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MeeEnak Sdn Bhd produces “Instant Spicynoodle”. One of the main raw materials for the
product is the special spices that the company imports from Indonesia. The company orders the
spices 8 times a year.
Usage of special spices is on regular basis and on average half of the amount is held in the
inventory. The ordering cost which includes staffing cost incurred by the purchasing department
will amount to RM250 per order. The storage cost is RM5 per kg and insurance expenses
amounting to RM1.50 per kg.
Based on the company’s budget, for every 100 packets of “Instant Spicynoodle”, 0.5 kilograms
of the special spices are required. The planned production for the current year is 400,000 packets
of “Instant Spicynoodle”.
The operation manager has asked the cost accountant to review the current situation and consider
possible ways to save the operation cost to maximize the company’s profit.
Required :
a. Tabulate the relevant annual cost of placing 4, 5,6 and 8 orders per year. Determine the
Economic Order Quantity and the number of orders which should be placed in a year that would
minimize the total cost.
2∗𝑅𝑈∗𝑂𝐶
EOQ = ට
𝐻𝐶
2∗𝑅𝑈∗𝑂𝐶
EOQ ට
𝐶𝐶
2∗400 000∗𝑅𝑀250
ට
𝑅𝑀6.50
3) Ordering Cost
Ordering Cost = Fix ordering cost * Number of order per year
Ordering Cost = RM250 * 8
Ordering Cost = RM2 000
4) Carrying Cost
Carrying Cost = Carrying cost * EOQ/2
Carrying Cost = RM6.5 * 5 547/2
Carrying Cost = RM18 027.8
2∗𝑅𝑈∗𝑂𝐶
EOQ ට
𝐶𝐶
2∗400 000∗𝑅𝑀250
ට
𝑅𝑀6.50
c. Calculate any cost saving between the current policy and the Economic Order Quantity in (a).
Saving Cost :
= RM327 000
= RM306 972.2
For the ended 31 October 2018, the following overhead cost are incurred :
RM RM
Indirect Material
Cutting 8,800
Machining 6,760
Assembly 8,200
Administration 3,080
Store 1,600 28,440
Indirect wages and supervision
Cutting 5.600
Machining 6.800
Assembly 4,800
Administration 3,800
Store 1,400 22,400
Repair and Maintenance
Cutting 1,960
Machining 5,160
Assembly 580
Administration 240
Store 120 8060
Rental on building 26,400
Depreciation – plant 12,000
Depreciation – fittings 7,300
Utilities 15,000
Additional Information:
1. Actual direct labour costs and machine hours used for the production departments:
Direct labour costs Machine hours
Cutting RM43,200 (24,000 hours × RM1.80) 22 500
Machining RM30,000 (10,000 hours × RM3) 43 200
Assembly RM60,800 (30,400 hours × RM2) 12 000
Required:
a. Prepare an overhead analysis sheet. Use direct distribution method for reapportionment of
services department. All calculations are to be rounded up to the nearest RM.
Overhead Analysis Sheet.
Production centres Service centres
Item of Basis of Total Cutting Machining Assembly Administration Store
expenditure allocation (RM) (RM) (RM) (RM) (RM) (RM)
Indirect 28,440
Direct 8,800 6,760 8,200 3,080 1,600
materials
Indirect 22,400
wages and Direct 5,600 6,800 4,800 3,800 1,400
supervision
Repair and
Direct 8060 1,960 5,160
Maintenance 580 240 120
Rental on
Area 26,400 5,280 10,560 7,920 1,320 1,320
building
Depreciation – Value of
12,000 3,000 7,200 900 900 -
plant plant
Depreciation – Value of
7,300 1,460 730 2,920 1,460 730
fittings fittings
Notes :
Cutting Machining Assembly Administration Store
Administration 20 50 20 - 10
Store 20 60 10 10 -
Administration:
a) Cutting = 20 × 11,550 = 2,567
90
There is general acceptance that the time based methods (direct labor hours, machine hours and
to some extent direct labor cost) are more likely to reflect the load on a cost center as production
overheads.
In respect of capital intensive operations or machine related departments, machine hours’ base is
more appropriate since most of the overheads in these departments would be closely related to
machine hours. However, for labor intensive operations direct labor hours base is the most
appropriate method.
The beauty of a predetermined overhead rate is that is gives you a percentage to monitor on a
weekly, monthly or quarterly basis, with the amount of expense and base being relative and
proportionate to one another at any given moment in time. You can use production labor as your
base, or choose other bases that are relevant to your business such as production hours,
machining hours or production materials. For example, you can monitor the percentage of labor
benefits, production supplies and utility expense to the amount of labor spent in a given period.
A prudent business manager would not wait until the end of the year to calculate their actual
overhead rate. Rates should be calculated on a periodic basis and compared to the predetermined
rate as way to monitor expenses throughout the year in relation to corresponding production
bases. To monitor an overhead rate, actual costs are tabulated at a given time and the actual
overhead rate is calculated in the same fashion as the original budget.
If the actual overhead rate exceeds the predetermined rate, it's time to start examining expenses.
The quickest way to review them is to list all expenses in descending dollar value order. Then
research the details of the most expensive items first. Doing this on at least a monthly basis will
give management a good sense of where the most money is being spent and will allow time to
make spending adjustments, as necessary, to keep the actual rate in alignment with the
predetermined rate.
QUESTION 3 : JOB COSTING
Izy Style Company received an order, Job BG; from the Berjaya Group to refurbish its meeting
room which is to be completed in 10 days.
Direct labour consists of two skilled workers and three semi-skilled workers. Skilled workers
are paid RM30.00 per day and semi-skilled workers are paid RM20.00 per day.
The company also needs to lease a special sewing machine in order to complete the job. The cost
of leasing the machine is RM50.00 a day. Production overhead cost is 10% of prime cost while
selling distribution cost is 5% of the production cost.
Required:
Calculate the total cost of the job received by Izy Style Company and determine the selling price
for the job if the company decided to have a 40% profit margin.
1) There are three components of job cost: direct materials, direct labour and applied
overhead.
a) Direct Material :
Fabric Consumption (meter) Cost per meter (RM) Total
Antique satin 150 50.00 7,500
Raw silk 200 60.00 12,000
Ribbon lace 100 30.00 3,000
22,500
Direct Material = RM22,500
b) Direct Labour
# Direct labour consists of two skilled workers and three semi-skilled workers. Skilled workers
are paid RM30.00 per day and semi-skilled workers are paid RM20.00 per day.
c) Applied overhead.
The cost of leasing the sewing machine is RM50.00 a day.
RM50.00 x 10 day = RM500
Production overhead cost is 10% of prime cost
= 10% x RM23,700
= RM2,370
Distribution cost is 5% of the production cost.
= 5% x RM2,370
= RM119
2) Determine the selling price for the job if the company decided to have a 40% profit
margin.
Creative Enterprise started business on 1 December 2016. It manufactures only one type of
pockets calculator. The standard cost per unit of calculator is as follow:
RM
Direct labour 4.00
Direct material 9.00
Variable production overhead 2.00
Fixed production overhead 5.00
20.00
Other costs :
Fixed Administrative Expenses RM132,000 per annum
Variable Selling and Distribution Expenses 10% of sales
The fixed production overhead is absorbed based on a budget normal output of 34,800 units per
annum. Total fixed production overhead incurred for the financial year ending 30 November
2018 was RM174,000 and it was incurred evenly during the year.
Detail on production and sales of calculators for the year ended 30 November are as follow:
2017 2018
units units
Production 27,000 31,000
Sales 24,000 30,000
MARGINAL COSTING
RM RM
Sales revenue at RM27 each 1,458,000
Variable costs
Direct materials 522,000
Direct labour 232,000
Variable production overheads 116,000
Variable Selling & Distribution Expenses 145,800
1,015,800
Contribution per unit 442,200
Fixed costs :
Production overheads 290,000
Administrative Expenses 132,000
422,000
Net Profit 20,200
ii) Absorption Costing Approach
ABSORPTION COSTING
RM RM
Sales revenue at RM27 each 1,458,000
Variable costs
Direct materials 522,000
Direct labour 232,000
Variable production overheads 116,000
Production overheads 290,000
1,160,000
Gross Profit 298,000
Distribution & Administrative costs :
Variable 145,800
Fixed 132,000
277,800
Net Profit 20,200
b) Reconcile the difference in the profit under the two approaches.
When comparison of the results of absorption costing and marginal costing is undertaken, the
adjustment for under absorbed and / or over absorbed overheads becomes necessary. In
absorption costing, on the basis of normal level of activity, the fixed overhead rate is
predetermined. A situation of under‐absorption and/or over‐absorption arises when there is a
difference between actual level of activity and normal level of activity.
When inventory levels increase or decrease during a period then profits differ under absorption
and marginal costing.
If inventory levels increase, absorption costing gives the higher profit.
This is because fixed overheads held in closing inventory are carried forward (thereby reducing
cost of sales) to the next accounting period instead of being written off in the current accounting
period (as a period cost, as in marginal costing).
If inventory levels decrease, marginal costing gives the higher profit.
This is because fixed overhead brought forward in opening inventory is released, thereby
increasing cost of sales and reducing profits.
If inventory levels are constant, both methods give the same profit.
As shown above, the two methods used give the same profit and inventory levels are constant.
c) Explain two differences between Margin Costing and Absorption Costing
.
Differences between Margin Costing and Absorption Costing
Margin Costing Absorption Costing
Main use to help with short-term to calculate profit
decision-making in the forms • to calculate inventory
of valuation for financial
– break-even analysis statements
– margin of safety
– target profit
– contribution sales ratio
– limiting factors
– ‘special order’ pricing
• costs have to be identified as • not as useful in short-term
Limitions either fixed or variable decision-making as marginal
• all overheads have to be costing
recovered, otherwise a loss • may provide less accurate
will be made basis for calculation of
• not acceptable under IAS 2, selling prices where
Inventories overheads are high and
• calculation of selling prices complex in nature
may be less accurate than
other costing methods