Question Tag: Overhead Allocation

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FM – Nov 2021 – L3 – Q1 – Strategic Cost Management

Analyze costs and investment requirements for Femi Appliances Ltd's new motor vehicle vacuum cleaner product line.

Question

Femi Appliances Limited (FAL) is a Nigerian-based manufacturer of household appliances with many distribution centers across various locations in Nigeria and along the ECOWAS sub-region. FAL is now considering the development of a new motor vehicle vacuum cleaner – VC4.

The product can be introduced quickly and has an expected life of four years, after which it may be replaced with a more efficient model. Costs associated with the product are estimated as follows:

Direct Costs (per unit):

Labour:
- 3.5 skilled labour hours at ₦500 per hour
- 4 unskilled labour hours at ₦300 per hour
Materials:
- 6 kilos of material Z at ₦146 per kilo
- Three units of component P at ₦480 per unit
- One unit of component Q at ₦640
Other variable costs: ₦210 per unit

Indirect Costs:

Apportionment of management salaries: ₦10,500,000 per year
Tax allowable depreciation of machinery: ₦21,000,000 per year
Selling expenses (excluding salaries): ₦16,600,000 per year
Apportionment of head office costs: ₦5,000,000 per year
Rental of buildings: ₦10,000,000 per year
Annual interest charges: ₦10,400,000
Other annual overheads: ₦7,000,000 (includes building rates ₦2,000,000)

If the new product is introduced, it will be manufactured in an existing factory, having no effect on rates payable. The factory could be rented out for ₦12,000,000 per year to another company if the product is not introduced.

New machinery costing ₦86,000,000 will be required, depreciated on a straight-line basis over four years with a salvage value of ₦2,000,000. The machinery will be financed by a four-year fixed-rate bank loan at 12% interest per year. Additional working capital requirements may be ignored.

The new product will require two additional managers at an annual gross cost of ₦2,500,000 each, while one current manager (₦2,000,000) will be transferred and replaced by a deputy manager at ₦1,700,000 per year. Material Z totaling 70,000 kilos is already in inventory, valued at ₦9,900,000.

FAL will utilize the existing advertising campaigns for distribution centers to also market the new product, saving approximately ₦5,000,000 per year in advertising expenses.

The unit price of the product in the first year will be ₦11,000, with projected demand as follows:

Year 1: 12,000 units
Year 2: 17,500 units
Year 3: 18,000 units
Year 4: 18,500 units

An inflation rate of 5% per year is anticipated, with prices rising accordingly. Wage costs are expected to increase by 7% per year, and other costs (including rent) by 5% annually. No price or cost increases are expected in the first year of production.

Income tax is set at 35%, payable in the year the profit occurs. Assume all sales and costs are on a cash basis and occur at the end of the year, except for the initial purchase of machinery, which would take place immediately. No inventory will be held at the end of any year.

Required:

a. Calculate the expected internal rate of return (IRR) associated with the manufacture of VC4. Show all workings to the nearest ₦million. (19 Marks)

b. i. Explain what is meant by an asset beta and how it differs from an equity beta. (2 Marks)
ii. Given the company’s equity beta is 1.2, the market return is 15%, and the risk-free rate is 8%, discuss whether introducing the product is advisable. (4 Marks)

c. The company is concerned about a potential increase in corporate tax rates. Advise the directors by how much that the tax rate would have to change before the project is not financially viable. A discount rate of 17% per year may be assumed for part (c). (5 Marks)

Answer

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Tags: Cost Analysis, Depreciation, Financial strategy, Investment Appraisal, Labour Costs, Material Costs, Overhead Allocation, Product Development, Profitability analysis, Strategic Decision-Making
Level: Level 3

Topic: Strategic Cost Management

PM – May 2017 – L2 – SA – Q2 – Costing Systems and Techniques

Calculate profit per motorcycle type using existing and ABC methods and evaluate costing methods for overhead absorption.

Question

Sadet Nigeria Limited assembles three types of motorcycles at the same factory: the 50cc Prelude, the 100cc Roadmaster, and the 150cc Roadstar. Sadet has invested in manufacturing technology to reduce labor costs in response to market demands.

Historically, Sadet used direct labor hours to allocate overhead costs. Now, they are considering activity-based costing (ABC).

Motorcycle Data:

Requirements:

a. Calculate the total profit for each of Sadet’s three motorcycle types, using:

i. The existing overhead allocation method based on labor hours.
ii. Activity-Based Costing (ABC).
(14 Marks)

b. Write a report for Sadet’s directors as a Management Accountant, evaluating the labor hours versus activity-based costing methods in Sadet’s circumstances.
(6 Marks)

Answer

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Tags: Activity-Based Costing, Cost Drivers, Overhead Allocation, Profit Analysis
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2017

MI – Nov 2020 – L1 – SA – Q11 – Costing Techniques

Identify the method that allocates overhead to products based on activities that give rise to costs.

Question

Which of the following attributes support overhead to products using the activities which give rise to the cost?

A. Activity based costing

B. Absorption costing

C. Marginal costing

D. Standard costing

E. Activity based budgeting

Answer

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Tags: Activity-Based Costing, Cost Management, Overhead Allocation
Level: Level 1

Topic: Costing Techniques
Series: NOV 2020

MI – Nov 2015 – L1 – SA – Q6 – Costing Techniques

Determines the appropriate basis for apportioning joint security costs among shop owners.

Question

The Management of Tejuosho Shopping Mall incurred a certain amount of money as joint security cost for the month of October 2014. What will be the most appropriate basis of apportioning this cost amongst the individual shop owners in the mall?
A. Value of inventory held in each store/shop
B. Cost of equipment in each shop
C. Number of workers in each shop
D. Floor area occupied by each shop
E. Turnover recorded by each shop

Answer

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Tags: Cost Apportionment, Joint Costs, Overhead Allocation
Level: Level 1

Topic: Costing Techniques
Series: NOV 2015

MI – May 2022 – L1 – SB – Q1 – Costing Methods

Prepare an overhead analysis to allocate costs to production and service departments.

Question

A small manufacturing company has three production and two service departments. The following data were extracted from the company’s records:

	Total	Spinning & Weaving	Processing	Finishing	Maintenance	Stores
Rent & Rates (₦)	6,000,000
Electricity (₦)	5,400,000
Canteen Exp (₦)	420,000
Maintenance Exp (₦)	2,780,000				2,780,000
Stores Expenses (₦)	1,431,000					1,431,000
Area Occupied (Sq.m)	12,000	3,500	2,500	3,000	2,000	1,000
Energy Consumed (Kw/h)	10,000	3,000	3,000	2,000	1,500	500
No. of Employees	120	40	20	30	20	10
No. of Requisition	2,700	600	500	790	800	10
Plant Value (₦)	55,600,000	25,000,000	15,000,000	15,000,000	600,000
Apportionment Rate 1	100	35%	30%	30%		5%
Apportionment Rate 2	100	25%	20%	30%	25%

You are required to prepare the overhead analysis allocating and apportioning costs to the three production departments and giving the last four digits from the reciprocal apportionment to the Spinning & Weaving department.

Answer

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Tags: Costing, Departmental Costs, Overhead Allocation
Level: Level 1

Topic: Costing Methods
Series: MAY 2022

MI – May 2023 – L1 – SA – Q9 – Costing Techniques

This question asks for the calculation of the machine hour rate based on given data.

Question

Where machine hours is 7,200 hours, machine set-up time allowed is 720 hours and works overhead is ₦32,400. What is the machine hour rate?
A. ₦2
B. ₦3
C. ₦4
D. ₦5
E. ₦6

Answer

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Tags: Cost Calculation, Machine Hour Rate, Overhead Allocation

Topic: Costing Techniques
Series: MAY 2023

MI – Mar-Jul 2020 – L1 – SA – Q2 – Costing Methods

Identify the incorrect method of allocating service department costs.

Question

In a manufacturing set-up, the service department provides services to other service departments as well as the production department. Which of the following is NOT a method of allocating the service department cost?

A. Specified order of closing
B. Repeated distribution method
C. Indirect allocation method
D. Simultaneous equation method
E. Matrix method

Answer

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Tags: Cost Allocation, Cost Management, Costing Methods, Overhead Allocation, Service Department
Level: Level 1

Topic: Costing Methods
Series: MAR/JULY 2020

MI – May 2016 – L1 – SA – Q5 – Costing Methods

Calculate the absorption rate using Direct Labour for product YZ based on the given data.

Question

The following data were extracted from the records of ABCYZ Limited in respect of its product YZ:
The absorption rate using Direct Labour is
A. N2.00
B. N8.00
C. N12.00
D. N24.00
E. N40.00

Answer

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Tags: Absorption Rate, Costing, Direct Labour, Overhead Allocation
Level: Level 1

Topic: Costing Methods
Series: MAY 2016

MA – Nov 2017 – L2 – Q3 – Activity-based costing

Calculate the prime cost, profit per unit using both absorption and activity-based costing, and comment on the differences and limitations.

Question

Bonti Ltd produces three different products using two production departments. The company currently uses Absorption Costing to establish product costs and profitability. The Directors have recently attended a conference on Activity Based Costing (ABC) and are examining whether ABC might provide a better system for Bonti Ltd.

The following budgeted information for the period ended 31 December 2017 has been collated for each of the three products:

Product	Taya	Maya	Paya
Production and Sales (units)	8,750	4,000	6,000
Unit sales price (GH¢)	56	106	84
Direct materials	1.5kg	6kg	7kg
Direct labour:
– Machine Department (hours per unit)	1 hour	8 hours	6 hours
– Assembly Department (hours per unit)	4 hours	3 hours	1 hour
Direct expenses (GH¢ per unit)	2	6	3
Machine Department (machine hours per unit)	2 hours	5 hours	4 hours

Raw material costs GH¢4 per kilo, and the hourly rate for all labour is GH¢5. The direct expenses relate entirely to specialized packaging, which is uniquely designed for each of the products and is therefore directly attributable to that product alone.

The current costing system absorbs overheads to the Machine and Assembly Departments on the basis of a recovery rate of GH¢3.50 per machine hour and GH¢1 per labour hour respectively.

The following is an analysis of the overheads by department:

Department	Overheads (GH¢)
Purchasing Department	22,400
Production Set-up & Design Dept	34,500
Customer Service Department	32,600
Machine Department	123,000
Assembly Department	26,500

The Departmental Managers have provided the following additional information about operations in their departments:

Activity	Taya	Maya	Paya	Total
Number of set-ups	10	10	30	50
Number of customer orders	80	86	160	326
Number of purchase orders	30	32	50	112

The Machine Department is capital intensive, and the Assembly Department is labour intensive.

Required:

a) Calculate the prime cost for each product.
b) Calculate the profit per unit for each product if overheads are absorbed on the Current Costing basis.
c) Calculate the profit per unit for each product if overheads are absorbed using an Activity Based Costing approach. Clearly identify any cost drivers you assign.
d) Comment on why there is a difference between the profit/loss shown on an Absorption Costing basis and that shown using Activity Based Costing.
e) Identify THREE limitations of Activity Based Costing.

Answer

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Tags: ABC Limitations, Cost Drivers, Overhead Allocation, Prime Cost, Profit Analysis
Level: Level 2

Topic: Activity-based costing
Series: NOV 2017

MA – July 2023 – L2 – Q3a – Activity-Based Costing

This question involves calculating the cost driver rates and overhead cost per unit using the Activity-Based Costing (ABC) technique for three products under the 1D1F policy.

Question

The following three products are produced by a company under the “1D1F” policy with additional information provided.

Product	Cee	Dee	Gee
Units	4,000	6,000	4,800
Labour hours per unit	3	2.5	1.5
Number of units in a batch	400	500	600
Number of machine hours per unit	4	5	7

The annual overheads have been grouped under three headings:

Overhead Category	Amount (GH¢)
Labour related	45,000
Batch related	69,000
Machine related	120,000

Required:
i) Using the Activity Based Costing (ABC) technique, calculate the Cost Driver Rates for each group of overheads.
(6 marks)

ii) Calculate the overhead cost per unit of product “Cee” under the ABC technique.
(4 marks)

Answer

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Tags: Activity-Based Costing, Cost driver rates, Overhead Allocation
Level: Level 2

Topic: Activity-based costing
Series: JULY 2023

FM – Nov 2021 – L3 – Q1 – Strategic Cost Management

Analyze costs and investment requirements for Femi Appliances Ltd's new motor vehicle vacuum cleaner product line.

Question

The product can be introduced quickly and has an expected life of four years, after which it may be replaced with a more efficient model. Costs associated with the product are estimated as follows:

Direct Costs (per unit):

Labour:
- 3.5 skilled labour hours at ₦500 per hour
- 4 unskilled labour hours at ₦300 per hour
Materials:
- 6 kilos of material Z at ₦146 per kilo
- Three units of component P at ₦480 per unit
- One unit of component Q at ₦640
Other variable costs: ₦210 per unit

Indirect Costs:

Apportionment of management salaries: ₦10,500,000 per year
Tax allowable depreciation of machinery: ₦21,000,000 per year
Selling expenses (excluding salaries): ₦16,600,000 per year
Apportionment of head office costs: ₦5,000,000 per year
Rental of buildings: ₦10,000,000 per year
Annual interest charges: ₦10,400,000
Other annual overheads: ₦7,000,000 (includes building rates ₦2,000,000)

FAL will utilize the existing advertising campaigns for distribution centers to also market the new product, saving approximately ₦5,000,000 per year in advertising expenses.

The unit price of the product in the first year will be ₦11,000, with projected demand as follows:

Year 1: 12,000 units
Year 2: 17,500 units
Year 3: 18,000 units
Year 4: 18,500 units

Required:

a. Calculate the expected internal rate of return (IRR) associated with the manufacture of VC4. Show all workings to the nearest ₦million. (19 Marks)

Answer

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Tags: Cost Analysis, Depreciation, Financial strategy, Investment Appraisal, Labour Costs, Material Costs, Overhead Allocation, Product Development, Profitability analysis, Strategic Decision-Making
Level: Level 3

Topic: Strategic Cost Management

PM – May 2017 – L2 – SA – Q2 – Costing Systems and Techniques

Calculate profit per motorcycle type using existing and ABC methods and evaluate costing methods for overhead absorption.

Question

Historically, Sadet used direct labor hours to allocate overhead costs. Now, they are considering activity-based costing (ABC).

Motorcycle Data:

Requirements:

a. Calculate the total profit for each of Sadet’s three motorcycle types, using:

i. The existing overhead allocation method based on labor hours.
ii. Activity-Based Costing (ABC).
(14 Marks)

b. Write a report for Sadet’s directors as a Management Accountant, evaluating the labor hours versus activity-based costing methods in Sadet’s circumstances.
(6 Marks)

Answer

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Tags: Activity-Based Costing, Cost Drivers, Overhead Allocation, Profit Analysis
Level: Level 2

Topic: Costing Systems and Techniques
Series: MAY 2017

MI – Nov 2020 – L1 – SA – Q11 – Costing Techniques

Identify the method that allocates overhead to products based on activities that give rise to costs.

Question

Which of the following attributes support overhead to products using the activities which give rise to the cost?

A. Activity based costing

B. Absorption costing

C. Marginal costing

D. Standard costing

E. Activity based budgeting

Answer

Find Related Questions by Tags, levels, etc.

Tags: Activity-Based Costing, Cost Management, Overhead Allocation
Level: Level 1

Topic: Costing Techniques
Series: NOV 2020

MI – Nov 2015 – L1 – SA – Q6 – Costing Techniques

Determines the appropriate basis for apportioning joint security costs among shop owners.

Question

Answer

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Tags: Cost Apportionment, Joint Costs, Overhead Allocation
Level: Level 1

Topic: Costing Techniques
Series: NOV 2015

MI – May 2022 – L1 – SB – Q1 – Costing Methods

Prepare an overhead analysis to allocate costs to production and service departments.

Question

A small manufacturing company has three production and two service departments. The following data were extracted from the company’s records:

	Total	Spinning & Weaving	Processing	Finishing	Maintenance	Stores
Rent & Rates (₦)	6,000,000
Electricity (₦)	5,400,000
Canteen Exp (₦)	420,000
Maintenance Exp (₦)	2,780,000				2,780,000
Stores Expenses (₦)	1,431,000					1,431,000
Area Occupied (Sq.m)	12,000	3,500	2,500	3,000	2,000	1,000
Energy Consumed (Kw/h)	10,000	3,000	3,000	2,000	1,500	500
No. of Employees	120	40	20	30	20	10
No. of Requisition	2,700	600	500	790	800	10
Plant Value (₦)	55,600,000	25,000,000	15,000,000	15,000,000	600,000
Apportionment Rate 1	100	35%	30%	30%		5%
Apportionment Rate 2	100	25%	20%	30%	25%

Answer

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Tags: Costing, Departmental Costs, Overhead Allocation
Level: Level 1

Topic: Costing Methods
Series: MAY 2022

MI – May 2023 – L1 – SA – Q9 – Costing Techniques

This question asks for the calculation of the machine hour rate based on given data.

Question

Where machine hours is 7,200 hours, machine set-up time allowed is 720 hours and works overhead is ₦32,400. What is the machine hour rate?
A. ₦2
B. ₦3
C. ₦4
D. ₦5
E. ₦6

Answer

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Tags: Cost Calculation, Machine Hour Rate, Overhead Allocation

Topic: Costing Techniques
Series: MAY 2023

MI – Mar-Jul 2020 – L1 – SA – Q2 – Costing Methods

Identify the incorrect method of allocating service department costs.

Question

A. Specified order of closing
B. Repeated distribution method
C. Indirect allocation method
D. Simultaneous equation method
E. Matrix method

Answer

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Tags: Cost Allocation, Cost Management, Costing Methods, Overhead Allocation, Service Department
Level: Level 1

Topic: Costing Methods
Series: MAR/JULY 2020

MI – May 2016 – L1 – SA – Q5 – Costing Methods

Calculate the absorption rate using Direct Labour for product YZ based on the given data.

Question

The following data were extracted from the records of ABCYZ Limited in respect of its product YZ:
The absorption rate using Direct Labour is
A. N2.00
B. N8.00
C. N12.00
D. N24.00
E. N40.00

Answer

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Tags: Absorption Rate, Costing, Direct Labour, Overhead Allocation
Level: Level 1

Topic: Costing Methods
Series: MAY 2016

MA – Nov 2017 – L2 – Q3 – Activity-based costing

Calculate the prime cost, profit per unit using both absorption and activity-based costing, and comment on the differences and limitations.

Question

The following budgeted information for the period ended 31 December 2017 has been collated for each of the three products:

Product	Taya	Maya	Paya
Production and Sales (units)	8,750	4,000	6,000
Unit sales price (GH¢)	56	106	84
Direct materials	1.5kg	6kg	7kg
Direct labour:
– Machine Department (hours per unit)	1 hour	8 hours	6 hours
– Assembly Department (hours per unit)	4 hours	3 hours	1 hour
Direct expenses (GH¢ per unit)	2	6	3
Machine Department (machine hours per unit)	2 hours	5 hours	4 hours

The current costing system absorbs overheads to the Machine and Assembly Departments on the basis of a recovery rate of GH¢3.50 per machine hour and GH¢1 per labour hour respectively.

The following is an analysis of the overheads by department:

Department	Overheads (GH¢)
Purchasing Department	22,400
Production Set-up & Design Dept	34,500
Customer Service Department	32,600
Machine Department	123,000
Assembly Department	26,500

The Departmental Managers have provided the following additional information about operations in their departments:

Activity	Taya	Maya	Paya	Total
Number of set-ups	10	10	30	50
Number of customer orders	80	86	160	326
Number of purchase orders	30	32	50	112

The Machine Department is capital intensive, and the Assembly Department is labour intensive.

Required:

Answer

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Tags: ABC Limitations, Cost Drivers, Overhead Allocation, Prime Cost, Profit Analysis
Level: Level 2

Topic: Activity-based costing
Series: NOV 2017

MA – July 2023 – L2 – Q3a – Activity-Based Costing

This question involves calculating the cost driver rates and overhead cost per unit using the Activity-Based Costing (ABC) technique for three products under the 1D1F policy.

Question

The following three products are produced by a company under the “1D1F” policy with additional information provided.

Product	Cee	Dee	Gee
Units	4,000	6,000	4,800
Labour hours per unit	3	2.5	1.5
Number of units in a batch	400	500	600
Number of machine hours per unit	4	5	7

The annual overheads have been grouped under three headings:

Overhead Category	Amount (GH¢)
Labour related	45,000
Batch related	69,000
Machine related	120,000

Required:
i) Using the Activity Based Costing (ABC) technique, calculate the Cost Driver Rates for each group of overheads.
(6 marks)

ii) Calculate the overhead cost per unit of product “Cee” under the ABC technique.
(4 marks)

Answer

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Tags: Activity-Based Costing, Cost driver rates, Overhead Allocation
Level: Level 2

Topic: Activity-based costing
Series: JULY 2023

Question Tag: Overhead Allocation

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FM – Nov 2021 – L3 – Q1 – Strategic Cost Management

Analyze costs and investment requirements for Femi Appliances Ltd's new motor vehicle vacuum cleaner product line.

Direct Costs (per unit):

Indirect Costs:

Required:

You're reporting an error for "FM – Nov 2021 – L3 – Q1 – Strategic Cost Management"

PM – May 2017 – L2 – SA – Q2 – Costing Systems and Techniques

Calculate profit per motorcycle type using existing and ABC methods and evaluate costing methods for overhead absorption.

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MI – Nov 2020 – L1 – SA – Q11 – Costing Techniques

Identify the method that allocates overhead to products based on activities that give rise to costs.

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MI – Nov 2015 – L1 – SA – Q6 – Costing Techniques

Determines the appropriate basis for apportioning joint security costs among shop owners.

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MI – May 2022 – L1 – SB – Q1 – Costing Methods

Prepare an overhead analysis to allocate costs to production and service departments.

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MI – May 2023 – L1 – SA – Q9 – Costing Techniques

This question asks for the calculation of the machine hour rate based on given data.

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MI – Mar-Jul 2020 – L1 – SA – Q2 – Costing Methods

Identify the incorrect method of allocating service department costs.

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MI – May 2016 – L1 – SA – Q5 – Costing Methods

Calculate the absorption rate using Direct Labour for product YZ based on the given data.

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MA – Nov 2017 – L2 – Q3 – Activity-based costing

Calculate the prime cost, profit per unit using both absorption and activity-based costing, and comment on the differences and limitations.

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MA – July 2023 – L2 – Q3a – Activity-Based Costing

This question involves calculating the cost driver rates and overhead cost per unit using the Activity-Based Costing (ABC) technique for three products under the 1D1F policy.

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FM – Nov 2021 – L3 – Q1 – Strategic Cost Management

Analyze costs and investment requirements for Femi Appliances Ltd's new motor vehicle vacuum cleaner product line.

Direct Costs (per unit):

Indirect Costs:

Required:

You're reporting an error for "FM – Nov 2021 – L3 – Q1 – Strategic Cost Management"

PM – May 2017 – L2 – SA – Q2 – Costing Systems and Techniques

Calculate profit per motorcycle type using existing and ABC methods and evaluate costing methods for overhead absorption.

You're reporting an error for "PM – May 2017 – L2 – SA – Q2 – Costing Systems and Techniques"

MI – Nov 2020 – L1 – SA – Q11 – Costing Techniques

Identify the method that allocates overhead to products based on activities that give rise to costs.

You're reporting an error for "MI – Nov 2020 – L1 – SA – Q11 – Costing Techniques"

MI – Nov 2015 – L1 – SA – Q6 – Costing Techniques

Determines the appropriate basis for apportioning joint security costs among shop owners.

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MI – May 2022 – L1 – SB – Q1 – Costing Methods

Prepare an overhead analysis to allocate costs to production and service departments.

You're reporting an error for "MI – May 2022 – L1 – SB – Q1 – Costing Methods"

MI – May 2023 – L1 – SA – Q9 – Costing Techniques

This question asks for the calculation of the machine hour rate based on given data.

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MI – Mar-Jul 2020 – L1 – SA – Q2 – Costing Methods

Identify the incorrect method of allocating service department costs.

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MI – May 2016 – L1 – SA – Q5 – Costing Methods

Calculate the absorption rate using Direct Labour for product YZ based on the given data.

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MA – Nov 2017 – L2 – Q3 – Activity-based costing

Calculate the prime cost, profit per unit using both absorption and activity-based costing, and comment on the differences and limitations.

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MA – July 2023 – L2 – Q3a – Activity-Based Costing

This question involves calculating the cost driver rates and overhead cost per unit using the Activity-Based Costing (ABC) technique for three products under the 1D1F policy.

You're reporting an error for "MA – July 2023 – L2 – Q3a – Activity-Based Costing"

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