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Pieman Products Revised QA

Pieman Products makes custom trailers and has received a request to build a racing motorcycle trailer. It will require £1,150 in materials and 250 direct labor hours to complete. To calculate overhead costs, Pieman Products divides its annual indirect costs of £51,000 by the 16,000 planned annual direct labor hours to get an overhead rate of £3.1875 per hour. This rate is applied to the 250 direct labor hours for the job to calculate £796.88 in overhead costs. Along with direct materials and labor costs, the total cost of the trailer is approximately £4,447.

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69 views6 pages

Pieman Products Revised QA

Pieman Products makes custom trailers and has received a request to build a racing motorcycle trailer. It will require £1,150 in materials and 250 direct labor hours to complete. To calculate overhead costs, Pieman Products divides its annual indirect costs of £51,000 by the 16,000 planned annual direct labor hours to get an overhead rate of £3.1875 per hour. This rate is applied to the 250 direct labor hours for the job to calculate £796.88 in overhead costs. Along with direct materials and labor costs, the total cost of the trailer is approximately £4,447.

Uploaded by

surbhiaggarwal13
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Pieman Products

Pieman Products Ltd makes road trailers to the precise


specification of individual customers.
All direct labour is paid at the same hourly rate.
• A customer has asked the business to build a trailer for
transporting a racing motorcycle to race meetings.
• It is estimated that this will require materials and
components that will cost £1,150.
• It will take 250 direct labour hours to do the job, of which 50
will involve the use of machinery.
• (So – it is NOT 300 hours – it is 250 labour hours of which
50 are used working on machines).
1
Pieman Products
The following is Direct materials cost £50,000
predicted to occur Direct labour cost £160,000
during the Direct labour time 16,000 hrs
forthcoming year:
Indirect labour cost £25,000
▪ Calculate a ‘logical’ Depreciation of machine £8,000
cost for the job and Rent £10,000
explain the basis of Heating, lighting & power £5,000
dealing with the Indirect materials £2,000
overheads you Other indirect cost (overheads) £1,000
propose.
Machine time 3,000 hrs
2
Pieman Products Answer
Indirect Costs
Indirect labour cost £25,000
Depreciation of machine £8,000
Rent £10,000
Heating, lighting & power £5,000
Indirect materials £2,000
Other indirect cost (overheads) £1,000
Total indirect costs £51,000

This list does not include the direct costs because direct costs
will be dealt with separately. 3
Pieman Products Answer
How should we calculate the Overhead Recovery Rate?
A direct-labour hour basis of charging overheads to jobs is
probably the most logical in this case.
The business’s work is probably labour intensive; it is
probably difficult to introduce very much machine controlled
work into making trailers to individual specifications.
There are many more direct labour hours budgeted to be
worked during the year than machine hours, which itself is
indicative of the labour hour intensity of work rather than
machine hour intensity.
Pieman Products Answer
Overhead Recovery Rate per Direct Labour Hour
The direct-labour hours are given as 16,000 hours = £51,000
total indirect costs/16,000 hours = £3.1875 per direct-labour
hour.
The trailer job uses 250 direct labour hours and thus the
overhead charge will be 250 labour hours @ £3.1875 =
£796.88.
The direct labour wage rate is the planned annual direct
labour cost of £160,000 divided by the planned annual direct
labour hours of 16,000 – wage rate of £10 for each hour.
Pieman Products Answer
Cost Type Amount
Direct Materials £1,150
Direct Labour (250 x (£160,000/16,000)) £2,500
Indirect Costs (250 x £ 3.1875) £796.88
Total Cost £4,446.88

Full cost of the trailer: About £4,447

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