Fundamenetal Issues on Management Accounting

1.  Somerset Ltd manufactures components for the motor industry.

In one of its workshops it has three workers, Joe, Jack and Jonny, who at any one time work on batches of the same component. The standard time allowed to produce one unit is one hour.

The workers rate of pay is £10 per hour. They work a 38 hour week, any additional hours receiving a premium of 50%. Each period is 4 weeks.

The workers share equally in a bonus scheme which rewards them for efficient production. Time saved during a period is paid at a rate of 80% of the normal rate of pay. The calculation for the bonus is the difference between expected production time for actual output and actual production time for actual output.

During the most recent period the hours worked were:

                  Joe                         165

                  Jack                        165

                   Mo                         170        

Production in the period was 560 units.

Produce a statement for the period showing the actual labour cost for the period.  Show basic pay, overtime premium, and bonus earned by each worker and in total.

How should the overtime premium be treated in the cost accounts?

2.   Somerset Ltd is reviewing the method it uses for valuing its material issues and stock. Identify three popular methods it might employ and, assuming there are rising price levels, explain how each deals with valuing issues of materials and stock. Describe the characteristics of each method.

3.  Somerset Ltd estimated the following indirect costs for the year.

     £

Indirect wages                                               300,000

Repairs and maintenance                               16,000

Rent and rates                                              20,000

Depreciation of machinery                               40,000

Electricity - power                                           30,000 

Sundries                                                       38,150

                                                                   444,150

The following information relates to the company's two production and two service departments for the year.

 

Production Departments

Service Departments

 

Machinery

Finishing

Maintenance

Canteen

Machine cost (£)

300,000

100,000

-

-

Machine hours

15,000

1,000

-

-

Power usage (%)

80%

20%

-

-

Floor area (sq. metres.)

1,500

400

50

50

Number of employees

17

8

3

2

Sundries (£)

19,600

17,350

1,200

-

Direct labour hours

4,000

17,250

 

 

 

 

 

 

 

The proportion of work done by the service departments

 

Machinery

Finishing

Maintenance

Canteen

Maintenance (%)

60

40

-

-

Canteen (%)

60

30

10

-

Calculate an appropriate overhead absorption rate for each production department stating and using suitable bases for apportioning the factory indirect costs.

4.  Actual figures for the period are as follows:

                                                         Machinery                          Finishing

Indirect costs (£)                                310,000                               137,500

Direct labour hours                             4,200                                  16,800

Machine hours                                   16,080                                 1,100

(a)          Calculate the under/over absorption of overheads for each production department for the period.

(b)         Explain how an unsatisfactory method of overhead absorption can adversely affect the profits of a business.

5.            Somerset Ltd has been asked to quote for a job. It aims to make a net profit of 40% on the sales price. The estimated costs for the job are as follows:

Direct materials                                                £400

Direct labour                                      15 hours at £10 per hour

Production overheads                  

To be recovered using the rates calculated in Question 3.

Machining Department                 30 Machine hours

Finishing Department    15 Direct labour hours

Other costs in relation to selling, distribution and administration are recovered at a rate of £200 per job.

Calculate the quote for the job.

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