Absorption costing is a method for accumulating the costs associated with a production process and apportioning them to individual products. This type of costing is required by the accounting standards to create an inventory valuation that is stated in an organization's balance sheet. A product may absorb a broad range of fixed costs and variable costs. These costs are not recognized as expenses in the month when an entity pays for them. Instead, they remain in inventory"as*aneasset until such time as the inventory is sold; at that point, they are charged to the costiofgoods soldiThe Components of Absorption Costing The key costs assigned to products under an absorption costing system are noted below. Direct Materials Direct materials are materials that are included in a finished product. Direct Labor Direct labor includes the factory labor costs required to construct a product. Variable Manufacturing Overhead Variable manufacturing overhead includes the costs to operate a manufacturing facility, which vary with production volume. Examples are supplies and electricity for production equipment. Fixed Manufacturing Overhead Fixed manufacturing overhead includes the costs to operate a manufacturing facility, which do not vary with production volume. Examples are rent and insurance.2032 S High Fech Limited mmufacurerofSealextric oy cre. Whey two cst cenites, assembly and finishing, and information is avallable as follow, Indirect Costs ont Centres Assembly | Finishing $ 3 Production supervisor slary 5000 500 ‘Apponioued costs 9750 | is290 @ Toral Indirect Cost Resembby Case Cnbee Prod: Supersisoe Salary S800 Prepoctioned Cost 156 gi Use the information given inthe table above to calculate he total indirect ost for EACH Finishing Cost Centra Prd: Sup. Salang Boa Aeporhioned Cott 16 250 # 20,865(©) Thetotl production hours forthe hotness are as follows b Cont Contes Production Hours Gay | ey s s Labour hows LH) 3500 | 2500 Machine hows (| soo 1500 ional formation +The assembly cost conte operates ong Tkbour hou tensive asi. +The fishing cost eenue operates on a machine hours ass State the Formula 9 calculate the oveshend absorption at (OAR), Overheod Msocper Rate Lome) Estinated Overhead (lndicect Cost) Bethe Estimated Cat Anver Volume, Siete Murs(ii) Calculate the overhead absorption rate (OAR) for EACH cost centre. Assembly (est Conive Estimated Oh iy 150 ladoour hours ea ong = Hal Fiosing Cost Cortre Fetimated yh, 20 ¢50 Mocrine Yours ~ 1500 one = \3-G0High Tech Limited has received an order for some ONE toy car requires the use of (EKG The breakdown of the remaining production details is as follows. -alextric toy cars. Th Assembly ishing 8 s Labour hours @ $25 per hour sasnean | Sse Machine hours, S hours 2 hours (©) Use the spaces provided in the tables on pages 25 and 26 to calculate and arrive atthe total ‘cost of producing ONE Scalextric toy car. Remember to apply your previously ealeulated OARS forthe two cost centres appropriately. Cal wolion* of Total Unit (ask Per Car , a 8 = So (matennt (ost Suactity Xx (ost X10 Per wnt)b Praduton Hows Calsuatons Assembly [Finishing | Production Hours Com Centre | Cost Centre Total Cont Labour hours 3.16 x| 3:S0x “as Boo | 25-00 | '* 295x | 2.00% Machioe ours al B40 43-60 Totals 14-55 | 5.35 | 224HES Overall Total Cost of Producing One Toy Car TaN Geet Marlo cost 60.00 Production hours total cst 22y.€S Oreralwtalcost] ATTY. E S| marks)(@ High Tech Limited has a 50% mark-up poliey, (Define the term ‘markup pricing’ 4 Cost based Prema > Priam vased on he cast bo prodaua Qa ProductGi) Calculate the total dollar value of the mark-up on ONE Scalextric toy car. Cost prte gar Car = aa Te i KX Mark ~up pecwontage = Sef c a (i mark) Gi) Calculate the selling price of ONE Scalextric toy car. SC ctting Pevce CP per Gr $F Mack We DTUES + (37.648 (@marks) > AMID. AS *2. Ellerslie is the owner of The Wedding Cake Maker. She uses absorption costing to price her products. Ellerslie has provided the following information on costs. @) @ Place a check mark (’) in the relevant column of the table, to indicate whether the cost items are direct or indirect production costs. Cost Items/Overheads Direct Indirect Salary of the cake decorator x Rent for the factory Machine depreciation Cost of the raw materials used to make the customized cakes v (4 marks)Gi) The following details are available about indireet costs for the decorations department. Decorations Department Indirect Overheads s | Allocated costs 17 000 Apportioned costs 3.000 Calculate the total indirect costs for the decorations department, Show all working, Decorations Department — Total Indirect Costs/Overheads Toad ndicecke cost Ritoroked Cesk s £ Peppectoned Costs Neco Beo0o BO SSS. (2 marks)(©) The following details are available about the production hours spent for labour and iuchinery in the decorations department cost centre o w Decorations Department Details for December 2023 | Tots! Hours Machine hours (MI) 400 Direct labour hours (DL) 100 ‘State which is the dominant factor in the decor tabulated information above. a Macht 1s department, based on the SEES. “ mari) Using the information from (a) rate for applying overhead costs clearty. i) om page 10 and (b) (), aleulate an abvorpion the decorations department. Show all w ome = sr. Oy Ede Capt Ariver volume 2 eso §=6—= Ase lay foo NKIn December 2022, Ellerslie received an order for a customized wedding cake and incurred the following costs in its production. Direct Materials Costs $450 Direct Labour Costs $1250 20 hours || indirect Machine Hours Spent Bool © @__Use the absorption rate calculated in (b) (ii) on page 11 to work out the indirect overheads/costs for | order. OAS % Madrine Yours spud Sox 20 =H10coGi) In the space provided below, calculate the total production cost for this order. Overall Total Production Cost Total Cost for Special Order $ Direct materials total cost uso Direct labour total cost { Se Indirect overheads total cost ;oo0o Total production cost £ajqoeo (4 marks)“The Wedding Coke Maker has amas ROHEYORSISI @® Calculate the selling price for this special wedding cake order. Show all working clearly. ce + Mack we a Cost Pe 2700 Mack up (Bf 2) _\3S0_ Sing gece & er @ marks) © Essa, the head cake maker, i given th job of making the customized wedding eake. Its the company’s policy to pay its workers using the “pieoe rats” sytem, List ONE advantage ofthe piece rate system as a method of payment. a tea ds, Wore, {2 Rawd.9.0, Hoo. work war dong. (mark) ‘Total 20 marks