Question

QUESTION 1 [25] FIFO Limited has gathered the following information: Dept A R600 000 Dept B R300 000 Dept C R150 000 R200 000 R150 000 1 200 2 000 400 Value of machinery Material usage Floor area (m²) Number of employees Machine hours Kilowatt-hours 500 300 100 1 000 8 000 5 000 9 000 7 000 2 000 Departments A and B are production departments, and department C is a service department. Machine hours are used as a basis for the secondary allocation. The following expenses were incurred during the first production year. Insurance on buildings R120 000 Depreciation of machinery R75 000 Cafeteria costs R37 500 Water and electricity R115 500 Required: a) Allocate the overheads to the different departments. Show both the primary as well as the secondary allocation of the overheads. (20) b) Calculate the overhead allocation rates for Department A based on material usage, and for Department B, based on machine hours. (5)

A&b

Answer 1

Answer:

Overhead cost Total Cost Cost driver units Cost per cost driver A B C Insurance on buildings 120,000 3600 33.33 66,667 40,000 13,333 Depreciation | 75,000 10,50,000 0.0714 42,857 21,429 10,714 Cafeteria cost 37,500 900 41.67 20,833 12,500 4,167 Water and electricity 115,500 | 18,000 6.4167 57,750 44,917 12,833 Total 348,000 188,107 118,846 41,047

This is the Primary allocation of overhead

Note : Cost per cost driver unit = Total cost/ total Cost driver

For secondary allocation, Machine hours are basis.

So we allocate, servuy department costs to production department based on machine hours

For Production Dept A = (Total costs / Total machine hours of A & B) x Machine hours of A

= (41,047/13,000) x 5,000

= 15,787

For production department B = (41,047/13,000) x 8,000

= 25,260

Also, Calculating overhead allocation rate for department A based on material usage

Dept A = (Total Cost / Total Materials)

= (188,107+15,787) / 200,000

= (203,894) / 200,000

= 101.947% of material cost or 1.01947

Dept B = (Total Cost / Total Materials)

= (118,846+25,260) / 8,000

= (144,106) / 8000

= 18.013 per machine hour