The company applies manufacturing overhead on the basis of machine hours. Budgeted overhead and machine activity for the year were anticipated to be $1,000,000 and 25,000 hours, respectively.



Question 1


Ola Ltd, which uses a job costing system, had two jobs in process at the start of the year: Job L1 ($68,000) and Job L2 ($30 000). The following information is available:

⦁ The company applies manufacturing overhead on the basis of machine hours. Budgeted overhead and machine activity for the year were anticipated to be $1,000,000 and 25,000 hours, respectively.

⦁ The company worked on three jobs during the first quarter (i.e. from 1 January to 31 March). Direct materials used, direct labour incurred and machine hours consumed were as shown in the following table:


Job numbers  Direct material  Direct labour  Machine hours

L1  $15,000  $30,000     900

L2       –  33,000  1,600

L3  45,000  65,000  2,000


⦁ Manufacturing overhead incurred during the first quarter was $215,000.

⦁ Ola Ltd completed Job L1 and Job L2 during the first quarter. Job L2 was sold on credit, producing a profit of $30,000 for the company.




⦁ Calculate the company’s predetermined overhead rate.


⦁ Calculate manufacturing overhead applied to production for the first quarter.


⦁ Determine the cost of jobs completed in the first quarter.


⦁ Determine the cost of the jobs still in process at the end of the first quarter.











Question 2


Dream Limited manufactures ice cream. The company employs a process costing system for its manufacturing operations. All direct materials are added at the beginning of the process and conversion costs are incurred uniformly throughout the process. The company’s production quantity schedule for January is as follow:


Unit (tubs)

Work in process on 1 January (55% complete as to conversion)      8,000

Units started during January             11,000

Total units to account for


Units from beginning work in process, which were completed and

transferred out during January             8,000

Unit started and completed in January           6,000

Work in process on 31 January (35% complete as to conversion)

Total units to account for




⦁ Calculate each of the following amounts:

⦁ Equivalent units of direct material during January. Use the FIFO method.

⦁ Equivalent units of conversion during January. Use the FIFO method.

⦁ Equivalent units of direct material during January. Use the weighted average method.

⦁ Equivalent units of conversion during January. Use the weighted average method.


⦁ Explain the major difference between weighted average and FIFO method in process       costing systems













Question 3


North-South Pole Company produces two products, a jacket suitable for adventure-seeking people (Spirit) and a jacket for less-adventurous people (Companion).


Production and Sales per year      20,000 units (Spirit) & 5,000 units (Companion)

Direct labour          3.5 hours per unit (both)

Direct labour cost        $32.00 per hour

Estimated annual manufacturing overhead  $285,000

Direct materials         $180 per unit (both)


Breakdown of overhead rates


Activity Cost Pools  Estimated Overhead  Expected Use of Cost Drivers per Activity  Activity Based Overhead Rates

Machine set-up    $  40,000  200  $?  per set-up

Sewing  $135,000  37,500 machine hours (MH)  $?  per MH

Inspection    $  25,000  1000  $?  per inspection



The breakdown between the two products for assigning overheads are as follows:


Product  No. of Set-ups  Sewing  Inspections

Spirit  105  23,500  500

Companion  95  14,000  500




From the following information, calculate the unit costs for “Spirit” and “Companion” using both the traditional method of costing (i.e. manufacturing overhead rate is based on units produced), and Activity based Costing.











Question 4


Wattle Limited has two divisions: Industry and Consumer. The Industry Division transfers partially completed components to the Consumer Division at a predetermined transfer price. The Industry Division’s standard variable production cost per unit is $500. This division could sell all its components to outside buyers at $650 per unit in a perfectly competitive market.


The Consumer Division has a special offer of $740 for its product. The Consumer Division incurs variable costs of $260 in addition to the transfer price for the Industry Division’s components. Both Industry and Consumer divisions currently have spare production capacity.



⦁ Determine a transfer price using the general transfer pricing rule.

⦁ Assume that the transfer price has been set at $530, is the Consumer Division manager likely to want to accept or reject the special offer? Why?

⦁ Is the decision in the best interests of Wattle Limited as a whole? Explain.





Question 5

You are the chief financial analyst of Hercules Manufacturing Limited. The company manufactures bowls and has been planning to aggressively expand its sales into the Middle Eastern markets. You have been tasked to analyse its reports using CVP and provide explanations to the Director, Tierra Muller.

The operating statement relating to the month ended September 30, 2019 of Hercules Manufacturing Limited is as follows:


$’000  $’000

Sales (22,000 units)    3,300

Direct materials  726

Direct labour  374

Production overheads  798

Total    1,898

Gross profit    1,402

Selling overheads    1,042

Net profit    360

The variable production overheads were $9 per unit while the variable selling overheads were $11 per unit.


⦁ Calculate the contribution margin per unit.

⦁ Calculate the breakeven sales in units, and provide one explanation on the usefulness of breakeven sales information.

⦁ Calculate the margin of safety in dollars and provide one explanation on the usefulness of margin of safety information.

⦁ The company has a capacity of 30,000 units per year. Management is not happy with the financial performance for the last year, and one course of action for the coming year were proposed in the recent management meeting:

• The sales manager believed that unit volume would increase by 30% with the incurrence of $200,000 on advertising.

Prepare a CVP income statement for the alternative (showing columns for totals only). Would you recommend this alternative and why?

⦁ The company has a target net income of $750,000. Assume additional advertising costs will be incurred, what is the required sales in dollars for the company to meet its target?





Question 6

Heath Production manufactures chairs. Several weeks ago, the company received an enquiry from Rose Limited. Rose wants to market a foldable chair similar to one of Heath’s, and has offered to purchase 11 000 units if the offer can be completed in three months. The cost data for Heath’s foldable chair is as follow:

Direct material    $16.40

Direct labour (0.125 @ $36 per hour)        4.50

Total manufacturing overhead      20.00

Total    $40.90

The normal selling price of Heath’s foldable chair is $53.00. However, Rose has offered Heath only $31.50 because of the large quantity it is willing to purchase. Rose requires a modification of the design that will allow a $4.20 reduction in direct material cost.

The production manager of Heath notes that the company will incur $7400 in additional setup costs and will have to purchase a $4800 special equipment to manufacturing the units for Rose. The equipment will be discarded once the special order is completed.

Total manufacturing overhead costs are applied to production at the rate of $40 per machine hour. The figure is based, in part, on budgeted annual fixed overhead of $1 500 000 and planned production activity of 60 000 machine hours (5000 hours per month).

Rose will allocate $3600 of existing fixed administrative costs to the order as “part of the cost of doing business”.



a) Which of the data above should be ignored in making the special order decision? For what reason?

⦁ Assume that Heath’s present sales will not be affected by the special order, should the order be accepted from the financial point of view? Show calculation.

⦁ Assume that Heath’s current production activity 80 per cent of planned machine hours, can the company accept the order and meet Rose’s deadline? Explain.



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