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The cost of sales includes all production cost but in the question given below they have included administration and selling expenses.
Swindle Co makes widgets. Two types of labour are involved in the production of a widget, skilled and
unskilled. Skilled labour is paid $15 per hour and unskilled $3 per hour. Twice as many unskilled labour
hours as skilled labour hours are needed to produce a widget, six unskilled labour hours being needed.
A widget is made up of two different direct materials. Five kg of Material X and two metres of Material Z
are needed. Material X costs $2 per kg and Material Z $5 per metre.
Variable production overheads are incurred at Swindle at the rate of $3.00 per direct skilled labour hour.
The basis of fixed cost absorption is direct skilled labour hours. For the coming year, budgeted fixed
production overheads are $100,000 and budgeted production of widgets is 10,000 units.
Administration, selling and distribution overheads are added to products at the rate of $20 per widget,
and a mark-up of 15% is made on each.
Task 1
Complete the standard cost card for a widget:
Standard cost card for a widget $
Direct materials – X
Direct materials – Z
Direct labour – skilled
Direct labour – unskilled
Variable production overhead
Fixed production overhead
Admin selling and distribution overhead
Standard cost of sale
Standard profit
Standard sales price
(8Please do not type out full questions like this because it is copyright of BPP and therefore it is not allowed for us to show it on our website. I have the BPP Revision Kit, and so in future you only need to give the number of the question 🙂
Generally speaking in financial accounts the cost of sales only includes production costs. However we are not preparing financial accounts here – this is management accounting and in practice management can do whatever they want (whatever they find the most useful).
The admin and selling expenses are included here for two reasons. One is that the question specifically says that the mark-up is applied to all costs, including admin and selling costs.
The other is that they blank cost card provided in the question makes it very clear that the admin and selling costs are to be added before calculating the mark-up.
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