per unit.
Assume at the end of the period that actual overheads in Dept B were €20,438 and actual labor hours were 4,820 and actual machine hours were 1,110.
Shedworld Ltd manufactures garden sheds. The company has always used an absorption costing system, but at a recent conference, the Managing Director discovered that many businesses use a variable costing system for internal reporting purposes. The Managing Director is unclear on the differences between absorption costing and variable costing and accordingly, is seeking your advice. Shedworld makes substantially more sales in the spring and summer months which involves building up stocks in the early months of the year.
The Managing Director has presented you with the following information regarding the company’s activities in 2019
Budgeted information for 2019 Per unit
Direct materials 4 meters * €9 per meter
Direct labor 2 hours * €10 per hour
Variable manufacturing overhead €15
Variable selling overhead €8
Budgeted fixed overheads for 2019
The normally expected production volume per annum is 10,000 units.
The actual production for 2019 amounted to 10,600 units. The sales volume achieved for the year was 11,500 units with a unit selling price of €200. The actual fixed manufacturing overhead was €130,000 and fixed selling overhead was €145,000. All variable costs per unit were incurred as budgeted.
The opening stock of finished goods on 1st Jan 2019 consisted of 3,000 units valued at €260,000 which included €30,000 with respect to fixed manufacturing overhead.