Cost Calculation and Overhead Allocation

This assignment delves into the process of calculating costs for a special order. It details the breakdown of direct materials, labor, manufacturing overheads, administrative overheads, and their application in determining the final price quoted to a customer named Bushy George. The solution explores overhead allocation methods, predetermined overhead rates, and activity-based costing as alternative approaches. It also emphasizes the importance of considering indirect costs for accurate product pricing.

ASSIGNMENT 2

Solution 1:
A: Flexible budget to determine the value of variable cost at different expenditure level. Variable
cost is depended on the capacity used and revenue generated. Flexible budgets help to determine
the various variable costs that are associated with different level of production. So it can be said
that with the help of flexible budgets past performance of the organization can be calculated
through evaluating the actual usage and budgeted usage on same level of activity. In evaluating
the performance it will provide details of change in variable costs and semi variable costs. There
can many reasons that make flexible budget an essential part to evaluate the part performance of
the manufacturing business. Flexible budgets are beneficial where costs change frequently with
the level of business activity (Pratt, 2003). For example, in the manufacturing business the
budgeted overheads are segregated and added as fixed cost and other variable costs are directly
linked with the level of revenue. The objective of such performance evaluation will be to
evaluate the variances under actual expenses and budgeted expenses. The variances will help to
focus on the particular area of expenses and all action will be taken to control the cost (Norton
and Porter, 2008).
B: Cash Budgets are prepared to show how the cash flows within the business. The purpose of
cash budget is to check the requirement of cash to fulfill the requirement of working capital
within the business operation. Cash budget is typically dependent upon the three other budgets
that are prepared before making the cash budgets. Cash budgets firstly needs the cash receipts
that directly comes from the sales budgets, secondly cash budget need cash expenses that comes
from the purchase budget and lastly any cash expenses (fixed or variable) can be taken from the
projected profit and loss account and projected balance sheet.
Mainly cash receipts are received after or in 1 or 2 months of sales have been made. So it
impacts the cash budget directly as any variation in prediction of cash receipts will directly
change the cash requirements. Similarly in case of cash payments there will be flow of cash to
the suppliers depending upon the cash credits they provide. So any change in cash credits it will
directly impact the cash budget (Besley and Brigham, 2008).
C: Operating cycle refers to the average time taken for receipts of cash from the sale of inventory
after the acquisition of inventory. Operating cycle is different from the cash cycle as cash cycle

is influenced with many other factors while operating cycle in linked with the sale of inventory
and cash receipts from inventory. Short operating cycle means business will receive the cash
very frequently. On the other hand cash conversion cycle means days required or taken to
convert the business resources into cash flows. Cash cycle is very important for any business as
it tells time period taken from each dollar value of inventory is put to the production and sales
made before any cash is realized (Shim, Siegel and Shim, 2011). Working capital refers to the
difference of short term assets and short term liabilities. So the difference of these two these
items is working capital which is needed to finance the business operations. Cash cycle means
time needed to convert resources back into cash. The difference in value of cash received and
cash expenses will help to finance the working capital requirement and also generates the income
(Besley and Brigham, 2008).
D: A Government organization varies from not profit organization to profit sharing basis
organizations. Not profit organizations work for the public interest with a motive to earn the
profits. Accounting in the non government organization will reveals only the cash received and
cash paid at various public benefit transactions. Private companies are required to report the
government and the top management about the profitability of the company. In case of
government there are no such liabilities, so therefore it is not compulsory to follow each and
every step for accounting in government organization (Bierman and Smidt, 2007).
E: Cost accounting refers to the process of collecting the information about the cost of products,
recording them properly, classifying them accordingly, and lastly analyzing and summarizing the
various elements of cost to provide the management with best alternative they can adopt for
making the policies regarding the cost efficiency and coat capabilities. Under the costing system
there are many costing process such as activity based costing system, traditional costing system,
and standard costing etc. These systems provide information regarding the cost behavior and cost
control (Pratt, 2003).
Solution 2:
Given Details in the question
Budget for the year
Direct labour costs for the year $ 537,600.00

Manufacturing overheads for the year $ 598,080.00
Administrative overheads for the year $ 695,520.00
Direct labour hours for the year 14000.00
Total machine hours for the year 7000.00
A: Manufacturing Overhead rate for the Wonder products is as follows:
Manufacturing overheads are distributed on the basis of machine hours are consumed, therefore
manufacturing overhead allocation rate will be calculated as under:
Calculation of the Manufacturing overhead allocation rate
Manufacturing overheads for the year $ 598,080.00
Total machine hours for the year 7000.00
Manufacturing overhead allocation rate $ 85.44
B: Administrative overhead allocation rate for Wonder Products is as follows:
Administrative overheads are distributed on the basis of direct labour hours are consumed,
therefore administrative overhead allocation rate will be calculated as under:
Calculation of the administrative overhead allocation rate
Administrative overheads for the year $ 695,520.00
Direct labour hours for the year 14000.00
Administrative overhead allocation rate $ 49.68
C: Price quoted to the Bushy George to build the especially ordered wonderful creation is
calculated as under:
Calculation of the Labour hour rate
Direct labour costs for the year $ 537,600.00
Direct labour hours for the year 14000.00
Labour Hour Rate $ 38.40
(Besley and Brigham, 2008)
Calculation of price for especially ordered wonderful creation

Particulars Amount
Direct materials $ 19,000.00
Direct labour $ 28,800.00
Manufacturing overheads $ 34,176.00
Administrative overheads $ 37,260.00
Total Cost $ 119,236.00
Add: Mark up @40% of total cost $ 47,694.40
Price to be quoted to Bushy George $ 166,930.40
D: Overhead expenses are not directly identified in the products as it occurs in relation to
manufacturing process not with the manufacturing process. Overhead rates such as
administrative overhead rate and manufacturing overhead rate are linked with how much labour
hours and machine hours has been used in the product. While considering the cost related to job
or taking decision regarding the price than there is need to check the overheads that are used
indirectly to arrive the total cost (Pratt, 2003). While producing different products there is use
various activities and cost related to that activity is needed to include in the total cost. In
traditional costing approach all indirect overheads are allocated using one overhead rate like
machine hour or labour hour rate. Under this approach, activities that are not even used in the
particular product become part of it. Alternative approach for this is activity based costing
(Adler, 2013).
E: Predetermined overhead rate are used to calculate the unit cost of the product due to many
reasons. It is easier to calculate the cost of product using the budgeted overhead rate rather than
using the actual overhead used in the product. It also simplifies the cost accounting work at the
year end. Every product uses some cost of overhead but it is very time consuming process so
companies think fit to use the budgeted overhead rate (Besley and Brigham, 2008).

References
Adler, R. 2013. Management Accounting. Routledge.
Besley, S. and Brigham, E. F. 2008. Essentials of Managerial Finance. Cengage Learning.
Bierman, H., and Smidt, S. 2007. The Capital Budgeting Decision, Ninth Edition: Economic
Analysis of Investment Projects. Routledge
Norton,C. and Porter, G. 2008. Financial Accounting: The Impact on Decision Makers. Cengage
Learning.
Pratt, S. P. 2003. Cost of Capital: Estimation and Applications. John Wiley & Sons.
Shim, J.K., Siegel, J.G. and Shim, A.I. 2011. Budgeting Basics and Beyond. John Wiley & Sons.