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XYZ company has 3 production departments. The company uses a plant-wide rate to allocate overhead costs; it uses direct wages cost as the activity base (or cost driver). You are given production information for 2017:After adding production overhead to prime cost, gross profit is ascertained by increasing production cost by one-third.
a) Calculate the overhead plant-wide rate. (1 mark)
b) Apply the plant-wide rate to the contract undertaken for client G. Calculate the full production cost of this contract. (2 marks)
c) Calculate departmental overhead rates. (3 marks)
d) For each of the departmental overhead rates calculated in (c) above, explain (in detail) why you chose a particular activity base (or cost driver). You must provide reasons for each overhead rate calculated. You must also justify your choice of activity base (or cost driver) by relating each driver back to the case-facts. You must not make generalised statements in justifying your choices. (4 marks)
e) Apply the departmental overhead rates to the contract undertaken for client G. Calculate the full cost of this contract. (4 marks)
f) Compare the costs figures in (b) and (e) for the contract for client G. Explain the difference in cost figures: you must explain how well the overhead rates reflect the overhead costs incurred and consumed. Identify the overhead rate that better allocates overhead costs. (8 marks)
g) What are the challenges faced when allocating overhead costs to products. Can these challenges identified be overcome by using Activity Based Costing? Explain using your own words. Your answer should INCLUDE an explanation of the implications of the hierarchy of overhead costs and activities. (8 marks)
Production Dept Direct wages ($) Direct labour hours Machine hours Productionoverhead costs During 2017 , the ﬁrm incurred the following costs andconsumed the following resources to complete a particularcontract for client G:
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