Student Doubts Forum

Problem 28

Problem 28

by María Fabini Otegui -
Number of replies: 1

Hello, I'm doing exercise 28 and I cannot reach to the same answers as in the solution handbook.

I have this calculations.

Preparatin Rate = 190e/MH

Assembly Rate = 35.667E/LH

Product L

MOH (Product Liquid) = 100MH*190E/MH + 400LH*35.667E/LH = 33266.8E

DM = 37500 + 4200 = 41700

Assuming there is no DL and no changes in WIP the COGM (product L) = 74966.8

COGS = COGM/unit * sales --> 74966.8/420000units * 378000 units --> COGS = 67470.12

Sales - COGS = 189000 - 67470.12 so the PBT gives me different than the solution.

Can you please spot my mistake?

In reply to María Fabini Otegui

Re: Problem 28

by Pedro Pinto da Silva Perdigão -
Hello María,

The rates you found for Preparation and Assembly are not exactly those, I'm going to explain what you should do here. Although it is not mentioned in the exercise, you should you the simultaneous equation method to allocate the costs from the service cost centres to the production cost centres.

Maintenance = 4 000 + 20% Cleaning
Cleaning = 4 000 + 20% Maintenance

By solving the equation system, you would find that M = 5 000 and C = 5 000. Then, by reallocating from service cost centres do production cost centres, you would get:

Preparation = 35 000 + 1 000 (Maint.) + 2 000 (Cleaning) + 4 250 (Quality Control) = 42 250
Assembly = 50 000 + 2 000 (Maint.) + 1 500 (Cleaning) + 4 250 (Quality Control) = 57 750


In both, you need to consider that there is some reallocation of costs from Maintenance and Cleaning to the Quality Control department. In the end, your rates will be 211,25€/Mh and 38,5€/Lh, respectively.


What you did afterwards is correct, you only need to use these different overhead rates and you will get to the right result.


Good study!