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Development of a subsidiary of DEF Rubber Sdn Bhd

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Added on  2021-03-23

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The following is the monthly cost of direct overhead: Total Cost ($) Indirect Labour 50,000 - 250,000 Rental of Factory ** 50,000 Depreciation of Plant and Equipment 175,000 - 250,000 Fixed Cost 175,000 - Marketing of Plant and Equipment 5,000 490,000 IMPORTANT ASSUMPTION – CONT’D 8. The following is the allocation of cost pools: Latex Rubber Glove: Nitrile Rubber Glove: 5% 5% Drying (box) 20% 20% Leaching (box) 10% 10% Variable 10% Dipping (box)

Development of a subsidiary of DEF Rubber Sdn Bhd

   Added on 2021-03-23

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EXECUTIVE SUMMARY The principal activities of DEF Rubber Sdn Bhd are selling and distribution of different type of rubber raw material and chemical. The board of DEF Rubber Sdn Bhd would like to set up a new incorporated subsidiary, ABC Glove Sdn Bhd whose is planning manufacturing of medical gloves during this Covid-19 period. The initial target two medical glove, that are Latex Rubber Glove and Nitrile Rubber Glove. IMPORTANT ASSUMPTION 1. The maximum capacity of monthly production for Latex Rubber Glove and Nitrile Rubber Glove 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 1 box. Direct Material Cost of Latex Rubber and Nitrile Rubber is $6.00/box and $7.00/box respectively. 5. 1 box of Latex Rubber Glove required Chemical A for production which cost $1.00 per box. Whilst 1 box of Nitrile Rubber Glove required Chemical B for production which is also 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 Labour 50,000 Indirect Material 25,000 Rental of Factory ** 50,000 Depreciation of Plant and Equipment 100,000 Utilities ** 250,000 Insurance 10,000 Maintenance of Plant and Equipment 5,000 490,000
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IMPORTANT ASSUMPTION – CONT’D 8. 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, the remaining 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% Total 50% 50% 13. Selling Price is $19.00 and $20.00 per box for Latex 14. Rubber Glove and Nitrile Rubber Glove respectively.
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QUESTION 1 Analyse the cost behaviors using alternative cost estimation techniques. Justify the reason for choosing the respective cost estimations technique used. ANSWER 1 1.1 Classification of Variable Cost & Fixed Cost Below are the variable cost and fixed cost of Latex Rubber Glove and Nitrile Rubber Glove in full capacity production on monthly basis: - Cost Behavior Total Cost ($) Product Cost ($) Period Cost ($) Latex Rubber Variable Cost 1,500,000 1,500,000 - Nitrile Rubber Variable Cost 1,750,000 1,750,000 - Chemical A (Latex) Variable Cost 250,000 250,000 - Chemical B (Nitrile) Variable Cost 250,000 250,000 - Direct Labour Variable Cost 3,000,000 3,000,000 - Indirect Labour Fixed Cost 50,000 50,000 - Indirect Material Variable Cost 25,000 25,000 - Rental of Factory ** Fixed Cost 50,000 37,500 12,500 Depreciation of Plant and Equipment Fixed Cost 100,000 100,000 - Utilities ** Variable Cost 250,000 187,500 62,500 Insurance Fixed Cost 10,000 10,000 - Maintenance of Plant and Equipment Fixed Cost 5,000 5,000 - Selling and Marketing Expenses Fixed Cost 185,000 - 185,000 General Admin Expenses Fixed Cost 175,000 - 175,000 7,600,000 7,165,000 435,000 ** 75% of the company’s building and utilities devoted to production activities, the remaining 25% used for supportive overhead function.
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ANSWER 1 – CONT’D 1. Total Variable Cost (monthly) = $7,025,000 2. Total Fixed Cost (monthly) = $575,000 3. Total Product Cost (monthly) = $7,165,000 4. Total Period Cost (monthly) = $435,000 Account analysis is the most common approach of estimating variable and fixed cost. It is more accurate and realistic on calculation single unit cost compare to other cost estimation method. In this case, the process of production glove is complicated. Thus, single unit cost estimation should be more accurate and realistic. However, historical data should fully provide to support the estimation of every future single unit cost especially the low demand of glove in a specific month. In this case, ABC Glove Sdn Bhd is a new incorporated manufacturing glove company. The cost accountant should be aware on it.
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