- 20 Marks
IMAC – MAY 2021 – L1 – Q5 – Cost Segregation and Estimation | Forecasting | Standard Costing and Variance Analysis
Apportionment of service center costs to production departments and calculation of direct materials price variance.
Question
a) A company is preparing its annual budget and it is estimating the number of units of Product W that would be sold in each quarter of year 2. Past experience has shown that the trend for sales of the product is represented by the following relationship:
y = a + bx where: y = quantity of sales units in the quarter a = 15,000 b = 3,000 x = the quarter number where 1 = quarter 1 of year 1
Actual sales of Product W in year 1 were affected by seasonal variations and were as follows:
| Quarter | Actual Sales Units |
|---|---|
| 1 | 20,250 |
| 2 | 19,425 |
| 3 | 25,200 |
| 4 | 24,300 |
Required: Calculate the expected unit sales of Product W for each quarter of year 2, after adjusting for seasonal variations using the multiplicative model. (6 marks)
b) The records of direct labour hours and total factory overhead cost of Cooper Limited over the first six months of its operations are given below:
| Month | Direct Labour Hours | Total Factory Overheads (GH¢000) |
|---|---|---|
| September | 50,000 | 14,800 |
| October | 80,000 | 17,000 |
| November | 120,000 | 23,800 |
| December | 40,000 | 11,900 |
| January | 100,000 | 22,100 |
| February | 60,000 | 16,150 |
Management is interested in distinguishing between the fixed and variable portions of the overheads.
Required: Using the least square regression method, estimate the variable cost per direct labour hour and the total fixed cost per month. (9 marks)
c) State and explain the methods used in setting: i) Direct Material Cost Standard. (2.5 marks) ii) Direct Labour Cost Standard. (2.5 marks)
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