QUESTION 1 [18 Marks]

Furniture (Pty) Ltd is a furniture making business manufacturers quality furniture to

customers’ orders. It has three production departments and two service departments.
Budgeted overhead costs for the coming year are as follows:

Overhead Total in Rands

Rent and rates 12 800
Machine insurance 6 000
Telephone charges 3 200
Depreciation 18 000
Production supervisor’s salaries 24 000
Heating and lighting 6 400
Total 70 400

The three production departments and two service departments are housed in the new
premises, the details of which, together with other statistics information are given as follows:

Allocation base Production departments Service departments

Cutting Assembly Cleaning and General Procurement
polishing maintenance
Floor area occupied (sq. 3 000 1 800 600 600 400
meters)
Machine value (R’000) 24 10 8 4 2
Direct labour hours 3 200 1 800 1 000
(budgeted)
Labour rates per hour R3.8 R3.5 R3.4 R3.00 R3.00
General maintenance costs 50% 25% 25%
apportioned
Procurement costs 20% 30% 50%
apportioned

Required

a) Prepare a statement showing the overhead cost budgeted for each 9 marks
department, showing the basis of apportionment used. Also calculate
overhead absorption rates for each department
b) Two pieces of furniture are to be manufactured for a customer. The direct
costs are as follows:

Cost item Job 123 Job 124 Job 125

Direct Material R154 R108 R200
Direct Labour: Cutting 20 hours 16 hours N/A
:Assembly 12 hours 10 hours 15 hours
:Cleaning and polishing 10 hours N/A 5 hours

Calculate the total cost of each job 5 Marks

c) If the company set its selling prices at cost plus 25% mark up, calculate 3 Marks
the quoted selling prices for the three jobs above

Drury Adapted - Adjusted

QUESTION 1 [FURNITURE (PTY) LTD]

(a) The service department cost should be reallocated using the following bases:

Canteen: Number of employees

Engineering shop: Number of service hours Stores: Number of stores orders

The canteen does not receive any services from the other service departments.

Therefore the canteen should be reallocated first. The Engineering Shop receives
services from the other two service departments and should be reallocated last.
Overhead allocation
Dept. Basis MC Assemb Paint Eng Stores Canteen
shop shop
(£) (£) (£) (£)
160 000 130 000 84 000 52 000 75
000
Canteen Employees 27 000 17 000 13 000 10 000 8 000 (75 000)
Stores Orders 24 000 18 000 12 000 6 000 (60 000)
Eng. shop Service hrs 45 000 30 000 25 000(100 000)
–––––– –––––– –––––– ––––––– –––––– ––––––
Total overhead 276 000 225 000 180 000
Machine hours 9 200
Direct labour hours 11 250
Labour cost £45 000
Machin
e hour
rate
Direct labour cost rate 400% of direct labour cost

(b) Overhead absorption statement

MC Assembly Paint shop
(£) (£) (£)
Overhead absorbeda 300 156 140
Actual overhead 000
2 9 0 000
1 6 7 000
1 5
– – –– – – –– – –
(Under-) 0 0 0 0 0 0 5 0
Over-absorption – – – – –– –
11 000 0 0
10 000 –
Notes
a10 000 machine hours X £30 per
hour. 7800 Direct labour hours at
£20 per hour. 400% of direct
(c) See ‘Budgeted overhead rates’ in Chapter 3 for an explanation of why overheads
should be absorbed using predetermined bases. The second part of the question
relates to whether or not volume allocation base (i.e. machine hours and direct labour
hours or cost) are appropriate, particularly when direct labour is a small proportion of
total cost. The answers should discuss the need for developing non-volume-based
cost driver rates using activity-based costing systems.
 QUESTION 2 [25 MARKS]

Gert Khozi is a South African fashion designer. His fashion atelier is based in,
Johannesburg. He specialises in couture red carpet gowns, he also designs ready-
to-wear range. Gert is known for dressing South African and international celebrities
at red-carpet events.

You offered to assist Gert with allocation of overheads after he indicated that one
blanket rate is used to allocate overheads since the previous accountant resigned
and left the work half done. He is currently making a wedding gown and suit for you
and your spouse, so you didn’t mind rendering this service to him in exchange for a
good discount.

Before handing the production schedule to you he said: “I may not remember much
about overhead allocation but it is definitely incorrect to include any traceable direct
cost under overheads, it’s referenced under Note 1, just have a look and let me know
what you think”

The production process consists of three main departments and two service
departments. You were provided with the following information for the year ended 31
March 2021:

EXTRACT OF THE PRODUCTION SCHEDULE

Production Departments Support Department

Design Cutting Sewing Administrative Maintenance
Item Total Department Department
Traced direct Note 1 R500 R350 R400 R300 000 R250 000
manufacturing 000 000 000
costs
Other allocated R50 R100 R80 R70 000 R90 000
manufacturing 000 000 000
overheads**

Unallocated
overheads
Rental R600 000
Electricity R120 000
Insurance on R140 000
machinery
Salaries and R560 000
Wages
Marketing and R80 000
advertising

Allocation basis
Office space (m²) 675m² 40 200 350 35 50
Electricity 105 000 30 000 20 000 25 000 20 000 kwh 10 000 kwh
Kilowatts Usage kwh kwh kwh kwh
No. of employees 48 5 15 20 5 3
Value of R1000 R120 R250 R450 R100 000 R80 000
machinery 000 000 000 000
Percentage use 100% 15% 40% 30% 5%
of maintenance
department
Percentage use 100% 40% 25% 25% 10%
of administrative
department

** Assume these have been correctly allocated

Note 1

Traced direct manufacturing costs relates to manufacturing overheads which are

directly traceable to the departments.

YOU ARE REQUIRED TO:

A. Comment on Gert’s statement with regards to overheads included under 4

Note 1.

B. Advice Gert on the most appropriate cost accumulation method for his 2
business.

C. Discuss the most appropriate method of reallocating service center costs

to production departments 3

D Calculate the total manufacturing overheads per department for the

. year ended 31 May 2021 to be allocated to products. 15

Note: Assume service center costs are reallocated based on step-

down approach

Presentation Logic Layout 1

TOTAL 25
Comment on Gert’s statement with regards to overheads included under Note 1.

Overheads refers to costs that cannot be traced to a specific cost object.[1] A cost object may be a product, a department, service, cost centre etc [1]
Therefore a cost may be indirect to a product [1] but direct to a department if traceable to that department [1]
I therefore don’t agree with his comment [1]
Available 5
Maximum 4

Advice Gert on the most appropriate cost accumulation method for his business.

Job costing [1] is a cost accumulation method used where unique products or services are rendered to customer [1].
This method would be more appropriate as services rendered by Gert are based on unique customer specifications [1]

Available 3
Maximum 2

Discuss the most appropriate method of reallocating service center costs to production departments

Step-down approach [1] takes into account the fact the two departments use each other's services [1]
Therefore, this method would be more appropriate as admin uses services of maitenance department and maintenance department uses admin services [1]
Available 3
Maximum 3

Production Departments Support Department

Item Total Administrativ Maintenance

Design Cutting Sewing
e Department
Traced direct manufacturing costs Note 1 R500 000 R350 000 R400 000 R300 000 R250 000 [1]
Other allocated manufacturing overheads** R50 000 R100 000 R80 000 R70 000 R90 000 [1]
Rental R600 000 [1] For correct allocation base 35 555,56 177 777,78 311 111,11 31 111,11 44 444,44 [1]P
Electricity and water R120 000 [1] For correct allocation base R34 286 R22 857 R28 571 R22 857 R11 429 [1]P
Insurance on machinery R140 000 [1] For correct allocation base R16 800 R35 000 R63 000 R14 000 R11 200 [1]P
Salaries and Wages R560 000 [1] For correct allocation base R58 333 R175 000 R233 333 R58 333 R35 000 [1]P
Marketing and advertising R80 000 Non-Manufacturing cost [1]
Totals R694 975 R860 635 R1 116 016 R196 302 R442 073
Reallocation R66 311 R176 829 R132 622 R22 104 -R442 073 [2]P
Totals R761 286 R1 037 464 R1 248 638 R218 405
Reallocation R97 069 R60 668 R60 668 -R218 405 [2]P
Total overheads R1 619 640 R2 135 596 R2 557 944 R0 R0 [1]P

Office space (m²) 675 40 200 350 35 50

Electricity kilowatts usage 105 000 30 000 20 000 25 000 20 000 10 000
No. of employees 48 5 15 20 5 3
Value of machinery R1 000 000 R120 000 R250 000 R450 000 R100 000 R80 000
Percentage use of maintenance department 100% 15% 40% 30% 5%
Percentage use of administrative
100% 40% 25% 25% 10%
department
QUESTION 3 [30 MARKS]

Mametja Sekororo, your cousin, was recently appointed by MediCare Hospital as their
management accountant. Although he excelled in management accounting, he has always
struggled with overhead allocation, which happens to be your favourite topic, and hence he
approached you for assistance.

Medicare Hospital consists of four main cost centres (departments), namely: Maternity Ward,
Surgical/General Ward, Theatre and COVID-19 Ward. These four departments are serviced
by 3 Support Departments: Pharmacy, Administration and Catering department.The hospital
currently uses traditional absorption method for the purpose of allocating overheads to
cost objects (patients).

The hospital management has always questioned the accuracy of the overhead allocation
rate currently used by the hospital.The items presented in the tables below are the only
areas of concern, which your cousin was tasked to review and address. He completed the
task in 4 steps, as below, and with each step, he encountered problems.

Step 1: Cost Assignment (Identification of overheads)

In order to review the overhead allocation rate, he started with a cost assignment exercise,
i.e. tracing of costs to cost objects ( departments and patients), however, he struggled with
this exercise and requested you to assist. He provided you with the cost assignment
schedule below:

Cost Items Note Department Patients

Admission costs Note 1 ? ?

Water and Note 2 ? Indirect

electricity
Medication Note 3 ? Direct

Salaries: Nurses Note 4 Direct ?

Cuba doctors’ fees Note 5 ? ?

Note 1: Admission Costs

Copies are made for the purpose of compiling a patient’s file upon admission. Each copy
costs R0.80c, the number of copies made vary from patient to patient, however on average,
two to five copies are made per patient. This photocopying charges are insignificant and the
costs of charging them to each patient’s account outweighs the benefits.

Note 2: Water and Electricity

The municipal water and electricity bill is for the hospital as a whole and it is not broken
down per department.
Note 3: Medication

Each patient has an account where all their medication and other costs are charged for the
purpose of calculating the total hospitalisation costs. Medication costs are directly traceable
to patients.

Note 4: Nurses’ Salaries

The nurses are permanently placed in specific departments and earn a fixed monthly salary.

Note 5: Cuba doctors’ Fees

Medicare hospital had to deploy 25 doctors from Cuba, to assist with the fight against the
COVID 19 pandemic. The doctors are paid a fixed rate per hour. Time records are kept to
indicate the amount of time spent per patient. The doctors only attend to COVID 19 patients.
All COVID 19 patients are kept in their ward regardless of their secondary health conditions.
For example, a patient who is pregnant will not be in the maternity ward, but in the COVID
19 ward, due to the contangious nature of the virus.

Step 2: Allocation of overheads to cost centres and support departments

.

Your cousin identified the costs below as overheads, but struggled with selection of most
appropriate overhead allocation base.

Cost Centres Support Centres

Maternit Surgica Theatr COVI Pharmac Admi Caterin

y Ward l Ward e D 19 y n g
Ward
Insurance

Water and
electricity
Salaries: Nurses

Cuba doctors’
fees

Allocation Base

Floor space 1 200 Sq 1 500 500 Sq 700 100 Sq 150 200 Sq

Sq Sq Sq
Assets Value R140 mil R80 mil R220 R90 R5 mil R1 R2 mil
mil mil mil
No. of Nurses 35 40 20 25
 No. of 200 110 160 150 460 460 460
Patients/customer
s serviced

Step 3: Reallocation of support centre costs

Mametja Sekororo informed you that the catering department services all 4 cost centres and
the two support centres. No other services are exchanged between the three service
centres.

He further indicated that he has no idea on the allocation base that can be used for the
purpose of reallocating service/support centre costs.

YOU ARE REQUIRED TO:

A Discuss the purpose of overhead allocation in determination of a product/service 3

cost.

Note: Your discussion should be relevant to the scenario and general

answers with no application will not receive any mark allocation

B With reference to Step 1:

(i) (i) Complete Mametja Sekororo’s cost assignment schedule with 10

classification of costs as either direct or indirect. Provide reasons for your
answers

C With reference to Step 2:

(i) (i) Advice Mametja Sekororo on whether it is correct to allocate Cuba 4

doctors’ fees as part of overheads. Provide reasons for your answer.

(ii) (ii) Select the most appropriate allocation base for allocating overheads to 6
cost centers and support centers. Provide reasons for your answer.

D With reference to Step 3, advice Mametja Sekororo with regards to:

(i) (i) The most appropriate method for reallocation of service center costs to 3
cost centers.

(ii) (ii) Possible reallocation bases that can be used to reallocate the service 2
center costs to the cost centers.

Presentation, Logic and Layout 2

TOTAL 30
Discuss the purpose of overhead allocation in determination of a product/service cost

By incorporating indirect costs into pricing, prices can be increased to cover them effectively without negatively affecting your profits. [1]
Allocating overhead can also assist the company find ways of cut your costs, as it provides more understanding on overheads [1]
It can be a motivator for different departments to improve the efficiency of their products to reduce overhead costs [1]

Complete Mametja Sekororo’s cost assignment schedule with classification of costs as either direct or indirect. Provide reasons for your answers

Cost Items Note Department Patients

Admission costs It is not economically feasible to trace cost to each patient as the cost is insignificant [1] Indirect [1] Indirect [1]
Water and electricity Not directly traceable to any department because the water bill is not split per department [1] Indirect [1] Indirect
Medication costs per patient can be traced to each department where the patient was
Medication [1] Direct Direct
admitted [1]
Salaries: Nurses Not possible to trace the cost of each nurse to a patient and costs are fixed [1] Direct Indirect [1]
The doctors' fees are traceable to each department, since they are only servicing COVID
Cuba doctors’ fees 19 department. The costs of each doctor is traceable to a ptient as costs are charged [1] Direct Direct
based on time spent per patient
[1] [1]

Available 12
Max 12

Advice Mametja Sekororo on whether it is correct to allocate Cuba doctors’ fees as part of overheads. Provide reasons for your answer.

The doctors fees are direct costs and therefore directly traceable to cost object [1], therefore this cost shoould not be allocated with overheads [1].
Only indirect costs are allocated [1] as they cannot be traced [1]

Available 4
Max 4

(i) Select the most appropriate allocation base for allocating overheads to cost centers and support centers. Provide reasons for your answer.

Allocation Base

Insurance Assets Value 2

Water and electricity Floor space 2
Salaries: Nurses No. of Nurses 2

The most appropriate method for reallocation of service center costs to cost centers.

Step down approach [1]

The catering department's allocated overheads are reallocated to the two service centres and production centers [1]. Thereafter, the two service centres are then reallocated to the production departments before calculating overhead rate. [1]

Available 3
Max 3

Possible reallocation bases that can be used to reallocate the service center costs to the cost centers.

Number of patients serviced 1

Percentage use by each department 1

Available 2
Max 2