ack & Kerry (Pty) Limited has been in the manufacturing business for more than 10 years and has been making iron fencing rods used in specialised fencing. The manufacturing process has been mainly manual using machinery for basic tasks. After the managers’ strategic meeting at the end of 2019, the company decided to automate operations and to start using palisade bars in palisade fencing. The palisade bars are becoming popular, attracting a demand of 10 000 units per year. The demand for fencing rods is 40 000 units per year. The iron rod takes an hour of direct labour to produce, while the more complex palisade bar takes two direct labour hours to produce. Overhead costs are being allocated on the basis of direct labour hours. Overheads have been estimated at $1 020 000 for 2021, and the production will be scheduled to cater for the above demand. Unit costs for material and labour are as follows: Iron rod Palisade bar Direct material $32.00 $45.00 Direct labour $8.00 $16.00 In spite of the popularity of palisade bars, the company’s profits for 2020 did not grow in response to the automation, and the directors are beginning to think that automation was a big mistake. One of the managers then decided to investigate the overhead cost in detail and produced the following details of costs and activities that drive the costs: Cost pool Cost Activity Machine set-ups $408 000 2 400 Purchase orders $87 000 600 Machine hours $210 000 17 500 Maintenance requests $315 000 1 500 TOTAL $1 020 000 She also investigated the events and found the following pattern with the two products: Machine set-ups for the palisade bar is double that of the iron rod. Purchase orders for the iron rod are 5 times more than for the palisade bar. 40% of the total machine hours are spent on iron rods, and the rest on palisade bars. The ratio of the maintenance requests for iron rods and palisade bars is 13 to 17. REQUIRED TO: A.) Calculate the pre-determined overhead rate for 2021 and determine the cost to manufacture one unit of each product using the traditional costing approach. B.) What are the factors that make the palisade bar more costly to produce than the iron rod.
Question 1
Jack & Kerry (Pty) Limited has been in the manufacturing business for more than 10 years and has been making iron fencing rods used in specialised fencing. The manufacturing process has been mainly manual using machinery for basic tasks. After the managers’ strategic meeting at the end of 2019, the company decided to automate operations and to start using palisade bars in palisade fencing.
The palisade bars are becoming popular, attracting a demand of 10 000 units per year. The demand for fencing rods is 40 000 units per year. The iron rod takes an hour of direct labour to produce, while the more complex palisade bar takes two direct labour hours to produce. Overhead costs are being allocated on the basis of direct labour hours.
Unit costs for material and labour are as follows:
|
|
Iron rod |
Palisade bar |
|
Direct material |
$32.00 |
$45.00 |
|
Direct labour |
$8.00 |
$16.00 |
In spite of the popularity of palisade bars, the company’s profits for 2020 did not grow in response to the automation, and the directors are beginning to think that automation was a big mistake. One of the managers then decided to investigate the overhead cost in detail and produced the following details of costs and activities that drive the costs:
|
Cost pool |
Cost |
Activity |
|
Machine set-ups |
$408 000 |
2 400 |
|
Purchase orders |
$87 000 |
600 |
|
Machine hours |
$210 000 |
17 500 |
|
Maintenance requests |
$315 000 |
1 500 |
|
TOTAL |
$1 020 000
|
|
She also investigated the events and found the following pattern with the two products: Machine set-ups for the palisade bar is double that of the iron rod. Purchase orders for the iron rod are 5 times more than for the palisade bar. 40% of the total machine hours are spent on iron rods, and the rest on palisade bars. The ratio of the maintenance requests for iron rods and palisade bars is 13 to 17.
REQUIRED TO:
A.) Calculate the pre-determined overhead rate for 2021 and determine the cost to manufacture one unit of each product using the traditional costing approach.
B.) What are the factors that make the palisade bar more costly to produce than the
iron rod.
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