Overhead analysis and calculation of product costs

A furniture-making business manufactures quality furniture to customers’ order. It has three production departments and two service departments.

Budgeted overhead costs for the coming year are as follows:

Total (£)

Rent and Rates

12 800

Machine insurance

6 000

Telephone charges

3 200

Depreciation

18 000

Production Supervisor’s salaries

24 000

Heating, lighting

6 400

70 400

The three production department – A, B and C, and the two service department – X and Y, are housed in the new premises, the details of which, together with other statistics and information, are gives below.

Departments

A

B

C

X

Y

Floor area occupied (sq. metres)

3000

1800

600

600

400

Machine value (£1000)

24

10

8

4

2

Direct labour hrs budgeted

3200

1800

1000

Labour rates per hour

£3.80

£3.50

£3.40

£3.00

£3.00

Allocated Overheard:

Specific to each department (£000)

2.8

1.7

1.2

0.8

0.6

Service Department X’s

costs apportioned

50%

25%

25%

Service Department Y’s

costs apportioned

20%

30%

50%

Required:

(a) Prepare a statement showing the overhead cost budgeted for each department, showing the basis of apportionment used. Also calculate suitable overhead absorption rates.

(b) Two pieces of furniture are to be manufactured for customers. Direct costs are as follows:

Job 123

Job 124

Direct Material

£154

£108

Direct Labour

20 hours Dept A

16 hours Dept A

12 hours Dept B

10 hours Dept B

10 hours Dept C

14 hours Dept C

Calculate the total costs of each job.

(c) If the firm quotes prices to customers that reflect a required profit of 25% on selling price. Calculate the quoted selling price for each job.

(d) If material costs are a significant past of total costs in a manufacturing company, describe a system of material control that might be used in order to effectively control costs, paying particular attention to the stock control aspect.