“Jackson Manufacturing and Trading Company Limited produces several kitchen products, one of which is a Jack grinder. One Jack grinder has a prime cost of £3.2, which includes 15 minutes of direct labour (costed at £8.2 per hour). Each unit uses 20 minutes of machine time. The company’s management accountant has estimated the following totals for the coming financial year, 2019: Machine hours available in the factory 40,000 hours Direct labour hours available 80,000 hours Total production overheads £340,000” “Required:” “What is the estimated production cost of one Jack grinder if:” “production overheads are absorbed on the basis of machine hours? production overheads are absorbed on the basis of labour hours? “The managing director of Jackson Manufacturing and Trading Company Limited has very little knowledge about the overhead application. You are required to provide a brief explanation for the following questions: “Why do companies use predetermined overhead rates rather than actual manufacturing overhead costs to apply overhead to jobs? “What is a plantwide overhead rate? Why are multiple overhead rates, rather than a plantwide overhead rate, used in some companies?
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
“Jackson Manufacturing and Trading Company Limited produces several kitchen products, one of which is a Jack grinder. One Jack grinder has a prime cost of £3.2, which includes 15 minutes of direct labour (costed at £8.2 per hour). Each unit uses 20 minutes of machine time.
The company’s
|
Machine hours available in the factory |
40,000 hours |
|
Direct labour hours available |
80,000 hours |
|
Total production |
£340,000” |
“Required:”
- “What is the estimated production cost of one Jack grinder if:”
- “production overheads are absorbed on the basis of machine hours?
- production overheads are absorbed on the basis of labour hours?
- “The managing director of Jackson Manufacturing and Trading Company Limited has very little knowledge about the overhead application. You are required to provide a brief explanation for the following questions:
- “Why do companies use predetermined overhead rates rather than actual
manufacturing overhead costs to apply overhead to jobs?
- “What is a plantwide overhead rate? Why are multiple overhead rates, rather than a plantwide overhead rate, used in some companies?
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