Reference no: EM131061777

A local manufacturing firm produces three product lines, namely X, P and D.

You are required to accumulate the product cost (i.e. Material, Labour and Overhead) for product line X, as at the end of the month of April.

The three product lines consume resources of the firm's two production departments, Departments A and B. A Departmental approach is used to apply overhead using direct labour hours (DLH) as cost driver.

The firm's cost accounting system traces the actual direct costs to the product line, and allocates the actual overhead costs to the product line at the end of each month.

You are provided with the following information (a) to (c) for the month of April for Product line X:

a) The following refer to Dept A:

• 400 kg of Material Y were issued from stores to Dept A.
• 76 DLH were worked in Dept A at a basic wage of $4.50/DLH. The overtime premium paid on 6 of these hours were attributed to the high level of production in the firm. Overtime premium was paid at 50% of the basic wage.

b) The following refer to Dept B:

• 300 kg of Material Z were issued from stores to Dept B.
• Dept B returned 30kg of Material Z to the storeroom as excess to production requirements.
• 110 DLH were worked in Dept B at a basic wage of $4/DLH. The overtime premium paid on 30 of these hours were attributed to rush work in Product line P. Overtime premium was paid at of 40% of the basic wage.

c) Dept B damaged 5 kg of Material Z, which was then disposed. This loss of 5kg of Material Z was treated as occurring outside the normal production process, and was treated as a period cost.

Additional operational cost information for the month of April for Product lines X, P and D:

	Dept A	Dept B
	$	$
DM issued from stores *	6,500	13,730
DM returned to stores	135	275
DL at basic wage rate #	9,090	11,200
Indirect labour at basic wage rate	2,420	2,960
Overtime premium ^^	450	120
Lubricants and cleaning compounds	520	680
Maintenance	720	510
Other	1,200	2,150
* In Dept B, this includes Material Z that was disposed. # All DL in Dept A is paid a basic wage of $4.50/DLH, and in Dept B, $4/DLH. Dept A's direct labour includes a total of 20 hours spent on rectification work for Product lines X, P and D: records are not maintained on actual hours spent on corrective work for each line. ^^all the overtime premium in Dept B was incurred to complete rush orders in Product lines P and D.

The following data pertains to stock movement in April: stock is valued using the weighted average approach (the weighted average method was taught in ACFI 1002)

	Material Y	Material Z
Opening stock (April 1)	1,050 kg (valued at $529.75)	6,970kg (valued at $9,946.50)
Purchases	i) 600kg at $0.50/kg ii) 500kg at $0.50/kg iii) 400 kg at $0.52/kg	16,000 kg at $1.46/kg
Issues from stores	1,430 kg	8,100 kg
Returns from stores	-	30 kg

Required:

i) List of all direct and indirect costs that should be assigned to Product line X.

In the case of indirect costs, you must first identify the indirect costs, then calculate and apply the overhead rates to Product line X.

Calculate the total product cost of Product line X from these calculations.

ii) For each of the items in your list in (i), explain why you have treated it as direct or indirect. Your explanation should demonstrate (a) your ability to apply the theory informing whether costs are categorised as direct or indirect, (b) your ability to combine this theory with relevant information provided in the case facts. (24 marks for i and ii)

iii) This firm uses departmental overhead rates to allocate indirect costs to product lines. You are required to explain the following;

a) What is the plant-wide overhead rate? Is it different from departmental overhead rates? Explain how this rate is calculated in your answer to the second question.

b) Which is a better method to allocate overhead? Explain in full.