Question

1. Bell Franco Ltd. is currently using plantwide (blanket) overhead rate based on the machine hours of 250,000 hours to calculate its absorption rate of manufacturing overheads. The table 1 presents annual overhead costs of Bell Franco Ltd:

Description	£
Rent, heating and lighting of factory	400,000
Factory Insurance	200,000
Salary of factory manager and supervisor	100,000
Depreciation of factory machinery	250,000
Cleaning expenses[1]	75,000
Administrative overheads[2]	125,000
Selling overheads[3]	350,000

Table 1: Overhead costs

Due to recent expansion and competitive market condition, the company has decided to use the activity-based costing system from the new year. Based on the interviews of relevant personnel, the following activities have been determined.

	Order acquisition (%)	Material preparation (%)	Planning & layout (%)	Customer service (%)	Other (%)
Rent, heating and lighting of factory	0	40	50	0	10
Factory Insurance	20	30	35	0	15
Salary of factory manager and supervisor	30	25	30	5	10
Depreciation of factory machinery	10	20	50	0	20
Cleaning expenses	0	0	0	0	100
Administrative overheads	30	20	20	30	0
Selling overheads	40	0	0	50	10

The company has also estimated following measures of activity annually:

Activity measures	Quantity
Number of orders	4,000
Material handling	300,000 hours
Machine hours	250,000 hours
Number of customers	200

Required:

1. Using the existing costing system, what would be the company’s absorption rate of manufacturing overheads?
2. Calculate activity rates using the activity-based costing system and compare the results. Evaluate both costing systems (existing and upcoming). You may refer to the data above and relevant product costing.
3. Jane is a regular customer of the company and she placed 3 orders. Compute the product costs of the following job-order using the ABC system:

Direct material (£45 per kilo)	2,000 kgs.
Direct labour (£10/hour)	300 hours
Number of orders	3
Material handling	500 hours
Machine hours	600 hours

What would be the selling price if the company earns 25% profit on selling price?

                                                                                                                     

[1] 2/3^rd of the cleaning cost is spent for cleaning the factory floor. The rest is used for administrative building.

[2] It includes rent of the administrative building, hitting and lighting etc.

[3] It includes costs related to the marketing team’s salary, share of office rent, conveyance, business trips, advertisement etc.

Answer 1

Direct material =90000

Direct labour. =3000

Order Acquisition. =193.125

Material handling. =530

Machine hr. =1080

=94803.125

(+)25% profit. =31601.042

=126404.167