Traditional Product Costing Sample 1

Accounting

Traditional Product Costing

Sample Answer

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QUESTION ON TRADITIONAL PRODUCT COSTING

BLUECHIP ENGINEERING COMPANY LTD.

The bluechip Engineering Company Ltd. is divided into three departments. All engineering work is carried out according to customer’s order. The budgeted costs for 2016 were as follows:

Dept 1 Dept 2 Dept 3 Total

Direct materials €360,000

Direct labour €100,000 € 80,000 €140,000 €320,000

Manufacturing overheads €120,000 €120,000 € 80,000 €320,000

It was anticipated that machine hours worked would be 20,000 in Department 1, 16,000 in Department 2 and 4,000 in Department 3.

During 2015, manufacturing overheads were applied to jobs processed on the basis of direct labour costs, using a pre-determined rate calculated on a factory-wide basis.

The company is now considering switching to individual departmental rates, using machine hours as the basis in Departments 1 and 2 and labour costs as the basis in Department 3.

The actual material and labour costs of producing a particular order (job number 321) during 2014 were as follows:

Direct materials €3,800

Direct labour Dept. 1 €1,500

Dept. 2 1,000

Dept. 3 1,400

€3,900

The job requires 220 machine hours in Department 1, 160 in Department 2 and 50 in Department 3. During 2016, total direct labour costs were €305,000 and manufacturing overheads were €336,000.

You are required to:

  1. calculate the total manufacturing cost of job number 321, using th...

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