ACCT 301 Lecture Notes - Total Absorption Costing, Gestapo, Current Asset

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bronzealpaca588

25 Feb 2013

School

University of Calgary

Department

Accounting

Course

ACCT 301

Professor

All

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Document Summary

In accounting, there are various methods in dealing with direct and indirect costs, some of which have been explained in previous articles, such as direct/indirect materials and labor costs. The following series of articles aim to define and explain the different methods of dealing with overheads. They are defined as a cost incurred in making a product or a service, but cannot be traced directly and in full to the product or service. Overheads may be classified as manufacturing or non-manufacturing overheads for the purpose of this article. Manufacturing overheads being those costs related to the product or service as defined above, and non-manufacturing overheads are those that cannot be directly allocated to particular units of output. In absorption costing, overheads will be added to each unit of output of products manufactured and sold. It is a method for sharing overheads between different products on a fair basis.

Related Questions

1. Anderson Ltd. manufacture gearboxes for use in cars. At thestart of the

year, the management of Anderson Ltd. estimated that its costswould be:

This was based on the following:

Direct labour

Direct material

Variable production overhead

Fixed production overhead

Administration overhead

80 employees

2000 hours worked by each employee

40 000 gearboxes manufactured in the year as budgetedproduction

Â£200 unit selling price.

You have recently been employed by the company to establish astandard

costing system. At the end of the year you were able to extractthe

following information:

â¢ labour costs Â£4.40/hour

â¢ 32 000 units sold

â¢ Â£210/unit selling price

â¢ 160 000 hours were worked

â¢ variable production overheads were Â£640 000

â¢ fixed production overheads were Â£810 000

â¢ administration costs were Â£350 000

â¢ raw material prices were 10% higher than expected

â¢ total expenditure on raw material was Â£3.696 M

â¢ there were no opening or closing stocks of raw materials.

(a) You are required to prepare an operating statement for theyear, using

a standard absorption costing system.

Calculations should proceed according to the followingheadings

suffixing âAâ for Adverse and âFâ for Favourable whereappropriate.

Resulting quantities required for the statement are then enteredin the

âOperating Statement for the Yearâ sheet shown on page 6.

(All working must be shown.)

(Budgeted) Costs

Unit cost

Â£

Direct labour

Direct materials

Variable overhead

Fixed overhead

Admin. overhead

Total

Selling price

Standard profit (per unit)

Budgeted profit

Sales price variance

Sales quantity variance

Cost Variances

Labour Variances

Standard hours =

Standard cost/hour =

Rate variance =

Standard time =

Actual time =

Time variance =

Efficiency variance =

Material Variances

Material price =

Material usage â standard =

â actual =

Material usage variance =

Variable overheads

Standard cost =

Actual cost =

Expenditure variance =

Efficiency variance =

Fixed overheads

Expenditure variance =

Volume variance =

Admin overhead (treat as fixed)

Expenditure variance =

Volume variance =

Operating Statement for the Year

Â£â000 Â£â000

Budgeted Profit

Sales variance âprice

â quantity

Cost variances

Labour â rate

â efficiency

Material â price

â usage

Variable â expenditure

â efficiency

Fixed â expenditure

â volume

Admin â expenditure

â volume

Actual Profit

(b) Give reasons/explanations why the variances in (a) abovehave

occurred for the following:

(i) material price

(ii) labour efficiency

(iii) fixed overhead expenditure.

be more suitable. He asks you to outline the strengths and

weaknesses of both systems and recommend the most suitable.

(d) The Board of Anderson Ltd. want to adopt âidealâ standardsbecause

they feel it will encourage harder work. You are asked toproduce a

brief report giving your views.

Kubin Companyâs relevant range of production is 21,000 to 25,000 units. When it produces and sells 23,000 units, its average costs per unit are as follows:

	Average Cost per Unit
Direct materials	$	8.10
Direct labor	$	5.10
Variable manufacturing overhead	$	2.60
Fixed manufacturing overhead	$	6.10
Fixed selling expense	$	4.60
Fixed administrative expense	$	3.60
Sales commissions	$	2.10
Variable administrative expense	$	1.60

2. Assume the cost object is the Manufacturing Department and that its total output is 23,000 units.

a. How much total manufacturing cost is directly traceable to the Manufacturing Department?

b. How much total manufacturing cost is an indirect cost that cannot be easily traced to the Manufacturing Department?


2a.	Direct materials per unit
	Direct labor per unit
	Variable manufacturing overhead per unit
	Fixed manufacturing overhead per unit
	Total manufacturing cost per unit	$0.00
	Number of units sold
	Total direct costs	$0

2b.	Total indirect costs

beigemallard451

The cordless phone manufacturing division of a Denver-basedconsumer electronics company uses activity-based accounting. Forsimplicity, assume that its accountants have identified only thefollowing three activities and related cost drivers for indirectproduction costs.

Activity Cost Driver

Materialshandling Direct-materials cost

Engineering Engineering change notices

Power Kilowatt hours

Three types of cordless phones are produced: Senior, Basic, andDeluxe. Direct costs and cost-driver activity for each product fora recent month are as follows:

Senior BasicDeluxe

Direct-materialscost $25,000 $5,000 $ 125,000

Direct-laborcost $4,000 $1,000 $ 3,000

Kilowatthours 50,000 200,000 150,000

Engineering change notices13 5 2

Indirect production cost for the month was:

Materialshandling $ 8,000

Engineering 20,000

Power 16,000

Total indirect productioncost $ 44,000

Required:

1. Compute the indirect production cost allocated to eachproduct with the activity-based costing system.

2. Suppose all indirect production costs had been allocated toproducts in proportion to their direct-labor costs. Compute theindirect production allocated to each product.

3. In which product costs, those in Requirement 1 or those inRequirement 2, do you have the most confidence? Why?

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ACCT 301 Lecture Notes - Total Absorption Costing, Gestapo, Current Asset

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