F5 – JOLA PUBLISHING CO (JUNE 08 EXAM)

For part (a) you are not asked to calculate the overheads.

Part (a) is for the year that has just finished and you are given the overheads and asked to comment.

Part (b) is for the next year where the figures are all different and it is for the coming year that you are asked to do the calculations.

In part (b) the quality control costs will be charged based on the number of inspections. CB has 180 inspections and TJ has 20, so there are 200 in total. Since the total cost is 668,000, the cost for each inspection will be 668000 / 200 = $3,340.

The production setup costs will be charged based on the number of setups. CB has 4 production runs, and so 4 setups. TJ has 12 production runs and so 12 setups. There are therefore 16 production runs in total. The total cost is 52,000. So the cost for each production run is 52,000 / 16 = $3250

If you are still not clear, then do ask again 🙂

We seem to be a bit confused over the various parts 🙂
Parts (a) and (b) are purely discussion (why overhead allocations will have changed, and then about implementation problems).

Part (c) asks for the cost per unit using machine hours to absorb the overheads. This is traditional absorption from Paper F2, and I assume you are happy with that.

Part (d) asks to the cost per unit using ABC and I assume that it is this part that you have problems with.
You will know from my lecture that there are two ways of getting the same answer (and the examiner does show both ways in his answer) but that the easiest and best way is to split the overheads in total between the products and then having got the total overhead for each, divide by the number of units to get the overhead cost per unit.

As I wrote in my previous reply, the cost of each QC inspection is 3,340 and the cost of each production run is 3,250. The question tells us the property costs are to be absorbed on machine hours, and they come to $18 per hour.

So the total overheads for CB are as follows:
QC: 180 inspections x $3340 each time = 601,200
Set-up: 4 setups x 3250 each time = 13000
Property: 100000 hours x $18 = 1800000

So total overheads for CB = 2414200

The production of CP is 1,000,000 units, so the overhead cost per unit is 2414200 / 1000000 = $2.41

(Same approach obviously for TJ)

For CB, they are producing 1,000,000 a year and each unit is taking 6 minutes. So the total time is 1M x 6/60 = 100,000 hours. (the time is 100,000 hours, not the cost)

For TJ, the production is 10,000 a month, which is 120,000 a year. Each unit takes 10 minutes, so the total time is 120,000 x 10/60 = 20,000 hours.

So the total time is 100,000 + 20,000 = 120,000 hours.
The total cost is 2,160,000, so the cost per hour is is 2,160,000 / 120,000 = $18 per hour.

CB takes 100,000 hours, so the total property cost for CB is 100,000 x $18 = $1,800,000

You are welcome 🙂

You will have to be specific as to what you mean by ‘part 1’.

Maybe you are looking at an adaption of the exam question in a Revision Kit (they may have changed it) because in the original exam question in front of me there is no part 1. The question has parts (a), (b) and (c). Parts (a) and (b) are purely written, and part (c) asks for calculations.

(I assume that you have watched my free lectures on ABC and on traditional absorption costing? The lectures are a complete free course for Paper PM and cover everything needed to be able to pass the exam well.)