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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.