Question 12.7: A business consists of four cost centres: • Preparation depa...
A business consists of four cost centres:
• Preparation department
• Machining department
• Finishing department
• Human resources and training (HRT) department.
The first three product cost centres and the last renders a service to the other three. The level of service rendered is thought to be roughly in proportion to the number of employees in each product cost centre.
Overheads, and other data, for next month are expected to be as follows:
| $’000 | |
| Rent | 4,600 |
| Electricity to power machine | 3,000 |
| Electricity for heating and lighting | 1,800 |
| Insurance of building | 200 |
| Cleaning | 600 |
| Depreciation of machine | 2,000 |
| Total monthly salaries of the indirect workers: | |
| Preparation department | 600 |
| Machining department | 720 |
| Finishing department | 540 |
| HRT department | 540 |
The HRT department has a staff consisting of only indirect workers (including managers). The Other department have both indirect workers (including managers) and direct workers. There are 100 indirect workers within each of the four department and none does any ‘direct’ work.
Each direct worker is expected to work 160 hours next month. The number of direct workers in each department is:
| Preparation department | 600 |
| Machining department | 900 |
| Finishing department | 500 |
Machining department direct workers are paid $36 an hour, other direct workers are paid $30 an hour.
All of the machinery is in the machining department. Machines are expected to operate for 120,000 hours next month.
The floorspace (in square metres) occupied by the department is as follows:
| Preparation department | 16,000 |
| Machining department | 20,000 |
| Finishing department | 10,000 |
| HRT department | 2,000 |
Deducing the overheads, cost centre by cost centre, can be done, using a schedule, as follows:
|
$’000 |
Total
$’000 |
Prep’n
$’000 |
Mach’g
$’000 |
Fin’g
$’000 |
HRT $’000 |
|
| Allocated cost: | ||||||
| Machine power | 3,000 | 3,000 | ||||
| Machine depreciation | 2,000 | 2,000 | ||||
| Indirect salaries | 2,400 | 600 | 720 | 540 | 540 | |
| Apportioned cost | ||||||
| Rent | 4,600 | |||||
| Heating and lightings | 1,800 | |||||
| Insurance of building | 200 | |||||
| Cleaning | 600 | |||||
| Apportioned by floor area | 7,200 | 2,400 | 3,000 | 1,500 | 300 | |
| Cost centre overheads | 14,600 | 3,000 | 8,720 | 2,040 | 840 | |
| Reapportion HRT costs by number of staff (including the indirect workers) | 256 | 365 | 219 | (840) |
Now let us assume that the machining department overheads are to be charged to jobs on a machine hour basis, but that the direct labour hour basis is to be used for the other two departments. What will be the full (absorption) cost of a job with the following characteristics?
| Preparation
department |
Machining
department |
Finishing
department |
|
| Direct labour hours | 10 | 7 | 5 |
| Machining hours | _ | 6 | _ |
| Direct materials ($) | 185 | 20 | 20 |
This should be tackled as if each cost centre were a separate business, then departmental cost elements are added together for the job so as to arrive at the total full cost.
First, we need to deduce the indirect (overhead) recovery rates for each cost centre:
Preparation department (direct labour hour based):
$3,256,000/(600 × 160) = $33.91 per hour
Machining department (machine hour based):
$9,085,000/120,000 = $75.70 per hour
Finishig department (direct labour hour based):
$2,259,000/(500 × 160) = $28.24 per hour
The cost of the job is as follows:
| $ | $ | |
| Direct labour: | ||
| Preparation department (10 × $30) | 300.00 | |
| Machining department (7 × $36) | 252.00 | |
| Finishing department (5 × $30) | 150.00 | |
| 702.00 | ||
| Direct materials: | ||
| Preparation department | 185.00 | |
| Machining department | 20.00 | |
| Finishing department | 20.00 | |
| 225.00 | ||
| Overheads: | ||
| Preparation department(10 × $33.91) | 339.1 | |
| Machining department (6 × $75.70) | 454.2 | |
| Finishing department (5 × $28.24) | 141.2 | |
| 934.5 | ||
| Full cost of the job | 1,861.5 |