SATURNE: A MANUFACTURER OF KITCHEN EQUIPMENT

Purchases and Sales

Purchase of cast iron 12000 kg at € 24 / kg

Direct labour : melting working 0,5 hour per saucepan and 1 hours per frying pan
Direct labour is paid : € 20 / hours

Direct labour : finishing 1 hour per saucepan and 1,5 hours per frying pan.

Direct labour is paid : € 22,40 per hour

Consumption of cast iron 1 kg per saucepan and 2,2 kg per frying pan.

Sales rep. commission € 1,5 per article sold.

Production and Sales in May 2014

Sauce Pans Frying Pans

Production in May 4 000 3 000
Sales in May 3 850 3 000
Unit sales price € 80 € 100

Allocation Table for Overhead in May 2014

Operating Centres
Purchasing Melting Finishing Distribution
Total Secondary
3 000 20 000 10 000 15 000
Allocation (€)
Allocation (or Kg of cast iron N° of units
Direct labour hours € of sales
expenses) base purchase produced

QUESTIONS

i) Complete the allocation table above

ii) Calculate the fully allocated cost of raw materials purchased and comment
iii) Calculate the cost of production of finished goods and comment on the stock
iv) Calculate the fully allocated cost of goods manufactured
v) Calculate the fully allocated cost of goods sold
vi) Prepare the income statement for the month and give a conclusion. Don’t forget to
include the distribution allocation in your final income statement. Calculate the sales
price per unit, the full cost per unit (‘cout de revient’) and the profit per unit.
ALLOCATION TABLE

Operating Centres
Purchasing Melting Finishing Distribution
Total Secondary
3 000 20 000 10 000 15 000
Allocation (€)
Allocation (or Kg of cast iron N° of units
Direct labour hours € of sales
expenses) base purchase produced
Allocation base
units 12 000 kgs 5 000 hrs 7 000 units 608 000 €

€ 0,25 per Kg cast € 4 per hour of € 1,428 per unit € 0,02467 per € of
Allocation
iron purchased direct labour produced sales
melting

Did you see how I calculated : I used the allocation (or expense) base as the rule, looked back to
the data to find the underlying figure and then made the allocation calculation by a simple division
eg. € 3000 of overhead in purchasing, rule to share it out is according to how many kgs of cast
iron are bought : total purchase of cast iron is 12 000 – so 3000 / 12000 = € 0,25. This means, of
course, that I will include an extra € 0,25 per kg as a cost of raw materials in the next step !.

Notice also that the rule for melting shop overhead was ‘split according to the hours of direct
labour’. I did this – but I only looked at direct labour hours in the melting shop itself ! There was,
of course, some direct labour in finishing – but I am using a different allocation rule there.

STEP 2 : FULLY ALLOCATED COST OF RAW MATERIALS PURCHASED.

Only thing to remember here is to include the allocation from the table above !.

- full cost of purchase of raw materials : cast iron 12 000 x (24 + 0,25) = € 291 000

Notice that the allocation is just included as another layer of cost.

STEP 3 :  STOCK TABLE : RAW MATERIALS AVCO METHOD

We know how much raw materials we purchased in May. We can work out how much is cast iron
is consumed from the production data above

 4000 saucepans produced x 1 kg per saucepan = 4 000

 3000 frying pans produced x 2,2 kg per frying pan = 6 600
 TOTAL CAST IRON CONSUMED 10 600
 CAST IRON Units Unit price Total

Beginning Stock 0 0 0

Purchased 12 000 24,25 291 000

TOTAL AVAILABLE 12 000 24,25 291 000

Consumed 10 600 24,25 257 050

End Stock 1 400 24,25 33 950

Conclusion from this table :

 Cost of raw materials consumed : cast iron : € 257 050
 Stock on balance sheet : cast iron : € 33 950

Of course, we can split this per product as follows :

 Saucepans : 4 000 kg consumed at € 24,25/ kg € 97 000
 Frying pans : 6 600 kg consumed at € 24,25/ kg € 160 050
Concerning the stocks on the balance sheet, they have increased to 1 400 tonnes.

STEP 3 ; Fully Allocated Cost of Goods Manufactured

I decided to calculate the cost of goods manufactured product by product – so I’m going to split
between saucepans and frying pans. This is not strictly necessary – but it’s a good exercice.

SAUCEPANS

Cost of raw materials consumed € 97 000

Direct labour melting 2 000 hours x (€ 20) € 40 000
Allocation overhead labour 2 000 hours x (€ 4) € 8 000
Direct labour Finishing 4 000 x € 22,40 € 89 600
Overhead allocation Finishing 4 000 units produced x 1,43 € 5 714

TOTAL € 240 314

FRYING PANS

Cost of raw materials consumed : € 160 050

Direct labour melting 3 000 hours x (€ 20) € 60 000
Allocation overhead melting 3 000 hours x € 4 € 12 000
Direct labour finishing 4 500 hours x € 22,40 € 100 800
Overhead allocation Finishing 3 000 units produced x 1,43 € 4 286

TOTAL € 337 136

Total cost of goods manufactured is € 577 450 representing a unit cost of goods manufactured of :

For saucepans : € 240 314 / 4000 = € 60,08 per unit for saucepans
For frying pans : € 337 136 / 3000 = € 112,38 per unit for frying pans.

I think they already have a problem : cost of good manufactured for frying pans is higher than
their sales price ! This company must be making losses. This cost of goods manufactured is the
figure used for the final allocation in the allocation table.

STEP 4 : Fully allocated cost of goods sold.

STOCK TABLE : FINISHED GOODS (AVCO METHOD)

SAUCE PANS Units Unit price Total

Beginning Stock 0 0 0

Purchased 4 000 60,08 240 314

TOTAL AVAILABLE 4 000 60,08 240 314

Consumed 3 850 60,08 231 303

End Stock 150 60,08 9 012

FRYING PANS Units Unit price Total

Beginning Stock 0 0 0

Purchased 3 000 112,38 337 136

TOTAL AVAILABLE 3 000 112,38 337 136

Consumed 3 000 112,38 337 136

End Stock 0 0 0

Note that for frying pans : since there is no variation of stock (stock at 0 at the beginning and at
the end) the cost of goods manufactured and the cost of goods sold must be the same/

Fully allocated cost of goods sold : Saucepans : € 231 303

Frying pans : € 337 136

TOTAL COST OF GOODS SOLD € 568 438

This cost of goods sold includes all of the allocation that correspond to manufacturing overhead.
Note, however, that we have not yet included the allocation for distribution – nor the sales rep.
commission. These will be included in the final income statement.

STEP 5 : Draw up an income statement for the month.

All we need to do now is calculate a sales figure, include our cost of goods sold and, of course, not
forget the last allocation expense : the admin expense added calculated on the allocation base of
the cost of goods manufactured and the sales rep commission.

So our income statement is as follows :

Saucepans :

Sales 3 850 units x € 80 € 308 000

Fully Allocated COGS (from the stock table) (€ 231 302)

Allocation admin 308 000 x 0,02467 (€ 7 599)

Sales commission 3 850 x 1,5 (€ 5 775)

Profit € 63 323

Profit margin (in % of sales) 20,56%

Frying Pan

Sales 3 000 units x € 100 € 300 000

Fully Allocated COGS (from the stock table) (€ 337 136)

Allocation admin 300 000 x 0,002467 (€ 7 401)

Sales commission 3 000 x 1,5 (€ 4 500)

Profit / (loss) (€ 49 037)

Profit margin (in % of sales) - 16,3%

In conclusion, as we noted before, this company has a real problem with the frying pan product
which is generating a loss on a fully allocated basis. I think they need to do some serious work
looking at the sales price and the cost structure of the frying pan line – and perhaps even start to
think about abandoning frying pan production.