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EXECUTIVE SUMMARYThe principal activities of DEF Rubber Sdn Bhd are selling and distribution of different type ofrubber raw material and chemical. The board of DEF Rubber Sdn Bhd would like to set up anew incorporated subsidiary, ABC Glove Sdn Bhd whose is planning manufacturing of medicalgloves during this Covid-19 period. The initial target two medical glove, that are Latex RubberGlove and Nitrile Rubber Glove.IMPORTANT ASSUMPTION1.The maximum capacity of monthly production for Latex Rubber Glove and Nitrile RubberGlove are 250,000 boxes respectively.2.The depreciation rate of plant and equipment is 20% per year.3.1 box of glove has total 50 pairs of gloves (right and left hand).4.50kg of Latex Rubber or Nitrile Rubber can product 50 pair of gloves which equal to 1box. Direct Material Cost of Latex Rubber and Nitrile Rubber is $6.00/box and $7.00/boxrespectively.5.1 box of Latex Rubber Glove required Chemical A for production which cost $1.00 perbox. Whilst 1 box of Nitrile Rubber Glove required Chemical B for production which isalso cost $1.00 per box.6.1 box of Latex Rubber Glove or Nitrile Rubber Glove required 30 min for production.Direct Labour Rate is $12 per hour.7.The following is the monthly cost of direct overhead: -Total Cost ($)Indirect Labour50,000Indirect Material25,000Rental of Factory **50,000Depreciation of Plant and Equipment100,000Utilities **250,000Insurance10,000Maintenance of Plant and Equipment5,000490,000
IMPORTANT ASSUMPTION – CONT’D8.Indirect Labour consist of the salary of technician and production manager.9.Indirect Material is the packaging material such as glue, tape, packaging box.10.The rental of factory is about $1.00/sft at the total build up size 50,000 sft factory.11.** 75% of the company’s building and utilities devoted to production activities, theremaining 25% used for supportive overhead function.12.The following is the allocation of cost pools: -Latex Rubber Glove:Nitrile Rubber Glove:Cleaning (box)5%5%Drying (box)20%20%Leaching (box)10%10%Dipping (box)5%5%Stripping (box)5%5%Quality Check (box)3%3%Packaging (box)2%2%Total50%50%13.Selling Price is $19.00 and $20.00 per box for Latex14.Rubber Glove and Nitrile Rubber Glove respectively.
QUESTION 1Analyse the cost behaviors using alternative cost estimation techniques. Justify the reasonfor choosing the respective cost estimations technique used.ANSWER 11.1 Classification of Variable Cost & Fixed CostBelow are the variable cost and fixed cost of Latex Rubber Glove and Nitrile Rubber Glove infull capacity production on monthly basis: -CostBehaviorTotal Cost ($)Product Cost($)Period Cost($)Latex RubberVariable Cost1,500,0001,500,000-Nitrile RubberVariable Cost1,750,0001,750,000-Chemical A (Latex)Variable Cost250,000250,000-Chemical B (Nitrile)Variable Cost250,000250,000-Direct LabourVariable Cost3,000,0003,000,000-Indirect LabourFixed Cost50,00050,000-Indirect MaterialVariable Cost25,00025,000-Rental of Factory **Fixed Cost50,00037,50012,500Depreciation of Plant andEquipmentFixed Cost100,000100,000-Utilities **Variable Cost250,000187,50062,500InsuranceFixed Cost10,00010,000-Maintenance of Plant andEquipmentFixed Cost5,0005,000-Selling and MarketingExpensesFixed Cost185,000-185,000General Admin ExpensesFixed Cost175,000-175,0007,600,0007,165,000435,000** 75% of the company’s building and utilities devoted to production activities, the remaining25% used for supportive overhead function.
ANSWER 1 – CONT’D1. Total Variable Cost (monthly) = $7,025,0002. Total Fixed Cost (monthly) = $575,0003. Total Product Cost (monthly) = $7,165,0004. Total Period Cost (monthly) = $435,000Account analysis is the most common approach of estimating variable and fixed cost. It ismore accurate and realistic on calculation single unit cost compare to other cost estimationmethod.In this case, the process of production glove is complicated. Thus, single unit cost estimationshould be more accurate and realistic. However, historical data should fully provide to supportthe estimation of every future single unit cost especially the low demand of glove in a specificmonth. In this case, ABC Glove Sdn Bhd is a new incorporated manufacturing glove company.The cost accountant should be aware on it.