Pender Bearings PTY LTD
Question
Based on a single cost driver of 20,000 direct labour hours, Pender Bearings Pty Ltd has analysed its factory overhead costs for the following year as:
| Fixed | Variable | Total | |
| lndirect materials | 44,000 | 40,000 | 84,000 |
| lndirect labour | 46,000 | 40,000 | 86,000 |
| Fueloil | 18,000 | 20,000 | 38,000 |
| Repairs and maintenance | 10,000 | 15,000 | 25,000 |
| Other factory overhead | 22,000 | 5,000 | 27,000 |
| Total | 140,000 | 120,000 | 260,000 |
Required:
- lf Pender Bearings had estimated an activity level of 22,000 direct labour hours, estimate what the amount of the total variable,total fixed and total factory over head would have been.
- Pender Bearings estimates are based on 10 minutes of direct labour time per bearing produced Estimate.the factory over head cost per bearing(to two decimal places)at direct labour activity levels of :
- .24,000 direct labour hours
ii. 26,000 direct labour hours
iii . 28,000 direct labour hours
(c) Explain why the total cost per bearing reduces as the number of bearings produced increases .
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SAMPLE ANSWER : The variable cost per unit is constant and thus its contribution towards total per unit cost remains constant. Now if fixed cost is distributed over a larger number, then fixed cost attributed to each unit is lesser as compared to the situation where number of units produced is lesser.
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