Ernest, SA The Following Are Two of the Jobs Completed During the Drivers

question 36

Essay

Ernest, SA., has identified the following overhead costs and cost drivers for next year: $$\begin{array} { l l l c } \text { Overhead Item } & \text { Expected Cost } & { \text { Cost Driver } } & \text { Expected Quantity } \\\text { Setup costs } & £ 320,000 & \text { Number of setups } & 4,000 \\\text { Ordering costs } & 120,000 & \text { Number of orders } & 20,000 \\\text { Maintenance } & 480,000 & \text { Machine hours } & 24,000 \\\text { Power } & 40,000 & \text { Kilowatt hours } & 160,000\end{array}$$ The following are two of the jobs completed during the year: $\begin{array}{lll}&\text { Job } 320& \text { Job } 321\\\text { Direct materials } & £ 8,000 & £ 19,000 \\\text { Direct labour } & £ 6,400 & £ 12,000 \\\text { Units completed } & 800 & 1,600 \\\text { Direct labour hours } & 240 & 500 \\\text { Number of setups } & 12 & 20 \\\text { Number of orders } & 20 & 40 \\\text { Machine hours } & 400 & 600 \\\text { Kilowatt hours } & 280 & 400\end{array}$ The company's normal activity is 32,000 direct labour hours. (Round amounts to two decimal places.)
a.Determine the unit cost for each job using direct labour hours to apply overhead.
b.Determine the unit cost for each job using the four cost drivers.
c.Which method produces the more accurate cost assignment? Why?

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Definitions:

Centralized Organizations

Organizations where decision-making authority is concentrated at the top levels of management, with lower levels primarily responsible for implementing decisions.

Business Segments

Divisions within a company that operate in different types of markets or industries, each with its own specific financial and operational strategies.

Traceable Fixed Costs

Fixed expenses that can be directly linked to a specific business segment or product.

Common Fixed Costs

Costs that are shared among multiple product lines or departments within an organization and do not change with the volume of production.