Costing

Hi John

In the December 2007 Exam there was a costing question for Edward Co

We were told: ‘It takes 30 minutes to assemble a radio and the assembly workers are paid $12.60 per hour. It is estimated that 10% of hours are paid to the assembly workers for idle time.’

The solution in the mark scheme calculated the labour cost per unit as: 30/60 * $12.60.

However, I thought we would need to gross up the labour time to account for wastage at a rate of 10%, so I thought the solution should be: (30mins/90) x 100/60) x $12.60 = $7.

Further, the variable overheads per hour and the fixed overheads were $20 and $12, respectively. However, when these were absorbed into the units, they too were absorbed without adjusting for the idle time, i.e. the $20 and $12 were not absorbed as a proportion of the grossed up labour hours, instead the solution apportioned the overheads by: 30/60 x $20 and 30/60 x $12 and so the answers were $10 and $6, respectively.

I would have thought the idle time would have meant that the labour hours per unit needed to be grossed up to reflect the actual assembly hours which could be absorbed per unit. I thought that to derive the variable overhead charge per unit: (30mins/90) x 100/60) x $20 = $11.11

Am I fundamentally misunderstanding something?

I really am very grateful for your continued help, thank you so much.