Allocation and Apportionment of Overheads and Job and Batch Costing Solution

Question 20
(a)
(i) Value of issues to production on 5 March
Issued 3 000 kilos
1 500 @ 1.9 = 2 850
1 500 @ 1.92 = 2 880
Value of issues to production 5 730

(ii) Value of issues to production on 23 March

Issued 4 500 kilos
2 000 @ 1.92 = 3 840
2 000 @ 1.95 = 3 900
500 @ 2.00 = 1 000
Value of issues to production 8 740

(iii) Value of closing inventory at 31 March

Kilos
Opening inventory raw materials 1 500
Add purchases raw materials (3 500 + 2 000 + 1 500) 7 000
8 500
Less raw materials transferred to production (3 000 + 4 500) (7 500)
Closing inventory raw materials 1 000

Value of closing inventory = 1 000 @ 2 = $2 000

(b) Advantages of using FIFO

- Easy to calculate
- Inventory value is closer to current market value
- It is acceptable by IAS 2 for valuation of inventory for preparation of financial statements

(c) Apportionment of budgeted overhead costs

Total $ Production cost centres Service cost centre
Machining Assembly Stores
$ $ $
Depreciation 9760 6344 1952 1464
Heat and light 13850 8310 4155 1385
Machinery Maintenance 6500 5200 1300
Total overheads apportioned 30110 19854 7407 2849
Re-Apportionment of stores 2137 712 (2849)
Total overheads cost 30110 21991 8119 0

(d) Overhead absorption rate

OAR Machining = Budgeted overheads / Budgeted machine hours
= 21 991 / 13 400 = $1.64 per machine hour

OAR Assembly = Budgeted overheads / Budgeted labour hours

= 8 119 / 6 300 = $1.29 per labour hour
(e) Statement to show total selling price
Direct Labour (2.5 X 4) 10.00
Direct Materials (3 X 2) 6.00
Prime Cost 16.00
Add Overheads
- OAR Machining (1.64 X 1.5) 2.46
- OAR Assembly (1.29 X 2.0) 2.58 5.04
Cost per unit 21.04
X number of units 200
Total cost 4 208
Add mark-up (25 % X 4 208) 1 052
Selling price 5 260

(f) A discount of 10 % will result in a selling price of $4 734 [5 260 – (10 % X 5 260)] being charged. A profit
of $526 (4 734 – 4 208) will still be made. Total profit of the business will increase, and the factory will be
able to use the spare capacity available.
Accepting a lower price might cause other customers to be unhappy since they will be getting the goods at a
higher price. There is risk of losing customers. Other customers might also request discount. This will reduce
total profit of the business.
An additional profit of $526 is being made. It is advisable to accept the offer.