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A company makes three products, E, F and G. Total overheads for the year are expected to be $1.2 million, with the following split between cost pools:
Cost driver information has been estimated as follows:
no of quality inspections: 84000
no of purchase requisitions: 12000
no of materials handled: 240000 kg
The company plans to make 10,000 units of product E in the year, with an expected direct cost of $0.60 per unit. This annual production of product E is expected to require 20 quality inspections, 28 purchase requisitions, and 400 kilogrammes of materials.
What is the overhead cost per unit of product E?the answer is £0.1. how do you get this answer please?
Hi, Sorry for the delay, but this is a straightforward CIMA question that is dealt with entirely by our video lectures….
I also dont get same exact answer as your 0,1 ( I get more like 0.169 ..even allowing for rounding),
However,
1.2million split between 3 x cost pools of quality, purchasing and materials handling. So $400,000 overheads per activity.
The we find cost per cost driver by sharing that $400,000 over the total number of activity drivers relating to that cost..
Eg
$400,000 inspection costs for 84,000 inspections = $4,76 per inspectionWe do the same to find $33.33 per purchase requisition
And same to get $1.67 per kg of materials handled.
Now we have the ‘cost per cost driver rates’ above we can apply to product E.
This product line has
20 inspections @ 4.76 each = $95.20
28 purchase req @33.33each = $933.24
400 kg of mats handled @1.67per kg = $668Total overheads for product E = $1696.44
Then divided by 10,000 units = $0.17So I cant get back to your $0.1 per unit ( ive tried different ways of rounding – early or late – but no its definitely closer to 0,17)
I hope thats ok + explains
Thanks
Cath
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