Provide management accounting information

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:

 FixedVariableTotal
lndirect materials44,00040,00084,000
lndirect labour46,00040,00086,000
Fueloil18,00020,00038,000
Repairs and maintenance10,00015,00025,000
Other factory overhead22,0005,00027,000
Total140,000120,000260,000

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 :
  1. .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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