Managerial Accounting Homework: Costing and Overhead

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Assignment
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Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................6
Part A...........................................................................................................................................6
Part B............................................................................................................................................9
Part C..........................................................................................................................................11
Part D.........................................................................................................................................12
References......................................................................................................................................14
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Question 1
Flying Airlines Company is considering replacing the loader which has been 3 years old and
having a life of 4 years. It is proposed that if the old loader is sold at this point of time then it can
be sold for $ 5000. However if sold after an year it is assumed that the loader will be sold for a
NIL value as there is no salvage or scrap value for the same. The company is considering
replacing the loader with the new loader which will cost $ 20000 and have a useful life of just
one year thus it is considered that the depreciation will be charged for the loader in the first year
itself. Thus the analysis for replacing the loader truck with the conveyor belt now or wait for
another year and then replace the loader truck with the new conveyor belt is shown below:
At Year 0
If the Loader truck is replaced now
Particulars Amount
Cost of New Loader $ 20,000
Less: Sale price of old loader $ (5,000)
Annual variable cost for New Loader $ 50,000
Depreciation for New Loader $ 20,000
Total Cost $ 85,000
Notes:
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 If the new truck is replaced now then the value of old truck can be fetched and the amount of old
truck is reduced from the cost of new loader.
 Also annual variable cost and depreciation charged will be for the new loader and not old loader
as the same is sold in the beginning of the year.
After 1 Year
If Loader is replaced now
Particulars Amount
Annual depreciation for old Loader $ 25,000
Variable operating cost for old loader $ 80,000
Cost of New Loader $ 20,000
Total Cost $ 125,000
Notes:
 The annual variable cost and depreciation charged would be for the old machine as old machine
is used for 1 year then replacement is made.
 Cost of new loader will be considered without giving effect of the sale price of the old loader as
it is assumed that old loader will have Nil sale value after 1 year.
Analysis
Thus from the above tables it can be seen that the cost incurred by the company at this point of
time is less than cost that is incurred after 1 year from now. The cost incurred at Year 0 is $
85000 in comparison to $ 125000 after 1 year. Thus it is recommended that Flying Airlines
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Company should replace the old loader now and should not wait for 1 more year for
replacement.
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Question 2
Part A
A. Budgeted Period Cost
Period Costs Amount
Factory Rent $ 250,000
General Business Administration- HR, Legal etc $ 700,000
Sales Salaries $ 500,000
Factory Supervisor Salary $ 140,000
Depreciation Sales and Admin Building $ 250,000
Depreciation of manufacturing equipment $ 1,000,000
Factory Insurance $ 90,000
Electricity cost for factory plant $ 120,000
General factory cleaning and maintenance $ 50,000
Total Budgeted Period Cost $ 3,100,000
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B. Budgeted Prime Cost
Prime Costs Amount
Direct Material for prodution $ 1,300,000
Direct Factory Labour Cost $ 300,000
Total Budgeted Prime Cost $ 1,600,000
C. Budgeted Conversion Cost
Conversion Cost Amount
Indirect Materials used in Production $ 450,000
Indirect Labour used in Production $ 500,000
Total Budgeted Conversion Cost $ 950,000
D. Budgeted Product Cost
Total Product Cost Amount
Factory Rent $ 250,000
Factory Supervisor Salary $ 140,000
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Factory Insurance $ 90,000
Electricity cost for factory plant $ 120,000
Direct Material for production $ 1,300,000
General factory cleaning and maintenance $ 50,000
Direct Factory Labour Cost $ 300,000
Depreciation of manufacturing equipment $ 1,000,000
Indirect Materials used in Production $ 450,000
Indirect Labour used in Production $ 500,000
Total Budgeted Product Cost $ 4,200,000
E. Budgeted Overhead Cost
Overhead Cost Amount
Factory Rent $ 250,000
Sales Salaries $ 500,000
Factory Supervisor Salary $ 140,000
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Factory Insurance $ 90,000
General Business Admininstration- HR, Legal etc $ 700,000
Electricity cost for factory plant $ 120,000
General factory cleaning and maintenance $ 50,000
Depreciation Sales and Admin Building $ 250,000
Depreciation of manufacturing equipment $ 1,000,000
Indirect Materials used in Production $ 450,000
Indirect Labour used in Production $ 500,000
Total Budgeted Overhead Cost $ 4,050,000
Part B
Predetermined Overhead Rate (POHR) = Budgeted Annual Overhead / Budgeted Annual
cost driver level
i. POHR taking total annual labour hours as cost driver
Particulars Amount
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Direct Annual Labour Cost
300,00
0
Direct Labour Cost per Hour 30
Total Annual Labour hours (Cost Driver) 10000
Budgeted Annual Overhead 4050000
POHR
$
405.00
ii. POHR taking direct labour cost as cost driver
Particulars Amount
Budgeted Annual Overhead 4,050,000
Direct Annual Labour Cost
300,00
0
POHR
$
13.50
iii. POHR taking total machine hours as cost driver
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Particulars Amount
Budgeted Annual Overhead 4,050,000
Total Number of Machine hours annually
130,00
0
POHR
$
31.15
iv. POHR taking direct material cost as cost driver
Particulars Amount
Budgeted Annual Overhead 4,050,000
Direct Material Cost 1,300,000
POHR
$
3.12
Part C
Calculation of Applied overhead in following cases:
I. Actual Direct Labour hours were 11500
Particulars Amount
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Direct Labour Hours 11,500
POHR based on Labour hours 405
POHR $ 4,657,500
II. Actual Machine Hours were 125000
Particulars Amount
Total Machine Hours 125,000
POHR based on Machine hours 31.15
POHR $ 3,893,750
Part D
A. Using Direct Labour Hours
Particulars Amount
Actual Overheads $ 2,850,000
Applied Overheads $ 4,657,500
Over Applied Overhead $ 1,807,500
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