Week 6- Tutorial questions

6.6 In estimating the costs of products, manufacturers usually identify direct material, direct labour and manufacturing
overhead costs. What modifications may be made to these classifications in estimating service costs?

6.13 Explain how estimates of service costs help managers to manage resources and create value.

6.14 Describe the three factors that influence the costs and benefits associated with service costing. How are these factors
affected by the type of service firm?

P6.36 Job costing: consulting firm LO 6.7

Kiwi Consulting Services provides consulting services throughout Australia and New Zealand. It uses a job costing system to
accumulate the cost of client projects. Traceable costs are charged directly to individual clients; in contrast, other costs
incurred by Kiwi but not identifiable with specific clients are charged to jobs by using a predetermined overhead rate. Clients
are billed for directly chargeable costs, overhead and a markup for the profit margin.

Kiwi’s financial controller, Janet Campbell, anticipates the following costs for the coming year:

Percentage of cost directly

  Cost traceable to clients

Professional staff salaries $2 500 000 80%

 Administrative support
staff 500 000 50%

Travel 250 000 95%

Photocopying 50 000 95%

Other operating costs 100 000 50%

Total $3 400 000

The firm’s management wishes to make an $850 000 profit for the firm and plans to add a percentage markup on total cost
to achieve that figure.

On 10 April, Kiwi completed work on a project for AdCom Manufacturing. The following costs were incurred:

  Cost

Professional staff salaries $40 000

Administrative support
staff 3 000

Travel 5 000
 Photocopying 500

Other operating costs 1 500

Required:

1. Determine Kiwi’s total traceable costs for the coming year and the firm’s total anticipated overhead.

2. Calculate the predetermined overhead rate, assuming the cost driver is traceable costs.

3. What percentage of cost will Kiwi add to each job to achieve its profit target?

4. Determine the total cost of the AdCom Manufacturing project.

5. How much would AdCom be billed for the services performed? Compare this approach to the client billing system
described in this chapter.

6. Notice that only 50 per cent of Kiwi’s other operating costs is directly traceable to specific client projects. Identify
several costs that would be included in other operating costs and would be difficult to trace to clients.

7. Notice that 80 per cent of the professional staff cost is directly traceable to specific client projects. Give several
reasons that would explain why this figure isn’t 100 per cent.

P6.40 Process costing: university enrolments LO 6.9

Flagstaff University is exploring the possibility of outsourcing part or all of its enrolment function. This function involves three
separate processes:

(a) validation, where the new student’s secondary school results are sighted and the university’s offer of enrolment
is validated

(b) student records, where the student’s study program details for the current year are entered into the student
record system

(c) fees collection, where students pay their union fees and upfront course fees, if they choose to do so.

The annual costs of these three processes are:

Validatio
Cost n Student records Fees collection

Staff salaries $90 000 $60 000 $52 500

IT and other equipment depreciation 15 000 37 500 30 000

Equipment insurance 1 500 3 150 3 000

Telephone 1 650 4 950 3 000

Data processing 9 450 30 000 7 800

Postage 0 1 500 9 750

 Consumables 4 500 52 500 13 500

Electricity 1800 3600 3300

The university processes 14 000 student enrolments per year.

Required:

1. Calculate the cost per student enrolment for each process.

2. Calculate the total cost per student enrolment.

3. Does the total cost per student enrolment provide a reliable estimate of the costs incurred to process each enrolment?
Explain your answer.

4. Apart from informing its outsourcing decision, how might the university’s management use this information?

5. Would you recommend estimating service costs for all major student services in the university? Explain your answer.

P6.42 Estimating costs in a retail business LO 6.13

Partmate Pty Ltd is a retail business that sells car parts to customers who maintain their own cars. The company began
business on 1 January and the acquisition of the inventory of car parts during the year involved the following amounts:

Purchase price of merchandise $817 500

Goods and services tax on purchase of merchandise 81 750

Cost of inwards freight on merchandise 15 000

Trade discounts on merchandise 67 500

In addition to the cost of merchandise, the company incurred the following costs during the year:

  Cost

Staff salaries:  

Purchasing staff $60 000

Sales staff  157 500

Delivery driver (part-time)   22 500

Rent   45 000

Equipment depreciation and insurance     7 500

Telephone     4 950

 Computer software and hardware depreciation (inventory management system)   22 500

Data transfer (EDI order system)    9 000

Stationery and other consumables    4 500

Electricity    7 200

Required:

1. Estimate the cost of inventory purchased during the year.

2. Prepare an income statement for the company for the year assuming that, in pricing goods for sale, the company adds
a markup of 80 per cent on cost and that 90 per cent of the value of the inventory purchased during the year was
sold.

3. Suggest three ways in which the company could refine its costing system to provide more useful information for
managing its resources and creating value for its owners.

P7.39 Support department cost allocation: manufacturer LO 7.10

Finely Tuned Instruments manufactures gauges for the construction industry. The company has two production departments,
machining and finishing. There are also three support departments, human resources (HR), maintenance and design. The
budgeted overhead costs for the year for each department are as follows:

HR $300 000
 Maintenance 250 000

Design 350 000

Machining 800 000

Finishing 500 000

The budgeted machine hours for the machining department are 30 000, and the budgeted direct labour hours for the
finishing department are 15 000. These activities are used to allocate manufacturing overhead costs to products in the two
departments.

The usage of the support departments’ output for the year is as follows:

Provision of service output (hours of service)

  Provider of the service

User of the
service HR Maintenance Design

HR    – – –
 Maintenance 500 – –

Design 500 500 –

Machining 3 000 3 000 5 000

Finishing   6 000 4 500 3 000

Total 10 000 8 000 8 000

Required:

1. Use the direct method to allocate support department costs to production departments, and determine the
predetermined manufacturing overhead rates for the two production departments.

2. Explain the sequence that should be used to allocate the support department costs to production departments using
the step-down method.

3. Use the step-down method to allocate support costs to production departments, and determine the predetermined
manufacturing overhead rates for the two production departments.

P7.40 Support department cost allocation; departmental overhead rates; product costing: manufacturer LO
7.10

Opticon Ltd is developing departmental overhead rates based on machine hours for its moulding department and direct
labour hours for its assembly department. The moulding department has 20 machines that each run for 2 000 hours per
year. The assembly department employs 80 people, who each work 2 000 hours per year. The production-related overhead
costs distributed to the moulding and assembly departments are budgeted at $500 000 and $740 000, respectively. Two
support departments, repairs and engineering, directly support the two production departments, moulding and assembly.
These support departments have budgeted costs of $100 000 and $580 000, respectively. The production departments’
overhead rates cannot be determined until the support department costs are allocated. The following schedule reflects use of
the output of the repairs and engineering departments by the various departments.

  User departments

Repair
Support departments s Engineering Moulding Assembly

Repairs (repair hours) 0 2 000 3 000 15 000

Engineering (kilowatt hours) 250 000 0 850 000 150 000

Required:

1. (a) Calculate the overhead rates per machine hour for the moulding department and per direct labour hour for the
assembly department. Use the direct method to allocate support department costs.

(b) Estimate the overhead cost of a doodad, which is produced using 3 machine hours in the moulding department and 5
labour hours in the assembly department.
2. (a) Calculate the overhead rates per machine hour for the moulding department and per direct labour hour for the
assembly department. Use the step-down method to allocate support department costs. Allocate the repairs department
costs first.

(b) Now estimate the overhead cost of the doodad using the overhead rates estimated in part 2(a).