contractor or made by the business itself

contractor or made by the business itself
Re

sit for MN1041 assessment 3
Question 1:
Brendol Ltd makes a range of products, many of which require the use of
components,
which
are either bought from a sub

contractor or made by the business itself.
Three of the business’s products (‘Super’, ‘Basic’ and ‘Component 17’), whose
production all require the same facilities, require the use of a raw material ‘XR5’. XR5 is
not used on any other of the business’s products. The material is very difficult to wo
rk
with and requires a high level of a special skill. Both the material and appropriate skilled
labour is in limited supply.
All production labour is employed by the business on long

term contracts, where workers
are not laid off if there are surplus labou
r hours.
The budgeted per unit cost structures of the three products for the forthcoming year are as
follows:
Super
Basic
Component 17
£
£
£
Raw Material
24
19
16
Direct Labour
45
26
37
Variable overheads
2
4
2
Fixed overheads
37
19
29
Included
in the raw material costs were the following amounts for XR5, which has a
budgeted cost of £4 a gram:
£
Super
12
Basic
5
Component 17
11
Included in the direct labour costs were the following amounts for the special skilled
labour
(who work on the XR5), which is paid £12 an hour:
£
Super
22
Basic
19
Component 17
18
The Super and Basic are completed products that are sold to external customers at
budgeted unit prices of £180 and £110 respectively. Component 17 is used as a
component in another of the business’s products (the Deluxe). The final selling price of
each Deluxe is £200 per unit, but further variable processing costs of £110 per unit will
be incurred and fixed costs of £40 per unit will be absorbed.
The budgeted
demand for the forthcoming year for the three products is:
Units
Super
600
Basic
500
Component 17
350
The demand for each product is independent of that for the other two. The supply of XR5
during the forthcoming year is limited to 3,000 grams.
The maximum available amount of the special skilled labour during the forthcoming year
is 2,600 hours.
Note that only one of these limitations will have the effect of restricting the business from
satisfying the budgeted demand for the forthcoming year.
Required
(a)
Show, with clear workings and justification, the optimal amount of each product that
the business should produce during the forthcoming year.
(32
Marks)
(b)
State and explain the assumptions which you have made in reaching your conclus
ion
in requirement (a).
(
10
Marks)
(c)
State and explain the maximum amount that the business should pay for an additional
hour of the special skilled labour and for an extra gram of XR5, should either become
available at an appropriate time d
uring the forthcoming year.
(8
Marks)
Question 2:
Marine Mouldings Ltd makes fibreglass hulls for small sailing boats. Part of the work
involves the use of an automatic computer

controlled moulding machine, but quite a lot
of the work has
to be carried out by hand. The flexibility of both the workers and the
mould
ing machine means that the business can (and does) make hulls of a large variety of
shapes and sizes.
During the accounting year just about to start, th
e business plans the followi
ng:
Direct material
£80,000
Indirect material
£6,000
Direct labour cost
£100,000
Direct labour time
12,500 hours
Machine time
4,000 hours
Indirect labour cost
£40,000
Depreciation of machinery
£50,000
Rent and rates
£20,000
Heating and lighting
£5,000
Machine power
£5,000
General indirect costs
£4,000
The business has been asked to give a price estimate for a particular hull and to do so
needs to identify the full cost for the job. It is estimated that the hull will req
uire about 50
hours of direct labour, about 15 hours of machine time and about £320 worth of direct
material.
Required:
(a) Determine the full cost of the hull using a logical and reasonable basis. Explain fully
why you have adopted your particular basis.
(b) Explain the logic of ‘activity based costing’ (ABC) and discuss the extent to which
ABC could be useful in determining the cost of the hull which was the subject of
Requirement (a). You are not required to do any calculations for this part of the ques
tion.

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