Heron Ltd has two Production Departments 1 and 2 and two ancillary Service Departments X and Y. The following are the expected overhead costs for the next 6 months: Overhead Total € Depreciation of equipment 20,000 Depreciation of factory buildings 24,000 Factory heating 8,000 Factory cleaning 4,000 Factory canteen 5,400 The following information relates to the Production and Service Departments of the Factory: Production Service Dept. 1 Dept. 2 Dept. X Dept. Y Volume in cubic metres 1,000 2,000 600 400 Floor area in square metres 800 600 400 200 Number of employees 140 100 70 50 Book value of equipment €10,000 €15,000 €9,000 €6,000 Machine hours 4,000 1,000 You are required to: (i) Calculate the overhead to be absorbed by each Department stating clearly the basis of apportionment used. (ii) Transfer the Service Department costs to Production Departments 1 and 2 on the basis of machine hours. (iii) Calculate a machine hour overhead absorption rate for Departments 1 and 2.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Heron Ltd has two Production Departments 1 and 2 and two ancillary Service Departments X and Y.
The following are the expected
Overhead Total
€
Depreciation of factory buildings 24,000
Factory heating 8,000
Factory cleaning 4,000
Factory canteen 5,400
The following information relates to the Production and Service Departments of the Factory:
Production Service
Dept. 1 Dept. 2 Dept. X Dept. Y
Volume in cubic metres 1,000 2,000 600 400
Floor area in square metres 800 600 400 200
Number of employees 140 100 70 50
Book value of equipment €10,000 €15,000 €9,000 €6,000
Machine hours 4,000 1,000
You are required to:
(i) Calculate the overhead to be absorbed by each Department stating clearly the basis of
apportionment used.
(ii) Transfer the Service Department costs to Production Departments 1 and 2 on the basis of
machine hours.
(iii) Calculate a machine hour overhead absorption rate for Departments 1 and 2.
(iv) Explain why it is necessary to transfer Service Department costs to Production Departments 1 and 2.
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