and two support departments, quality control and engineering. Departmental overhead rates are applied based on machine hours for the machining department and direct labour hours for the finishing department. The budgeted level of machine hours is 80,000 hours and the budgeted level of direct labour hours is 96,000 hours. The budgeted overhead costs are as follows: Quality Control Engineering Machining Finishing 280,000 330,000 640,000 776,000
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Exercise #3
Portgas Ltd manufactures two products, Light and Heavy. It has two production departments, machining and finishing, and two support departments, quality control and engineering. Departmental
|
Quality Control |
Engineering |
Machining |
Finishing |
|
280,000 |
330,000 |
640,000 |
776,000 |
The work done by support departments for other departments are as follows:
|
|
Quality Control |
Engineering |
Machining |
Finishing |
|
Quality Control |
5% |
40% |
55% |
|
|
Engineering |
15% |
55% |
30% |
Light requires direct material costing $10 per unit and direct labour costing $35 per unit. A unit of Light is produced using 3 machine hours in the machining department and 6 labour hours in the finishing department. Heavy requires direct material costing $24 per unit and direct labour costing $50 per unit. A unit of Heavy is produced using 4 machine hours in the machining department and 7 labour hours in the finishing department.
Required:
Calculate the unit product cost for Light and Heavy. Calculate the overhead cost per unit using the:
- Direct method.
- Step-down method.
- Reciprocal services method.
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