IM2.

3 Intermediate: Analysis of costs by behaviour for decisionmaking

a. Calculate the cost of a satisfactory brain scan on machine type XR1. b. Brain scans can also be done
reduced reject rate of 6 per c
Variable running costs (£) 27500
Running hours 1100 Assumption: Fixed costs will
Variable cost per running hour 25 Incremental costs of an

Variable cost per running hour 25 Machine XR1:

Multiply by: Machine time (hours) 4 Variable cost per scan (
Variable machine cost 100
X-ray plates 40 Variable cost per scan (
Total variable cost 140 Divide by: Percent free
Variable cost per satisfa

Fixed costs (£) 20000 Machine XR50:

Running hours 1100 Variable running costs (
Fixed cost per running hour 18.1818 Running hours
Variable cost per runnin
Fixed cost per running hour 18.18182
Multiply by: Machine time (hours) 4 Variable cost per runnin
Variable machine cost (£) 72.72727 Multiply by: Machine tim
Variable machine cost
X-ray plates
Total variable cost 140 Variable cost per scan (
Variable machine cost 72.72727
Cost of a brain scan on Machine XR1 (£) 212.7273 Variable cost per scan (
Divide by: Satisfaction r
Cost of a brain scan on Machine XR1 212.7273 Variable cost per satisfa
Divide by: Satisfaction rate 90%
Total cost of a satisfactory scan (£) 236.3636 In comparing the variable cos
Machine XR50 has a lo
 scans can also be done on machine type XR50 and would take only 1.8 hours per scan with a
ced reject rate of 6 per cent. However, the cost of the X-ray plates would be £55 per scan.

mption: Fixed costs will remain unchanged, therefore irrelevant in making decisions.
Incremental costs of an additional scan will be considered as relevant costs.

Variable cost per scan (£) 140

Variable cost per scan (£) 140

Divide by: Percent free from error 90%
Variable cost per satisfactory scan (£) 155.5556

Variable running costs (£) 64000

Running hours 2000
Variable cost per running hour 32

Variable cost per running hour 32

Multiply by: Machine time (hours) 1.8
Variable machine cost 57.6
X-ray plates 55
Variable cost per scan (£) 112.6

Variable cost per scan (£) 112.6

Divide by: Satisfaction rate 94%
Variable cost per satisfactory scan (£) 119.7872

mparing the variable cost per satisfactory scan of Machine XR1 and Machine XR50,
Machine XR50 has a lower cost. Therefore, Machine XR50 should be used.
IM3.5 Intermediate: Overhead analysis sheet and calculation of overhead rates.
a. Prepare in columnar form a statement calculating the overhead absorption rates for each machine hour and eac
three production units. You should use bases of apportionment and absorption which you consider most approp

Cutting
Item of Expenditure Basis of Allocation Total (£) Tents (£)
Room (£)
Indirect wages Actual 147200 6400 19500
Consumable materials Actual 54600 5300 4100
Plant depreciation Actual 84200 31200 17500
Power Estimated power usage 31700 5389 12046
Heat and light Floor Area 13800 3680 4600
Rent and rates Floor Area 14400 3840 4800
Building insurance Floor Area 13500 3600 4500
359400 59409 67046
Reallocation of Service
Center Costs
Raw Material Stores Value of raw material issues 29210 5842
Canteen Direct Labor (hours) 2694.4375 18476.14
Maintenance Machine Usage (hours) 1886.5747 37731.49
359400 93200.012 129096

Direct Labor (hours) 112000 7000 48000

Machine Usage (hours) 87000 2000 40000

Direct Labor Hour

£ 13.31 £ 2.69
Overhead Rate

Machine Usage Hour

Overhead Rate £ 46.60 £ 3.23

‘The use of pre-determined overhead absorption rates based on budgets is preferable to the use of absorption r
b. data available after the end of a financial period.’ Discuss this statement insofar as it relates to the financial
management of a business.

Number of problems, like time and overhead fluctuations, are caused by the calculation of overhead rates base
an accounting period. This is because the product cost calculations have to be delayed until the end of the ac
calculations cannot be obtained before this date (Drury, 2012). From here, the use of actual overhead rates is n
in determining estimated overheads and an appropriate level of activity when calculating predetermined ove
overhead rates is preferred as the under- or over-recovery of overheads should b
s for each machine hour and each direct labour hour for each of the
which you consider most appropriate, and the bases used

Sleeping Raw Material

Canteen (£) Maintenance (£)
Bags (£) Stores (£)
20100 41200 15000 45000
2300 - 18700 24200
24600 2500 3400 5000
10144 951 2536 634
3220 690 1150 460
3360 720 1200 480
3150 675 1125 450
66874 46736 43111 76224

5842 (46,736.00) - 5842

21940.42 0 (43,111.00) -
42447.931 (82,066.00)
137104.35

57000
45000

£ 2.41

£ 3.05

ferable to the use of absorption rates calculated from historical

r as it relates to the financial

lculation of overhead rates based on the actual overheads incurred during

e delayed until the end of the accounting period, since the overhead rate
use of actual overhead rates is not recommended though there is difficulty
en calculating predetermined overhead rates. Still, the use of budgeted
-recovery of overheads should be expected.