Prepare a statement to show the total production overheads, Financial Accounting

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Aristo Ltd uses a system of absorption costing. The product passes through a machining department and an assembly department before it is completed. The assembly department is labour intensive and machining department is capital intensive;.

The company's cost accountant has calculated the following overhead costs for the financial year ended 31 May 2010.

 

 

Rs

Electricity :

Power

62,000

 

Heating and lighting

14,000

Supervisory wages

 

54,000

Rent and rates

 

21,000

Insurance :

Machinery

16,740

 

Premises

7,000

Depreciation of machinery

 

41,850

The given information should be used to evaluate the appropriate basis of apportionment for the year.

 

Production Departments

Service Departments

 

Machining

Assembly

Maintenance

Canteen

Cost of machinery

Rs 810,000

Rs 27,000

 

 

Machine hours

30000

6000

 

 

Power (kilowatt hours)

75000

25000

 

 

Direct labour hours

35000

105000

 

 

Number of employees

20

60

5

5

Floor area (square metres)

11000

8000

200

800

The proportion of work done by the service departments is estimated to be:

 

Machining

Assembly

Maintenance

Canteen

 

%

%

%

%

Maintenance

65

25

 

10

Canteen

25

75

 

 

It is the company policy to apportion the maintenance department's costs between the other three departments to remove those costs before apportioning the canteen costs between the production departments.

Required:

a) Create a statement to show the total production overheads for each production department, showing the basis of apportionment selected.

b) Determine an overhead absorption rate for each production department, using the most suitable basis of absorption.

c) What is activity Based Costing and how does it differ from traditional absorption costing?

d) Describe four differences between financial and management accounting.


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