College of Business and Economics

School of Accountancy

Department of Accountancy

UNIT 2
Question Bank
Cost and Management Accounting 3A
CMA03A3/BSR3A01

Copyright © University of Johannesburg, South Africa

Printed and published by the University of Johannesburg

© All rights reserved.

Apart from any fair dealing for the purpose of research, criticism or review as permitted under the Copyright Act 98 of
1978 (and as amended), no part of this material may be reproduced, stored in a retrieval system, transmitted or used
in any form or be published, redistributed or screened by any means electronic, photocopying, recording or otherwise
without the prior written permission of the University of Johannesburg.
QUESTION 2.1

DATA

Budgeted labour hours 8 500

Budgeted overheads R148 750
Actual labour hours 7 928
Actual overheads R146 200

REQUIRED:

a) Based on the data given above, what is the labour hour overhead absorption rate?

A R17,50 per hour

B R17,20 per hour
C R18,44 per hour
D R18,76 per hour

b) Based on the data given above, what is the amount of overhead under/over-absorbed?

A R2 550 under-absorbed
B R2 529 over-absorbed
C R2 550 over-absorbed
D R7 460 under absorbed

QUESTION 2.1 (SUGGESTED SOLUTION)

a) Answer = A
Budgeted overhead rates and not actual overhead rates should be used.
 Overhead rate = R148 750/8500 hours = R17,50 per hour.

b) Answer = D
R
Actual overheads incurred 146 200
Overheads absorbed (7928 x R17,50) 138 740
Under-absorbed overheads 7 460
QUESTION 2.2

Grimsell Limited budgeted the following figures for 19x8:

Department
1 2
Direct labour R320 000 R122 500
Factory overheads R504 000 R525 000

Direct labour hours 56 000 21 000

Machine hours 4 000 75 000

Overheads are apportioned to production by using both direct labour hours and machine hours as basis.

The budgeted factory overheads have to be apportioned equally in relation to each of the two bases.

At the end of March 19x8 the cost records for Task 24 reflected the following:

Department
1 2
Material R 80 000 R 40 000
Direct labour R 60 000 R 25 000

Direct labour hours 9 000 5 000

Machine hours 800 18 000

The task is classified as complete. The profit that was realised from the task amounted to 50% of the total
manufacturing and administration costs (administration costs amounted to R5 000).

At the end of 19x8 the actual hours in respect of the various departments were as follows:

Department
1 2
Direct labour hours 60 000 20 000
Machine hours 3 500 76 000

The actual costs for 19x8 were as follows:

Department
1 2
Direct labour 330 000 120 000
Factory overheads 505 000 540 000

YOU ARE REQUIRED TO:

a) calculate the allocation rates;

b) calculate the selling price for Task 24;
c) calculate the over/underapplied overheads for Departments 1 and 2 for 19x8.
QUESTION 2.2 (SUGGESTED SOLUTION)

a)
(i) Labour hours

Department 1 504 000 x 0,5*

56 000
= R4,50

Department 2 525 000 x 0,5*

21 000
= R12,50

* Budgeted overheads must be apportioned equally (i.e. 50%/50%).

(ii) Machine hours

Department 1 504 000 x 0,5

4 000
= R63

Department 2 525 000 x 0,5

75 000
= R3,50

b) Task 24
Departments
1 2 Total
Material 80 000 40 000 120 000
Direct labour 60 000 25 000 85 000
Overheads apportioned 90 900 125 500 216 400

Labour hours (C1) 40 500 62 500 103 000

Machine hours (C2) 50 400 63 000 113 400

Administration costs 5 000

Total costs 426 400
Profit (50% x 426 400) 213 200
Selling price 639 600
QUESTION 2.2 (SUGGESTED SOLUTION - CONTINUED)

CALCULATIONS

C1 Labour hours

9 000 x 4.5 = 40 500

5 000 x 12.5 = 62 500
103 000

C2 Machine hours

800 x 63 = 50 400
18 000 x 3.5 = 63 000
113 400

c) Apportioned overheads

Department
1 2 Total
Labour hours (C3) 270 000 250 000 520 000
Machine hours (C4) 220 500 266 000 486 500
490 500 516 000 1 006 500
Actual overheads 505 000 540 000 1 045 000
Underapplied overheads (14 500) (24 000) (38 500)

C3 Labour hours

60 000 x 4.5 = 270 000

20 000 x 12.5 = 250 000
520 000

C4 Machine hours

3 500 x 63 = 220 500

76 000 x 3.5 = 266 000
486 500
QUESTION 2.3

CA Ltd is a small engineering factory which manufactures two different products in two production departments.
In addition, a canteen is run as a separate department.

Product A Product B
Selling price per unit R60 R70
Sales volume 1 500 3 000
Increase (decr.) in finished goods (units) 500 (500)
Material costs per unit 8 5
Direct labour hours per unit
Workshop (R3 per hour) 5 6
Ass. department (R2 per hour) 4 4
Machine hours per unit
Workshop 3 8
Assembly department 1 -

Workshop Assembly Canteen Total

Factory overheads R R R R

Variable 26 000 9 000 - 35 000

Fixed 42 000 30 000 16 000 88 000
68 000 39 000 16 000 123 000

Number of employees 15 9 1
Floor area (M2) 4 000 1 000 1 000

YOU ARE REQUIRED TO:

a) determine an appropriate overhead allocation rate for each production department and to calculate the
total budgeted costs per unit for each product; and

b) calculate the impact on the budgeted profit if the following year's actual results are as predicted, except
that the sales and production of product A are 300 units more than what was budgeted.
QUESTION 2.3 (SUGGESTED SOLUTION)

a)
i) Calculation of total overhead allocation rate for each production department

Departments
Production Service
Workshop Mounting Canteen
Fixed overheads 42 000 30 000 16 000
Allocation – Canteen (15:9) 10 000 6 000 (16 000)
52 000 36 000 -
Basis M/hours Da/hours*
 Hours 26 000 (B1) 18 000 (B2) -
 Budgeted fixed overheads tariff/department R2,00 R2,00
per hour

Variable overheads
Overheads/Hours 26 000/26 000 9 000/18 000 -
 Budgeted variable overheads R1,00 R0,50
tariff/department per hour

 Total budgeted tariff/department per hour R3,00 R2,50

(fixed + variable)

* or % of direct labour costs

Wage tariff is constant in both departments.

CALCULATIONS

Activity base

1. Calculation of machine hours used

Units manufactured A B
Sales 1 500 3 000
Increase/(decrease) in finished goods 500 (500)
Units manufactured 2 000 2 500

Allocation methods
Workshop: machine hours per unit 3 8

 Machine hours 2 000 x 3 2 500 x 8

= 6 000 = 20 000
 Total machine hours = 6 000 + 20 000
= 26 000
 QUESTION 2.3 (SUGGESTED SOLUTION - CONTINUED)

2. Calculation of direct labour hours used

A B
Assembly department → direct labour hours 4 4
per unit

 Hours used 2 000 x 4 2 500 x 4

= 8 000 = 10 000
 Total direct labour hours = 8 000 + 10 000
= 18 000

ii) Budgeted costs/unit

Calculation 1
A B
Workshop
R3 X 3 hours 9
R3 X 8 hours 24
Assembly
R2,50 X 4 hours 10
R2,50 X 4 hours 10
Overheads/unit 19 34

Labour
- Workshop (R3 x 5/R3 x 6) 15 18
- Assembly (R2 x 4/R2 x 4) 8 8
23 26
Material 8 5
Overheads (B1) 19 34
Total costs per unit 50 65

(b) Impact on budgeted profit

Marginal income/unit: A
Selling price R60
Material (8)
Labour (23)
Variable overheads
(3 x R1) + (4 x R0,5) (5)
R24

Increase in profit: R24 x 300

= R7 200
Relevant costs → only the variable income and variable costs.
QUESTION 2.4

A furniture-making business manufactures quality furniture to customers' orders. It has three production
departments and two service departments. Budgeted overhead costs for the coming year are as follows:

Total
(R)

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 departments – A, B and C, and the two service departments – X and Y, are housed in
the new premises, the details of which, together with other statistics and information, are given below.

A B C X Y
Floor area occupied (sq metres) 3 000 1 800 600 600 400
Machine value (R'000) 24 10 8 4 2
Direct labour hrs budgeted 3 200 1 800 1 000
Labour rates per hour R3,80 R3,50 R3,40 R3,00 R3,00
Allocated Overheads:
Specific to each department (R'000) 2,8 1,7 1,2 0,8 0,6
Service Department X's cost 50% 25% 25%
apportioned
Service Department Y's cost 20% 30% 50%
apportioned

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 R154 R108
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
QUESTION 2.4 (SUGGESTED SOLUTION)

a)
Departments
Total A B C X Y
(R) (R) (R) (R) (R) (R)
Rent and ratesa 12 800 6 000 3 600 1 200 1 200 800
Machine insuranceb 6 000 3 000 1 250 1 000 500 250
Telephone chargesc 3 200 1 500 900 300 300 200
Depreciationb 18 000 9 000 3 750 3 000 1 500 750
Supervisors' 24 000 12 800 7 200 4 000
salariesd
Heat and lighta 6 400 3 000 1 800 600 600 400
70 400

Allocated 2 800 1 700 1 200 800 600

38 100 20 200 11 300 4 900 3 000

Reapportionment of 2 450 (50%) 1 225 (25%) 1 225 (25%) (4 900)

X
Reapportionment of 600 (20%) 900 (30%) 1 500 (50%) (3 000)
Y
R41 150 R22 325 R14 025 - -
Budgeted 3 200 1 800 1 000
D.L. hourse
Absorption rates R12,86 R12,40 R14,02

Notes:
a
Apportioned on the basis of floor area.
b
Apportioned on the basis of machine value.
c
Should be apportioned on the basis of the number of telephone points or estimated usage. This information
is not given and an alternative arbitrary method of apportionment should be chosen. In the above analysis
telephone charges have been apportioned on the basis of floor area.
d
Apportioned on the basis of direct labour hours.
e
Machine hours are not given but direct labour hours are. It is assumed that the examiner requires
absorption to be on the basis of direct labour hours.
QUESTION 2.4 (SUGGESTED SOLUTION - CONTINUED)

b)
Job 123 Job 124
(R) (R)
Direct material 154,00 108,00
Direct labour:
Department A 76,00 60,80
Department B 42,00 35,00
Department C 34,00 47,60
Total direct cost 306,00 251,40
Overhead:
Department A 257,20 205,76
Department B 148,80 124,00
Department C 140,20 196,28
Total cost 852,20 777,44

Profit 284,07 259,15

c)

Listed selling price 1 136,17 1 036,59

Let SP represent selling price.

Cost + 0,25SP = SP

Job 123:
R852,20 + 0,25SP = 1SP
0,75SP = R852,20
SP = R1 136,27
Job 124:
0,75SP = R777,44
SP = R1 036,59
QUESTION 2.5 (35 MARKS)

PART A (11 MARKS)

PTS Limited is a manufacturing company which uses three production departments to make its product. The
following factory costs are expected to be incurred in the year ending 31 December:

R
Direct wages Machining 234 980
Assembly 345 900
Finishing 134 525

Indirect wages and salaries Machining 120 354

Assembly 238 970
Finishing 89 700

R
Factory rent 12 685 500
Business rates 3 450 900
Heat and lighting 985 350
Machinery power 2 890 600
Depreciation 600 000
Canteen subsidy 256 000

Other information is available as follows:

Machining Assembly Finishing

Number of employees 50 60 18
Floor space occupied (m2) 1 800 1 400 800
Horse power of machinery 13 000 500 6 500
Value of machinery (R000) 250 30 120
Number of labour hours 100 000 140 000 35 000
Number of machine hours 200 000 36 000 90 000

REQUIRED:

a) Prepare the company’s overhead analysis sheet for the year to 31 December. (8)

b) Calculate appropriate overhead absorption rates (to two decimal places) for each
department. (3)
QUESTION 2.5 (CONTINUED)

PART B (14 MARKS)

A company makes a range of products with total budgeted manufacturing overheads of R973 560 incurred in
three production departments (A, B and C) and one service department.

Department A has 10 direct employees, who each work 37 hours per week.

Department B has five machines, each or which is operated for 24 hours per week.

Department C is expected to produce 148 000 units of final product in the budget period.

The company will operate for 48 weeks in the budget period.

Budgeted overheads incurred directly by each department are:

Production department A R261 745

Production department B R226 120
Production department C R93 890
Service department R53 305

The balance of budgeted overheads are apportioned to departments as follows:

Production department A 40%

Production department B 35%
Production department C 20%
Service department 5%

Service department overheads are apportioned equally to each production department.

REQUIRED:

a) Calculate an appropriate predetermined overhead absorption rate in each production

department. (10)

b) Calculate the manufacturing overhead cost per unit of finished product in a batch of 100 units
which take 9 direct labour hours in department A and three machine hours in department B
to produce. (4)

PART C (4 MARKS)

Reapportioning service cost centre costs is generally worthwhile and suggests an alternative treatment for
such costs.

REQUIRED:
Comment on the above statement (4)

PART D (6 MARKS)

Critically consider the purpose of calculating production overhead absorption rates. State clearly why actual
overhead rates should not be used. (6)
QUESTION 2.5 (SUGGESTED SOLUTION)
(35 MARKS)

PART A (11 MARKS)

a)
Overhead analysis sheet

Expense Apportionment Machining Assembly Finishing Total

basis (R) (R) (R) (R)

Indirect wages/salaries Allocated✓ 120 354 238 970 89 700 449 024
Rent Area✓ 5 708 475 4 439 925 2 537 100 12 685 500
Business rates Area✓ 1 552 905 1 207 815 690 180 3 450 900
Heat/light Area✓ 443 408 344 872 197 070 985 350
Machine power Horsepower✓ 1 878 890 72 265 939 445 2 890 600
Plant depreciation Value of plant✓ 375 000 45 000 180 000 600 000
Canteen subsidy No. of employees✓ 100 000 120 000 36 000 256 000
Total 10 179 032 6 468 847 4 669 495 21 317 374

✓ = for not using direct wages. (8)

b) Most of the overheads in the machine department are likely to be machine related and
therefore it is appropriate to use a machine hour rate. The machine hour cost rate is also
used for the finishing department, because machine hours are the predominant activity.
Similar arguments can be used to justify the use of a direct labour hour overhead rate in the
assembly department. The overhead rates are as follows:

R10 179 032

Machining = R50,90 per machine hour✓
200 000

R6 468 847
Assembly = R46,21 per direct labour hour✓
140 000

R4 669 847
Finishing = R51,88 per machine hour✓
90 000
(3)
QUESTION 2.5 (SUGGESTED SOLUTION - CONTINUED)

PART B (14 MARKS)

a)
Production department Service Total
department
A B C
(R) (R) (R) (R) (R)

Direct 261 745 ½ 226 120 ½ 93 890 ½ 53 305 ½ 635 060

Indirect 135 400 (40%)½ 118 475 (35%) ½ 67 700 (20%) ½ 16 925 (5%) ½ 338 500 ✓

Service dept
appointment 23 410 (1/3) ½ 23 410 (1/3) ½ 23 410 (1/3) ½ (70 230) ½
420 555 368 005 185 000 - 973 560

Allocation base (C1) 17 760 ✓ 5 760 ✓ 148 000 ✓

= R23,68 = R63,89 = R1,25
per direct per m/c hour per hour
labour hour
(10)

Calculations:

C1. Dept. A direct labour hours

= 10 x 37 x 48
= 17 760

Dept. B machine hours

= 5 x 24 x 48
= 5 760

Dept. C units
= 148 000

R
b) Dept A
9 direct labour hours at R23,68 213,12 ✓

Dept B
3 m/c hours at R63,89 191,67 ✓

Dept C
100 units at R1,25 125,00 ✓
529,79

Cost per unit = R5,30 (R529,79/100)✓

(4)
QUESTION 2.5 (SUGGESTED SOLUTION - CONTINUED)

PART C (4 MARKS)

Reapportioning production service department costs is necessary to compute product costs for stock
valuation purposes.✓✓ However, it is questionable whether arbitrary apportionment of fixed overhead costs
provides useful information for decision making. Such apportionments are made to meet stock valuation
requirements, and they are inappropriate for decision-making, cost control and performance
reporting.✓✓

An alternative treatment would be to adopt a variable costing system and treat fixed overheads as
period costs.✓✓ This would eliminate the need to reapportion service department fixed costs. A more recent
suggestion is to trace support/service department costs to products using an activity-based costing
system.✓✓
Any 2 x 2 = (4)

PART D (6 MARKS)

Actual overhead rates are not used because of:

(1) Delay in product costs if actual annual rates are used.✓

Information on product costs is needed timeously to enable calculation of

▪ monthly profit
▪ inventory calculations
▪ selling prices✓

(2) Fluctuating overhead rates that will occur if actual monthly rates are used.✓

An estimated normal product cost based on average long-run activity is required rather than an actual
product cost (which is affected by month-to-month fluctuations in activity).✓

Overhead expenditure is fixed in short term but

▪ monthly activity varies

And thus large fluctuations in overhead rates can occur.

(3) Expenses like repairs, maintenance and heating are not incurred evenly.✓

If budgeted overheads are not used, but actual overheads are used products produced in winter will be
more expensive.✓

Production overhead absorption rates are calculated in order to

▪ ascertain cost per unit of output for
 stock valuation and✓
 profit measurement purposes✓

Such costs are inappropriate for

▪ decision-making and✓
▪ cost control✓
QUESTION 2.6 (35 MARKS)

PART A (15 Marks)

Dunstan Ltd manufactures tents and sleeping bags in three separate production departments. The principal
manufacturing processes consist of cutting material in the pattern cutting room, and sewing the material in
either the tent or the sleeping bag department. Total manufacturing overheads of R362 000 were estimated
for the year. You have been provided with the following budgeted costs for the year ending
31 December 2006:

Raw material
Total Cutting Tents Sleeping Inventory Canteen Main-
room bags store tenance
R R R R R R R
Indirect 147 200 6 400 19 500 20 100 41 200 15 000 45 000
wages
Consumable 54 600 5 300 4 100 2 300 - 18 700 24 200
materials
Plant 84 200 31 200 17 500 24 600 2 500 3 400 5 000
depreciation
Power 32 900
Rent and 10 500
rates

Floor area 30 000 27% 33% 23% 5% 8% 4%

No of 123 7 48 57 3 5 3
employees
Machine 87 000 2 000 40 000 45 000
usage (hours)

Notes:

1. Each employee works on average 1 000 hours.

2. The balance of overheads are apportioned to departments as follows:

Cutting room 40%
Tents 35%
Sleeping bags 20%
Maintenance 5%

3. The raw material store, canteen and maintenance departments are service departments. An analysis
of the service they provide indicates that their costs should be apportioned as follows:

Maintenance department : Machine hours

Canteen department : No of employees
Raw material inventory store : Cutting room – 70%
Tents – 15%
Sleeping bags – 15%

Note: The Canteen department renders a service to all departments within the organisation and
costs should be apportioned accordingly.
QUESTION 2.6 (Continued)

REQUIRED:

1. Prepare the company’s overhead analysis sheet for the year ending 31 December 2006. (10)

2. Calculate an appropriate overhead absorption rate for each department. State the reasons for your
choice. (5)

PART B (5 Marks)

A company has been asked to quote on a job to produce 500 hydraulic industrial hammers. Their selling price
is based on cost plus 20%. They include an appropriate allocation of fixed overheads in determining their
cost price.

They have provided you with the following information:

Direct material R3 400

Direct labour R1 500
Direct expenses R 300
Direct selling cost R 200
Machine hours in Department 1 120
Labour hours in Department 2 230

You have calculated the appropriate absorption rates to be as follows:

Department 1 : R5 per machine hour
Department 2 : R2.50 per labour hour

REQUIRED:

Determine the appropriate price for the job. (5)

PART C (6 Marks)

You have been provided with the following budgeted information for two departments:

Department 1 Department 2

Budgeted overheads R120 000 R340 000

Budgeted absorption rates R12 per labour hour R17 per machine hour

Your manager is busy compiling his yearly financial report and would like to know whether there was an
over/under recovery of overheads in each department. He explained to you that there will be no over/under
recovery in Department 1 because actual overheads and budgeted overheads were the same.
QUESTION 2.6 (Continued)

You have collected the following data:

Department 1 Department 2

Actual overheads R120 000 R320 000

Actual labour hours worked 11 000 hrs 2 500 hrs

Actual machine hours worked 1 500 hrs 18 500 hrs

REQUIRED:

Determine the appropriate over/under recovery of overheads per department. Comment on the statement
made by your manager. (6)

PART D (5 Marks)

REQUIRED:

Critically consider the purpose of calculating production overhead absorption rates. State clearly why actual
rates should not be used. (5)

PART E (4 Marks)

REQUIRED:

Contrast the use of blanket as opposed to departmental overhead absorption rates. (4)
 7
QUESTION 2.6 (SUGGESTED SOLUTION)

PART A (15 Marks)

a)
Raw
Method of Cutting Sleeping material Main-
allocation Total room Tents bags inventory Canteen tenance
store

Indirect wages Allocated 147 20 6 400 19 500 20 100 41 200 15 000 45 000 (1)
Consumable materials Allocated 0 5 300 4 100 2 300 - 18 700 24 200 (1)
Plant depreciation (given) Book value 54 600 31 200 17 500 24 600 2 500 3 400 5 000 (1)
Power Floor area 84 200 8 883 10 857 7 567 1 645 2 632 1 316 (1)
Rent and rates Floor area 32 900 2 835 3 465 2 415 525 840 420 (1)
Other (Balance) Given 10 500 13 040 11 410 6 520 - - 1 630 (1)
32 600

Total overheads 362 00 67 658 66 832 63 502 45 870 40 572 77 566

0

Allocation of service centre

Canteen department 0 2 406 16 504 19 598 1 032 (40 572) 1 032 (2) P
362 00 70 064 83 336 83 100 46 902 0 78 598
0
Maintenance department 1 807 36 137 40 654 - (78 598) (1) P
0
362 00 71 871 119 473 123 754 46 902 0 0
0
Raw materials stores 32 832 7 035 7 035 (46 902) - - (1) P
0
Allocated overheads 362 00 104 703 126 508 130 789 0 0 0
0
(10)

b)
Cutting Sleeping
Room Tents Bags
Direct labour hours
Employees 7 48 57
Hours per employee 1 000 1 000 1 000
Total labour hours 7 000 (1) 48 000 (½) 57 000 (½) (2)

Absorption rate per direct labour hour 104 703 126 508 130 789 (2) P

7 000 48 000 57 000

= R14,96/hr = R2,64hr = R2,29/hr

Reason for choice: Labour hours are the biggest cause of expenses for each department. (1)

Alternative: Machine hours used for Tents and Sleeping Bags

(5)
QUESTION 2.6 (SUGGESTED SOLUTION –CONTINUED)

PART B (5 Marks)

R
Direct materials 3 400 (1)
Direct labour 1 500 (1)
Direct expenses 300 (1)
Allocated overheads Rate Hours
Dept 1 R5 120 600 (1)
Dept 2 R2,50 230 575 (1)

Cost 6 375

20% Mark up on cost 1 275 (1) P

Selling price (per unit) 7 650

∴ Total selling price (7 650 x 500) 3 825 000 (1) P

Direct selling cost is not included. Max (5)

PART C (6 Marks)

Dept 1 Dept 2
R R

Actual overheads 120 000 (1) 320 000 (1)

Allocated overheads
Department 1 (R12 x 11 000 hours) 132 000
Department 2 (R17 x 18 500 hours) 314 500
(12 000) 5 500
(1)P (1)P
Over absorbed Under absorbed

The manager’s statement is incorrect. (1)

Overheads are allocated on actual hours which did not correspond to budgeted hours. (1) (6)

PART D (5 Marks)

Actual overhead rates are not used because of:

1. Delay in product costs if actual annual rates are used

- Information on product costs is needed timeously to enable calculation of
- monthly profit
- inventory calculations
- selling prices (2)
ASS2-Q3-2005(FNM-2B)

QUESTION 2.6 (SUGGESTED SOLUTION – CONTINUED)

2. Fluctuating overhead rates that will occur if actual monthly rates are used.
- an estimated normal product cost based on average long-run activity is
required rather than an actual product cost (which is affect by month-to-
month fluctuations in activity) (2)
OR
- Overhead expenditure is fixed in the short term, but monthly activity varies
and thus large fluctuations in overhead rates can occur.

3. Expenses like repairs, maintenance and heating are not incurred evenly.
- If budgeted overheads are not used, but actual overheads are used products
produced in winter will be more expensive. (2)
Max (5)

PART E (4 Marks)

A blanket overhead rate established a single overhead rate (1) for the organisation as a
whole whereas departmental rates involve indirect costs being accumulated by different
departments and a separate overhead rate being established for each department. (2)

A blanket overhead rate can only be justified when all products or services consume
departmental overheads in approximately the same proportions. (2)

Where products or services consume departmental overheads in different proportions, the

use of a plant wide overhead rate will result in inaccurate assignment of overheads to
products. (2)

Max (4)
QUESTION 2.7 (25 MARKS)

PART A (15 Marks)

Zeerust Printing has decided that in 2005 it will charge their overheads to all jobs on the
basis of a pre-determined rate. The company has estimated that the year’s overhead is
likely to increase to R40 000 (budgeted cost). It has also estimated the following data for
both production departments:

Budget overheads:

Production departments X Y Total

Expected activity -
Labour hours 10 000 - 10 000
Machine hours - 20 000 20 000
Allocated (budgeted) cost: R18 000 R22 000 R40 000
Pre-determined recovery rate R1,80 R1,10

Actual results:

The following jobs were completed in

2005:

Jobs D E Total
R R R
Sales value 50 000 60 000 110 000
Direct material 10 000 15 000 25 000
Direct labour 7 000 8 000 15 000

Jobs D E Total
Labour hours 7 000 5 000 12 000
Machine hours 10 000 15 000 25 000

Actual overhead cost incurred R45 000

REQUIRED:

a) Calculate the profit for each job. (7)

b) Produce the actual income statement for 2005. (6)
c) Give reasons for the use of pre-determined overhead allocation rates. (2)

1
QUESTION 2.7 (Continued)

PART B (10 Marks)

Glentana company uses a fully integrated absorption costing system for recording
overhead costs and produced the following budgeted costs for a production level of 20 000
units:

Total
R
Raw material 160 000
Direct labour 140 000
Fixed manufacturing overheads 100 000
400 000

The actual results for the period showed that 24 000 units were produced. The actual
costs incurred were:
R
Raw material 192 000
Direct labour 168 000
Fixed manufacturing overheads 130 000

REQUIRED:

Show the overhead and work-in-progress accounts and explain the reasons for the under
or over recovered overhead. (10)

2
QUESTION 2.7 (SUGGESTED SOLUTION)

PART A (15 Marks)

a) Profit calculation:

Job D E
Sales 50 000 (½) 60 000 (½)
Direct material 10 000 (½) 15 000 (½)
Direct labour 7 000 (½) 8 000 (½)
o
Overhead 23 600* 25 500
Profit 9 400 11 500

Overhead allocation:

Job D
Machine hours R11 000 (1)
10 000 x 1,10 = R12 600 (1)
Labour hours R23 600 *
7 000 x 1,80 =
R16 500 (1)
Job E R 9 000 (1)
o
Machine hours R25 500
15 000 x 1,10 = (7)
Labour hours
5 000 x 1,80 =

By allocating the overheads to jobs ‘D’ and ‘E’ at a pre-determined rate we will end
up with an under or over allocated overhead amount. In a job-costing system both
direct and allocated costs are charged to the jobs. The jobs are then transferred to
the income statement. As overhead has been charged to the jobs at a pre-
determined rate, the actual overhead account must be transferred to the overhead
account and the difference charged to the income statement.

Overhead Account
Actual overhead 45 000 Job D overhead charged 23 600
Over-recovery (To income statement) Job E overhead charged 25 500
4 100 *** 49 100
49 100

b) 2005 Income Statement:

R
Sales 110 000 (1)
Cost of sales:
Direct materials 25 000 (1)
Direct labour 15 000 (1)
Allocated overheads (23 600* + 49 100 (1)
25 500o) 89 100 89 100
20 900
Gross profit + 4 100 **(2)
Over-recovered overhead R25 000

3
Actual profit (6)

4
QUESTION 2.7 (SUGGESTED SOLUTION – CONTINUED)

c) The allocation of overhead costs to the manufacturing and service departments and
then to the products is done for the purpose of:

- Calculating the profit on an individual job(1) or

- For the purpose of calculating the value of closing stock in the income
statement where a fully-integrated absorption costing system is used. (1)
(2)

PART B

Overhead Account
Actual overhead 100 000
WIP (24 000 x )
130 000 (1) 20 000
120 000 (1)
Under-recovery
10 000 (1)
130 000 130 000

WIP Account
Raw material Finished goods (1)
192 000 (2) 480 000
Direct labour
168 000 (2)
Overheads 480 000
120 000 (2)
480 000

The under-recovery of R10 000 can be explained as follows:

Volume:
The actual volume was 4 000 units greater than budget resulting in an over-recovery of
4 000 x R5 = R20 000(2)

Expenditure:
The budgeted expenditure was R100 000 as compared to the actual of R130 000. This
has given rise to an under-recovery of R30 000.(1)

R
Volume over-recovered 20 000
Expenditure under-recovered (30 000)
Net under-recovered (10 000)

Max (10)

5
6
QUESTION 2.8 (35
MARKS)

PART A (12 Marks)

Three cost centres are identified in the production of Zena chairs, namely Polishing,
Sanding and Finishing. The following information has been prepared by the cost
accountant of Cece Manufacturers:

Polishing Sanding Finishing

R R R
Indirect factory salaries and wages 46 290 119 483 197 340
Direct factory salaries and wages 58 745 115 300 26 905

Details of other manufacturing costs

are: 1 250 000
Depreciation of machinery 1 725 450
Rates and taxes 1 409 400
Rent of factory 197 070
Heat and lighting 512 000
Canteen expenses 361 000
Power – machine battery

Additional information
Polishing Sanding Finishing
Number of machine hours 420 000 79 200 415 300
Number of employees 120 140 60
Labour hours 300 000 240 000 210 000
Floor area occupied (m2) 1 500 1 500 2 000
Value of machinery R500 000 R60 000 R240 000
Kilowatt power of machinery 420 000 190 000 390 000

REQUIRED:

a) Prepare an overhead analysis schedule for Cece Manufacturers. (6)

b) Calculate suitable overhead recovery rates (to two decimal places, if applicable) for
each cost centre. Give reasons for your choice of allocation base. (6)

PART B (8 Marks)

a) Explain why indirect costs are not directly traced to cost objects in the same way as
direct costs. (4)

b) Give two reasons for the under- or over-recovery of overheads at the end of the
accounting period. (4)

7
PART C (10 Marks)

The budgeted production costs of Spiceworld for 20.7 were as follows:

R
Direct material 800 000
Direct labour 480 000
Production overheads 240 000

Actuals compared to budget for 20.7 were as follows:

1. Production and the efficiency thereof remained unchanged.

2. Labour hours increased by 10%, but the labour rate decreased from R16 per hour
to R14 per hour.

3. The purchase price of direct materials increased by 15% and all other factors in the
business stayed as is.

REQUIRED:

a) Calculate the factory overhead rate for 20.7 on the basis of direct labour hours. (3)

b) Calculate actual total cost of production for 20.7. (4)

c) Calculate the total cost of Job 15 if direct material used was R8 000 and direct
labours paid was R5 600. (3)

PART D (5 Marks)

Amakhosi Ltd absorbs production overheads on the basis of standard machine hours.

The following budgeted and actual information applied in its last accounting period:

Budget Actual
Production overhead R180 000 R178 080
Machine hours 50 000 48 260
Units produced 40 000 38 760

REQUIRED:

Prepare the production overhead account for the accounting period just ended. (5)

8
QUESTION 2.8 (35 MARKS)

PART A (12 Marks)

a) Polishing Sanding Finishing

Indirect salaries and 46 290 119 483 197 340 (1)*
wages 781 250 93 750 375 000 (1)
Depreciation 517 635 517 635 690 180 (1)
Rates and Taxes 422 820 422 820 563 760
Rent** 59 121 59 121 78 828 (1)
Heat and lighting 192 000 224 000 96 000 (1)
Canteen 151 620 68 590 140 790 (1)
Power
2 170 736 1 505 399 2 141 898

* Get mark only if amounts are correct AND also left out direct factory salaries
and wages out of analysis sheet

** Rent will be included in allocation rate if company uses absorption costing.

However if they use variable costing, it will not affect allocation rate

b) Machine Labour Machine (1)

hrs(1) hrs(1) hrs
420 000 240 000 211 500 (2)
= R5,17 = R6,27 = R5,16 P

The dominant factor was chosen as allocation base for each cost centre.(Reason
for choice of base) (1)P

12

PART B (8 Marks)

a) Direct costs can be accurately traced to cost objects because they can be
specifically and exclusively linked to a particular cost object whereas indirect costs
cannot. (2)

Indirect costs cannot be traced directly to a cost object because they are usually
common to several cost objects. Indirect costs are therefore assigned to cost
objects using cost allocations.
(2)
4
b) There will be an under-/over-recovery of overheads whenever actual activity(2) or
overhead expenditure(2) is different from the budgeted overheads and activity used
to estimate the budgeted overhead rate.
(4)

9
PART C (10 Marks)

a) Direct labour hours per budget = R480 000

÷ R16 per hour
= 30 000* labour hours (2)

Budgeted factory overhead rate

240 000
= (1)P
30 000 *

= R8

b) Total cost of production 20.7:

Direct materials (800 000 x 1,15) 920 000

(1)
Direct labour [(30 000* x 1,10(1)P) x R14(1)] 462 000
Overheads absorbed (33 000 x R8)(1)P 264 000
1 646 000

c) Job 15:

Direct materials 8 000

(1)
Direct labour 5 600
(1)
 5 600 
Overheads absorbed  x 8 3 200
 14 
(1)P
16 800

PART D (5
Marks)

PRODUCTION OVERHEAD
Bank  180 000(1) 
178 080 (1) WIP (48 260(1) x  * 173 736
 50 000(1) 
Under-absorption 4 344
(1)P
178 080 178 080

180 000
* or R3,60(2) =
50 000

10
11