Overhead Allocation and Cost Calculation

This assignment focuses on analyzing the overhead allocation methods used by Wonder Products. It calculates both manufacturing and administrative overhead rates based on machine hours and labor hours respectively. The assignment then determines the total cost of production for a specific product, considering direct materials, labor, and allocated overheads. Finally, it calculates the quoted price for the product by adding a 40% profit margin. The analysis highlights the importance of accurate overhead allocation in determining product costs and pricing strategies.

ACCOUNTING FOR MANAGERS

Answer 1:
a. Financial budget is made in order to evaluate the costs incurred of a year at the
beginning of the period. This is prepared to observe the difference between the actual
and estimated data and thus may be used by the management for making decisions.
Budgets may be classified into two categories: Fixed and flexible budget. Fixed
budget is formulated on the basis of output of the business. Even the output is
forecasted and thus it may be different from the estimated value. Because of this
reason flexible budget is made in comparison to fixed budget. The flexible budget is
prepared after analysing all the items available in the income statement on the basis of
the actual profit (Bruner, Eades and Schill, 2017).
The following tables show the use of fixed and flexible budget:
Statement showing fixed budget.
Particulars Budget amount for each unit Static budget Actual budget
Varianc
e
5000 units 8000 units
Revenue 30 150000 200000 -50000
Variable cost:
Material 12 60000 78000 -18000
Labour 8 40000 70000 -30000
Overhead 5 25000 42000 -17000
Total 25 125000 190000 -65000
Contribution 5 25000 10000 15000
Fixed cost:
Manufacturing 50000 45000 5000
Marketing 25000 26000 -1000
Total -50000 -61000 11000
Statement showing flexible budget.
Particulars
Budget amount for each
unit
Flexible
budget
Actual
budget
Varianc
e
8000 units 8000 units
Revenue 30 240000 270000 -30000
Variable cost:
Material 12 96000 125000 -29000
Labour 8 64000 70000 -6000
Overhead 5 40000 42000 -2000
Total 25 200000 237000 -37000
Contributio
n 5 40000 33000 7000

Fixed cost:
Manufacturin
g 50000 30000 20000
Marketing 25000 20000 5000
Total profit -35000 -17000 -18000
The budgeted costs are prepared on the basis of the number of units produced so that
the company may check it afterwards in order to identify the variations and it’s the
reason (Clarke and Clarke, 1990).
Thus it is found that flexible budget is more preferable because it helps to calculate
profit more accurately after observing all the costs incurred.
b. The cash budget is made by every firm so as to ascertain the source of the cash
generation and also to know where the money is being invested. The biggest motive
of a firm is to make products and sell them so it is important to make production
budget and sales budget (Fairhurst, 2015).
1. Sales budget: It is made by the firm so as to ascertain the estimate of the sales for
a short period of time. It is prepared for a short period of time because it is having
a volatile nature. The main income of a firm is generated by sales and thus it is
necessary to find the information relating to the cash inflow which may be used to
prepare the budget.
2. Production budget: In order to generate income it is necessary for a firm to
manufacture goods. It is also important that the firm should know about the
adequate quantity it needs to produce. So it is necessary to prepare a production
budget as there is outflow of the cash.
c. The two most important feature of a cash cycle are the operating cycle and working
capital. The operating cycle starts when the purchase of raw materials is done and
ends with the payment of the finished goods which means that the entire cycles shows
the conversion of resource to cash.
Working capital ratio may be acknowledged as the ratio between the current assets
and the current liabilities of a firm. There are several types of working capital:
d. I totally disagree with the statement because like private firms there are many other
such individuals like investors, creditors, government officials, public, etc who may
use the information for making economic decisions (Galbraith, Downey and Kates,
2002). The government organisations are not just entitled to look after generating
profit but they are also given the responsibility of satisfying wants of people and

economic development of the country, and thus the information is considered
important for the shareholders too.
e. A costing system may help the firm to decide the purchases and method of
production. The management looks at every corner of the situations and take decision
based on the decisions of cost controlling and outsourcing thus formulating the plan
which may fetch the firm with the maximum amount of profit. There may be an order
which may be harmful for the firm, so the activities are planned accordingly. Also, the
shareholders are being able to be updated about the financial position of the company.
Answer 2.
(a) The manufacturing overhead allocation rate of wonder products is calculated below:
Manufacturing overhead
rate= Manufacturing overhead
Machine hours
= 598080
7000
=
85.44 Per machine
hour.
Note: Manufacturing overhead are calculated as per the machine hour.
(b) The administrative overhead allocation rate of wonder products is calculated below:
Administrative overhead
rate= Administrative overhead
Labour hours
= 695520
14000
= 49.68 per labour hour.
Note: Administrative overhead is calculated as per labour hours.
(c ) Calculation of total cost:
Direct material 19000
Cost due to labour hours
(750*49.68) 37260
Cost due to machine hours
(400*85.44) 34176
Total cost 90436

Quoted price = Total cost + Profit margin.
Total cost 90436
Profit (40%) 36174.4
Quoted Price
126610.
4
(d) Any indirect costs that are related to the manufacturing process are known as
overheads. These overheads form a huge part of the total cost. It is important to
allocate overhead rate properly because there will lie a risk of over absorption or
under absorption of overheads. Also there are various problems in the traditional
approach, in the single blanket as there is a single cost driver whereas there are huge
number of activities that are carried out (Hassani, 2016).
(e) Time frame is the main reason for choosing the idea of predetermined rate. The
overhead is estimated when the process of production starts. However, the actual
figure of overhead is determined when the work comes to an end, It is not easy to
estimate the correct amount of overhead. There always lies a doubt that whether the
overhead that is determined will be close enough to the estimated overhead or not
(Holland and Torregrosa, 2008).

References:
Bruner, R., Eades, K. and Schill, M. (2017). Case studies in finance. Dubuque, IA: McGraw-
Hill Education.
Clarke, R. and Clarke, R. (1990). Strategic financial management. Homewood, Ill.: R.D.
Irwin.
Fairhurst, D. (2015). Using Excel for Business Analysis A Guide to Financial Modelling
Fundamenta. John Wiley & Sons.
Galbraith, J., Downey, D. and Kates, A. (2002). Designing dynamic organizations. New
York: AMACOM.
Hassani, B. (2016). Scenario analysis in risk management. Cham: Springer International
Publishing.
Holland, J. and Torregrosa, D. (2008). Capital budgeting. [Washington, D.C.]: Congress of
the U.S., Congressional Budget Office.