Solutions to Questions Due on 17th Dec.2014

8/10/2019 Solutions to Questions Due on 17th Dec.2014

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Solutions to questions due on 17 Dec. 2014

Question 1:

In manufacturing, product costs comprise direct materials, direct labour and manufacturingoverhead. Direct materials and direct labour, as direct costs, can be traced to the cost object.

Manufacturing overhead, as an indirect cost, is allocated. In some service organisations, thesecost categories exist in much the same manner. However, many service organisations havelittle or no direct materials, and their main cost element is direct labour. All other costs aretreated as indirect or overhead costs, including minor materials and consumables used indelivering the service. In service organisations, upstream and downstream costs may also beincluded in overhead costs, as costing of services is not influenced by accounting standards.

Question 2

While the Australian accounting standards do not require disclosure of the cost of individualservices, it is nonetheless essential in many businesses that managers know the cost of theservices they provide. Knowing the cost of the services can help:

as a basis for setting fees for interior design services offered

to assess the profitability of each service

to determine which services to promote, refine or withdraw

to control costs (although, given the heterogeneity of services in many industries,

this may sometimes be of limited value).

Question 3

(a) Predetermined overhead rate based on direct labour costs.

costlabourdirectBudgeted

overheadBudgeted =

400$442

000106$1

= 250% of professional labour cost (rounded)

(b) Cost of services

Smith and Sons

Jones and

Partners

The Business

Centre

Labour typeHourly rate Hours Total Hours Total Hours Total

IT Trainee $20 50 $1 000 20 $ 400 70 $1 400

IT Graduate $ 50 100 5 000 140 7 000 80 4 000

SeniorConsultant

$150 15 2 250 10 1 500 20 3 000

Total labourcost

8 250 8 900 8 400

Overhead 20 625 22 250 21 000

Total cost $28 875 $31 150 $29 400


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(c) Management may use the cost information:

(a) as a basis for setting fees

(b) to assess the profitability of each service

(c) to decide on promotion, refinement, or withdrawal of services(d) to control costs.

(d) If Gotta Geek Ltd was using a billing system for estimating its service costs, it wouldestimate the cost of each consulting job by accumulating the amounts that the client isto be charged for the service rather than by accumulating the costs of each job. The

billing system would estimate the fees to be charged based on chargeout rates perbillable hour for each separate labour type, such as IT trainees, graduates and seniorconsultants, that has been consumed in providing the IT consulting services, rather thanusing one single predetermined overhead rate for the entire business to allocate

overhead costs to services.

Question 4

(a) Total cost of each program

Activity Total cost* A B C D

Healthcheck

$140 percheckup

$140 $140 $140

Bush walk $80 per hour 160 160 $160

Gym

workout

$240 per hour 240 480 240

Yoga class $140 per hour 70 140 70

Massage $140 per hour 35 70

$405 $450 $920 $470

*Total cost = labour cost + overhead application rate

(b) The resort managers may use the cost information:

(a) as a basis for setting fees

(b) to assess the profitability of each service(c) to decide on promotion, refinement or withdrawal of particular types of services

(d) to control costs.

(c) The different rate of overhead for each class of labour suggests that each rate has beencalculated individually by identifying the budgeted overhead for that particular activityand dividing it by the budgeted labour hours for the activity. This approach enables theresort to recognise that more overhead resources are used per hour of professionallabour in the gym and during the medical check up, possibly because of the expensiveequipment associated with these services. In contrast relatively few overhead resources

are consumed during the bush walk. If the resort had calculated a blanket rate for allactivities, the ratio between overhead and labour cost would have been constant. As can


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be seen by the differential in overhead rates, using a blanket rate would have concealedthe level of diversity in overhead costs.

(d) The price of each program using the chargeout rates.

Activity Total rate A B C D

Healthcheck

$168 percheckup

$168 $168 $168

Bush walk $96 per hour 192 192 192

Gymworkout

$288 per hour 288 576 288

Yoga class $168 per hour 84 168 84

Massage $168 per hour 42 84

$486 $540 $1104 $564

In-class question solutions:

6.23

1 c

2 a or b

3 c

4 d

5 e

6 c

7 d

8 c or e

9 c or e

6.38

1

Costs

% directly

traceable to

clients

Total

traceable

costs

($)

Professional staff salaries $2 400 000 80% $1 920 000Administrative supportstaff 400 000 60% 240 000Travel 250 000 90% 225 000Photocopying 50 000 90% 45 000

Other operating costs 100 000 70% 70 000Total $3 200 000 $2 500 000


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The total traceable costs for the coming year are $2 500 000.

Total over head = total costs traceable costs

= $3 200 000 2 500 000

= $700 000

2 Predetermined overhead rate based on directly traceable costs:

costsraceabledirectly tBudgeted

overheadBudgeted =

000500$2

000700$

= 28% of directly traceable costs

3 The percentage of cost (directly traceable and overhead) that WACS will add to eachjob:

costsTotal

profitDesired =000200$3

000640$

= 20% of total costs

4

Martin Manufacturing project Costs

($)Professional staff salaries 41 000Administrative support staff 2 600Travel 4 500

Photocopying 500Other operating costs 1 400Total direct costs (given) 50 000Plus overhead at 28% of traceablecosts 14 000Total costs 64 000

5 Martin Manufacturing would be billed $64 000 plus 20% profit markup. This amountsto $76800.

This approach taken by WACS may be described as a service costing system thatdetermines total cost by applying a single predetermined overhead rate for the business

based on the difference between directly traceable costs and total costs. The total costthen needs to be increased by a profit margin to determine the fee charged. A client

billing system would estimate the fee charged based on a chargeout rate per billablehour, which includes an allowance for overhead and for profit.

6 Other operating costs are likely to include depreciation of IT equipment, office furnitureand other fixtures; rent or depreciation of firm accommodation; advertising of services;utilities; general office consumables and possibly training and professional developmentcosts of staff. Such costs would be difficult to trace directly to services performed forclients.


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Solutions to Questions Due on 17th Dec.2014

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