What are the essential purposes of any costing system? Explain.

Question 1 (20 marks)

Explain, using examples, why it is essential to create and use flexible budgets when evaluating past performance of a profit centre which manufactures and sells a product. What might be the objective of such a performance evaluation?
4 marks

When preparing a cash budget for a manufacturing business for the following year, there may be many other budgets that will need to be produced before the cash budget is completed.
List three (3) other budgets that must be prepared at the same time or before the cash budget is prepared, and for each one, explain the likely timing of cash flows that will occur and how this will impact on a cash budget.

4 marks

Why might a business decide to make a product internally when it could easily acquire it at a cheaper price from an external supplier? Explain.
4 marks

Accounting isn’t as important in the government organisations as it is in private enterprises, since the government does not have to worry about earning a profit. Do you agree? Explain.
4 marks

What are the essential purposes of any costing system? Explain.
4 marks

Question 2 (10 marks)

Wonder Products Pty Ltd builds beautiful things to order for customers. When quoting prices on jobs Wonder Products allocate manufacturing overheads on the basis of estimated machine hours to complete the job. They allocate administrative overhead costs on the basis of direct labour hours estimated to complete the job.

Below is a budget for the current year showing budget total figures.

Budget for the year

Direct labour costs for the year $537,600

Manufacturing overheads for the year 598,080

Administrative overheads for the year 695,520

Direct labour hours for the year 14,000

Total machine hours for the year 7,000

a) Calculate a manufacturing overheads allocation rate for Wonder Products.
2 marks

b) Calculate an administrative overhead allocation rate for Wonder Products.
2 marks

c) Bushy George has asked Wonder Products Pty Ltd to make an especially wonderful creation to his specifications that will require the following inputs:

Direct materials $19,000

Direct labour 750 hours

Machine usage 400 hours

Assuming a mark up of 40% on total costs, what price should be quoted to Bushy to build him this especially wonderful creation?

2 marks

d) Why is it so important to carefully allocate overhead expenses when quoting on jobs or when generally deciding on prices? Discuss problems that are encountered with overhead allocation methods and alternative approaches that might be taken.
2 marks

e) Why do companies use predetermined (budgeted) overhead allocation rates rather than using actual overhead costs in allocating overhead costs to units of product? Explain.
2 marks


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