Page 11 - P1 Integrated Workbook STUDENT 2018 - Copy

Traditional costing

Example 1

A manufacturer called Limco has gathered the following information about one
of their products:

 3 kilograms of materials are used at a cost of $5 per kg.

 20 minutes of direct labour are needed. This labour is paid $24 per hour.

 Variable overheads cost $6 per labour hour.

 Total fixed production overheads for the period are $200,000.

 Production and sales were expected to be 20,000 units, but, whilst actual
production rose to 21,00 units, actual sales were only 18,000 units.

 There are currently 3,000 units finished goods of the product in inventory.

Fixed production overheads are absorbed on a per unit basis.

Produce a standard cost card for this product using absorption costing
and value the closing inventory.

Solution

Firstly determine the overhead absorption rate for fixed production overheads:

Budgeted overheads
OAR =
Budgeted absorption basis

$200,000
OAR = = $10 per unit
20,000 units

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