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IIBMS – STAR ENGINEERING COMPANY

CASE – 4   STAR ENGINEERING COMPANY

\"IIBMS\"

IIBMS – STAR ENGINEERING COMPANY 

Star Engineering Company (SEC) produces electrical accessories like meters, transformers, switchgears, and automobile accessories like taximeters and speedometers.

SEC buys the electrical components, but manufactures all mechanical parts within its factory which is divided into four production departments Machining, Fabrication, Assembly, and Painting—and three service departments—Stores, Maintenance, and Works Office.

Though the company prepared annual budgets and monthly financial statements, it had no formal cost accounting system. Prices were fixed on the basis of what the market can bear. Inventory of finished stocks was valued at 90 per cent of the market price assuming a profit margin of 10 per cent.

In March, the company received a trial order from a government department for a sample transformer on a cost-plus-fixed-fee basis. They took up the job (numbered by the company as Job No 879) in early April and completed all manufacturing operations before the end of the month.

            Since Job No 879 was very different from the type of transformers they had manufactured in the past, the company did not have a comparable market price for the product. The purchasing officer of the government department asked SEC to submit a detailed cost sheet for the job giving as much details as possible regarding material, labour and overhead costs.

SEC, as part of its routine financial accounting system, had collected the actual expenses for the month of April, by 5th of May. Some of the relevant data are given in Exhibit A.

The company tried to assign directly, as many expenses as possible to the production departments. However, It was not possible in all cases. In many cases, an overhead cost, which was common to all departments had to be allocated to the various departments using some rational basis. Some of the possible bases were collected by SEC’s accountant. These are presented in Exhibit B.

He also designed a format to allocate the overhead to all the production and service departments. It was realized that the expenses of the service departments on some rational basis. The accountant thought of distributing the service departments’ costs on the following basis:

  1. Works office costs on the basis of direct labour hours.
  2. Maintenance costs on the basis of book value of plant and machinery.
  3. Stores department costs on the basis of direct and indirect materials used.

The accountant, who had to visit the company’s banker, passed on the papers to you for the required analysis and cost computations.

 

REQUIRED

 

Based on the data given in Exhibits A and B, you are required to:

 

  1. Complete the attached “overhead cost distribution sheet” (Exhibit C).
    Note: Wherever possible, identify the overhead costs chared directly to the production and service departments. If such direct identification is not possible, distribute the costs on some “rational basis.
  2. Calculate the overhead cost (per direct labour hour) for each of the four producing departments. This should include share of the service departments’ costs.
  3. Do you agree with:
    a.   The procedure adopted by the company for the distribution of overhead costs?
    b.   The choice of the base for overhead absorption, i.e. labour-hour rate?

 

Exhibit A

 

STAR ENGINEERING COMPANY

Actual Expenses(Manufacturing Overheads) for April

RS RS
Indirect Labour and Supervisions:

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

Indirect Materials and Supplies

Machining

Fabrication

Assembly

Painting

Maintenance

Others 

Factory Rent

Depreciation of Plant and Machinery

Building Rates and Taxes

Welfare Expenses

(At 2 per cent of direct labour wages and Indirect labour and supervision)

Power 

(Maintenance—Rs 366; Works Office Rs 2,200, Balance to Producing Departments)

Works Office Salaries and Expenses

Miscellaneous Stores Department Expenses 

33,00022,000

11,000

 7,000

44,000

32,700

2,200

1,100

3,300

3,400

2,800

1,68,000

   44,000

     2,400

   19,400

  68,586

1,30,260

     1,190

1,49,700

12,800

4,33,930

5,96,930

 

Exhibit B

STAR ENGINEERING COMPANY

Projected Operation Data for the Year 

Department  Area 

(sq.m)

Original Book of Plant & Machinery

Rs

Direct Materials

Budget

Rs

Horse 

Power

Rating

Direct

Labour 

Hours

Direct

Labour 

Budget

Rs

Machining

Fabrication

Assembly

Painting

Stores

Maintenance

Works Office

Total 

13,000

11,000

 8,800

 6,400

 4,400

 2,200

 2,200

48,000

26,40,000

13,20,000

  6,60,000

  2,64,000

  1,32,000

  1,98,000

    68,000

52,80,000

62,40,000

21,60,000

10,80,000

94,80,000

20,000

10,000

  1,000

  2,000

33,000

14,40,000

  5,28,000

  7,20,000

  3,30,000

30,18,000

52,80,000

25,40,000

13,20,000

  6,60,000

99,00,000

 

Note 

The estimates given in this exhibit are for the budgeted year January to December where as the actuals in Exhibit A are just one month—April of the budgeted year.

 

Exhibit C

STAR ENGINEERING COMPANY

Actual Overhead Distribution Sheet for April

Departments

Overhead Costs

Production Departments Service Departments Total Amount Actuals for April (Rs) Basis for Distribution
A. Allocation of Overhead to all departments

A.1 Indirect Labour and Supervision

 

 

 

1,49,700

A.2 Indirect materials and supplies  

12,800

A.3 Factory Rent 1,68,000
A.4 Depreciation of Plant and Machinery  

44,000

A.5 Building Rates and Taxes

 

 

2,400

 

A.6 Welfare Expenses

 

 

19,494

    A.7 Power   68,586
A.8 Works Office Salaries and Expenses  

1,30,260

 

 

 

A.9 Miscellaneous Stores Expenses

 

1,190

A. Total (A.1 to A.9) 5,96,430
B. Reallocation of Service Departments Costs to Production Departments
B.1 Distribution of Works Office Costs
B.2 Distribution of Maintenance Department’s Costs
B.3 Distribution of Stores Department’s Costs
Total Charged to Producing

C. Departments (A+B)

 

 

5,96,430

D. Labour Hours Actuals for April  

1,20,000

 

44,000

 

60,000

 

27,500

E. Overhead Rate/Per Hour (D)

 

\"IIBMS\"

IIBMS – STAR ENGINEERING COMPANY

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