Problem 1

Mr Blair the manager of L department had just received his monthly operating statement, and
the line for computing costs had upset him. ‘I can’t believe it. We just went through a study
showing how my department could save money by using the central computing department.
The first month using this department shows that my costs are up more than 20%’.

Before converting to the in house department the L department had used an outside firm to
provide computing support at a cost of £15000 per month. The company internal audit
department had recently reported that it was inefficient to use an outside firm for services
where needs could be handled internally. At present, computer services had unused capacity,
and the additional services required by L would cost an incremental £10000. After an
assurance that his requirements could really be supplied at this lower incremental cost, Blair
agreed to convert to internal supply of computing support.

After seeing the line on his monthly report showing that the 200 hours of work that his
department needed had produced computing costs of over £18000, Blair demanded an
explanation.

The manager of computing services department provided the following two tables of data for
computer service costs;

Table 1 – apportionment of computing costs to the other three divisions – prior to handling L’s
requirement

Department Computing services Percent Apportioned cost

hours
A 600 50% £60000
B 400 33.3% £40000
C 200 16.7% £20000
Total 1200 100% £120000

Table 2 – apportionment of computing department costs after L’s requirement is included

(+the £10000)

Department Computing services Percent Apportioned cost

hours
A 600 42.9% £55700
B 400 28.6% £37100
C 200 14.3% £18600
L 200 14.3% £18600
Total 1400 100% £130000

It was explained that costs had to be charged out in an equitable manner, and hours of work
done by computing services for all the departments seemed fairest.

1 Why had the apportioned cost been more than Blair had thought?

2 What was Blair expecting?

3 What do you think is fair?

Problem 2

Fullcost Ltd. manufactures a range of office equipment in three separate production

departments. Materials are first shaped in the Cutting Department, then machined ready for
the various fixings before final assembly.

The following budgeted and statistical information exists concerning Fullcost Ltd. for the year
ended 30 June.
Departments Cutting Machining Assembly Material Maintenance Total
stores
Costs £ £ £ £ £ £
Depreciation 18600 23050 10500 5000 10500 67650
Consumables 3150 4200 5000 0 11500 23850
Indirect wages 15750 14000 15000 12500 18250 75500
Electricity 120000
Rent 160000
Insurance 12000
Technical
data
Floor area (sq 250 150 250 100 50 800
metres)
% usage of 50 20 20 5 5 100
electricity
Number of 600 100 50 0 150 900
material issues
Number of 150 300 50 0 0 500
maintenance
jobs
Labour hours 8000 6000 10000 24000
Machine hours 8000 14000 4000 26000

Calculate appropriate overhead absorption rates for each production department. Justify your
choice of absorption base.