- 15 Marks
MA – May 2019 – L2 – Q3a – Relevant cost and revenue
Discuss blanket overhead rate and prepare an overhead analysis sheet, including re-apportionment of service department costs.
Question
Bobich Ltd manufactures plastic containers for the pharmaceutical industry. The factory, in which the company undertakes all its production, has two production departments, namely: Cutting and Shaping, and two service departments, namely: Stores and Maintenance.
The information below was extracted from the company’s budget for its financial year ended 31 March 2019:
| Allocated Overhead Costs | GH¢ |
|---|---|
| Cutting Department (Cutting) | 14,000 |
| Shaping Department (Shaping) | 16,000 |
| Stores Department (Stores) | 3,500 |
| Maintenance Department (Maintenance) | 2,800 |
| Other Production Overheads | GH¢ |
|---|---|
| Factory rent | 525,000 |
| Factory building insurance | 70,000 |
| Plant & machinery insurance | 39,000 |
| Plant & machinery depreciation | 58,500 |
| Canteen subsidy | 150,000 |
| Direct Costs | GH¢ |
|---|---|
| Cutting Department | 144,000 |
| Shaping Department | 210,000 |
The following additional information is also provided:
| Cutting | Shaping | Stores | Maintenance | |
|---|---|---|---|---|
| Floor area (square meters) | 18,000 | 12,000 | 3,000 | 2,000 |
| Value of Plant & Machinery (GH¢) | 300,000 | 50,000 | 25,000 | 15,000 |
| Number of stores requisitions | 1,000 | 500 | – | – |
| Maintenance hours required | 2,700 | 2,000 | 300 | – |
| Number of employees | 34 | 60 | 4 | 2 |
| Machine hours | 12,000 | 2,200 | – | – |
| Labour hours | 9,000 | 15,000 | – | – |
Required:
i) Explain what is meant by the term “blanket overhead rate.” (2 marks)
ii) Prepare an overhead analysis sheet based on the above information. You must clearly state the basis used for any apportionments. (7 marks)
iii) Re-apportion the service department costs and calculate the most appropriate overhead rate for each department. (Rate should be calculated to two decimal places). (3 marks)
iv) State THREE (3) reasons why companies calculate pre-determined overhead absorption rates. (3 marks)
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