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.
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|
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Rs
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Electricity :
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Power
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62,000
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Heating and lighting
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14,000
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Supervisory wages
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54,000
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Rent and rates
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21,000
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Insurance :
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Machinery
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16,740
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Premises
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7,000
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Depreciation of machinery
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41,850
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The given information should be used to evaluate the appropriate basis of apportionment for the year.
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Production Departments
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Service Departments
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Machining
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Assembly
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Maintenance
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Canteen
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Cost of machinery
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Rs 810,000
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Rs 27,000
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|
|
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Machine hours
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30000
|
6000
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|
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Power (kilowatt hours)
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75000
|
25000
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|
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Direct labour hours
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35000
|
105000
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|
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Number of employees
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20
|
60
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5
|
5
|
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Floor area (square metres)
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11000
|
8000
|
200
|
800
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The proportion of work done by the service departments is estimated to be:
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Machining
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Assembly
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Maintenance
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Canteen
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%
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%
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%
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%
|
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Maintenance
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65
|
25
|
|
10
|
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Canteen
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25
|
75
|
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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.