Question

Question 2 TAG Metallic Inc. deals in main products, Metallic Doors and Window Frames. There have been recent concerns about profit fluctuations, and there are concerns whether the products are appropriately costed and priced.TAG Metallic uses a cost margin pricing policy and uses a pre-determined overhead absorption rate based on direct labour hours for Doors and machine hours for Windows. The rate is calculated at the start of the year based on the following information:- Production overhead GHS 1,500,000 Direct labour hours 60,000 Machine hours 100,000 Set up hours 2,000 The following additional information is provided upon preliminary investigations: Metallic Doors Window Frames Production Volume 250 units 100 units Direct materials GHS 350 GHS 450 Ending value of materials GHS 80 GHS 120 Net value of Work in progress GHS 60 GHS (80) Direct labour hours 20 25 Machine hours 50 60 Set up hours 2 2.5 Margin 2/7 20% Direct labour rate GHS 20 GHS 15 Further analysis of production overheads and supporting information reveals the following:- Set up Maintenance Cutting Assembly Total GHS GHS GHS GHS GHS Indirect 60000 60000 100000 100000 320000 Materials Supervision 80000 120000 200000 Support costs 60000 60000 135000 180000 435000 Depreciation 25000 150000 50000 225000 You have been asked to analyse the information and make relevant calculations using traditional and activity costing methods, to inform decisions on pricing. NB: maintenance and cutting are based on machine hours whiles assembly is on labour hours Required: i. Calculate the predetermined overhead absorption rates used by TAG Metallic at the start of the year. ii. Calculate the standard cost and the sales price of Doors and Windows, using the predetermined overhead absorption rate. iii. Calculate an activity based overhead absorption rate iv. Calculate the cost and the sales price of Doors and Windows using the activity based overhead absorption rate