Question

Dehli Inkstone specializes in inkstone creation. Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound. (One pound contains 16 ounces.) Drilling requires 1 direct labor hours, for which workers are paid $10 per hour, and 40 minutes of machine time. The preliminary product (a ‘basic') is inspected to ensure that it is sound. Fifteen percent of the basics are rejected. It is not possible to rework these, and they have no salvage value. Each approved stone is handed to a master craftsperson who spends two hours making a ‘Standard' product or three hours creating a ‘Masterpiece'. Standards use half an hour of machine time and Masterpieces one hour. Finished inkstones are inspected again before packing. Four percent of finished products fail the final quality control assessment and are destroyed. Crafts persons are paid $18 per hour. It takes a ‘basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton, which cost 50 cents in materials and weigh 6 ounces in total.

Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted. Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.

Please calculate:

1.Material input needed for a Standard inkstones.

2. Machine hours needed for a Standard inkstones.

3. Direct labor hours needed for Masterpiece inkstones.

4. Please calculate the full (absorption) cost of both a Standard and Masterpiece inkstones, if direct labor hours are used as the cost driver? (Round overhead absorption rate to 3 decimal places).

Answer 1

Total direct labour hours = 97900

direct labour per basic inkstone = 1 hour

Total no of Inkstones = 97900/1 = 97900 Inckstones.

% of rejeccted inkstones = 15 %

No of inkstones after rejction = 97900*85% = 83215

No. of standard inkstones = 60% = 83215*60% = 49929

No of std inkstones ( after 4% rejection) = 47931

No of masterpieces = 83215 - 49929 = 33286

no of masterpieces (after 4% rejection) = 31954

1) Material input needed for Std inkstones = 49929*1.5 pounds = 74893 pounds

2) Machine hours needed for std inkstones

• In drilling = 40 minuts * 97900 * 60% = 39160 hours
• craftsman = 97900*60%*85%* 0.5 = 24965 hours

Total hours = 64125 hours

3) Direct labour hours needed = 33286*1 hour = 33286 hours

4) Absorption rate = 587400/97900 = 6/- per hour

Absorption cost of std = 49929*6 = 299574

Absorption cost of masterpiece = 33286*6 = 199716