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Calculation of Sami Design Company Budget for Given Year Assessment Answer

Question
Sami Design Ltd manufacturers Sami musical instruments for use by high school students. The company uses a job costing system in which manufacturing overheard is applied on the basis of direct labour hours. The company’s budget for the current year included the following predictions:
Budget Total Manufacturing Overhead | $4,50,600 |
Budgeted Total Direct labour Hours | $22530 |
During March, the firm began two production jobs:
Job number T81, consisting of 70 trombones
Job number C40, consisting of 125 cornets.
The event of March are described below:
1. 1000 squares metre of rolled Sami sheet metal were purchased on credit for $8000.
2. 400 kilograms of Sami tubing were purchased on credit for $5300.
3. The following requisitions were filed on 5 March:
Requisition number 112: 250 square metre of Sami sheet metal @$5 per square metre (For job T81)
Requisition number 113: 1000 kilogram of Sami tubing @ $10 per kilogram (for job number C40)
Requisition number 114: 10 litre of valve lubricant @ $1 per liter.
4. An analysis of Labour time sheets reveal the following labour usage for March:
Direct labour: Job number T81, 800hrs @ $18 per hour
Direct labour: job number C40, 900hrs @ $18 per hour
Indirect labour: general factory clean-up $3650
Indirect labour: factory supervisory salaries $8300
5. Depreciation of the factory building and equipment during March amounted to $11300
6. Rent paid in cash for warehouse space used during March was $1130
7. Electricity costs incurred during March amounted to $1995 The invoices for these costs were received, but the bill were not paid in March.
8. March council rates and property taxes on the factory were paid in cash $2260
9. Insurance cost covering factory operation for March was $2960. The insurance policy has been prepaid in february.
10. Costs of salaries and on-costs for sales and administrative personnel paid in cash during March amounted to $7300.
11. Depreciation on administrative office equipment and space amounted to $3650
12. Other selling and administrative expenses paid in cash during March amounted to $1000.
13. Job number T81 was completed in March.
14. Half the Trombones in job number T81 were sold on credit during March for $800 each.
The first March balances in selected accounts are as follows:
Account Name | 1 March Balance |
Cash | $9000 |
Account Receivable | $19000 |
Prepaid insurance | $6920 |
Raw Material Inventory | $149000 |
Manufacturing supplies inventory | $500 |
Work in progress inventory | $82000 |
Finished goods Inventory | $246000 |
Accumulated Depreciation: building and equipment | $102000 |
Accounts Payable | $13000 |
Wages payable | $8000 |
Required:
- Calculate the company’s predetermined overhead rate for the year current year.
- Complete job cost sheet for job number T81.
- Prepare journal entries to record the events of march.
- Set up ledger accounts, and post the journal entires made in requirement 3.
- Calculate the overapplied or underapplied overhead of March. Prepare the journal entries to close this balance into cost of goods sold.
- Prepare a schedule of cost of goods manufactured for March.
- Prepare a schedule of cost of goods sold for March.
- Prepare an income statement for March.
- Provide a management team of Sami design Ltd with the issues could occur applying the current traditional manufacturing overhead costing system.
- Analyse and describe the benefits for replacing activity based costing.
Answer
Accounting
1. Calculation of the company’s predetermined overhead rate for the current year.
Budgeted manufacturing overhead | $4,50,600 |
Budgeted total direct labour hours | 22530 |
Predetermined Overhead Rate= Budgeted manufacturing overhead/ Budgeted total direct labour hours
Predetermined Overhead Rate= $4,50,600/ 22530
Predetermined Overhead Rate= $ 20.00
2. Job cost sheet for job number T81
Amount | ||
(A)Direct Material | | |
250 Sq. Metre Sami Sheet Metal (250*$5) | | $ 1,250.00 |
(B)Direct Labour | | |
800 Hours @ $18 per hour | | $ 14,400.00 |
Prime Cost (A)+(B) | $ 15,650.00 | |
Overheads (800 Hours * $20) | | $ 16,000.00 |
Total Cost | | $ 31,650.00 |
3. Journal entries to record the events of Marc
Particulars | Debit | Credit |
Raw Material Inventory A/c Dr | $8,000 | |
To Accounts Payable A/c | $8,000 | |
(To purchase Sami Sheet Metal) | ||
Raw Material Inventory A/c Dr | $5,300 | |
To Accounts Payable A/c | $5,300 | |
(To purchase Sami Tubing) | ||
Work in Process Inventory A/c Dr | $2,250 | |
To Raw Material Inventory A/c | $2,250 | |
(To transfer raw material into WIP) | ||
Manufacturing Overheads A/c Dr | $10 | |
To Raw Material Inventory A/c | $10 | |
(To use indirect material) | ||
Factory Payroll A/c Dr | $30,600 | |
To Wages Payable A/c | $30,600 | |
(To record wages payable) | ||
Work in Process Inventory A/c Dr | $30,600 | |
To Factory Payroll A/c | $30,600 | |
(To use direct labour) | ||
Manufacturing Overheads A/c Dr | $11,950 | |
To Factory Payroll A/c | $11,950 | |
(To record indirect Labour) | ||
Manufacturing Overheads A/c Dr | $14,950 | |
To Accumulated Depreciation A/c | $14,950 | |
(To record depreciation) | ||
Manufacturing Overheads A/c Dr | $1,130 | |
To Cash A/c | $1,130 | |
(To pay rent) | ||
Manufacturing Overheads A/c Dr | $1,995 | |
To Accounts Payable A/c | $1,995 | |
(To pay electricity cost) | ||
Manufacturing Overheads A/c Dr | $2,960 | |
To Prepaid Insurance A/c | $2,960 | |
(To use prepaid insurance) | ||
Manufacturing Overheads A/c Dr | $2,260 | |
To Cash A/c | $2,260 | |
(To pay property tax) | ||
Sales & Administrative Overhead A/c Dr | $8,300 | |
To Cash A/c | $8,300 | |
(To pay sales and Administrative expenses) | ||
Work in Process Inventory A/c Dr | $35,255 | |
To Manufacturing Overhead A/c | $35,225 | |
(To transfer Manufacturing Overhead) | ||
Finished Goods Inventory A/c Dr | $31,650 | |
To Work in process Inventory A/c | $31,650 | |
(To record complete job T81) | ||
Cost of Goods Sold A/c Dr. | $24,125 | |
To Finished Goods Inventory A/c | $15,825 | |
To Selling & Administrative Overhead A/c | $8,300 | |
(To record cost of Goods sold) | ||
Finished Goods Inventory A/c Dr | $28,000 | |
To Sales A/c | $28,000 | |
(To record Sales) |
Calculation of Closing Inventory | |
Raw Material | Amount |
Opening Balance | $ 1,49,000 |
Purchased Sami Metal Sheets | $ 8,000 |
Purchased Sami Tubing | $ 5,300 |
Less: Transferred to WIP | $ -11,250 |
Less: Indirect Material | $ -10 |
Closing Raw Material Inventory | $ 1,51,040 |
Work in Process | Amount |
Opening Balance | $ 82,000 |
Raw Material Inventory | $ 11,250 |
Direct Labour | $ 30,600 |
Manufacturing Overheads | $ 35,255 |
Less: Transferred to Finished Goods | $ -31,650 |
Closing WIP Inventory | $ 1,27,455 |
Finished Goods | Amount |
Opening Balance | $ 2,46,000 |
WIP Inventory | $ 31,650 |
Cost of Goods Sold | $ -15,825 |
Closing Finished Goods Inventory | $ 2,61,825 |
4. Ledgers | |||
Raw Materials Inventory | |||
Opening Balance | $ 1,49,000 | WIP Inventory | $ 11,250 |
Purchased Sami Metal Sheets | $ 8,000 | Manufacturing Overhead | $ 10 |
Purchased Sami Tubing | $ 5,300 | Closing Balance | $ 1,51,040 |
Work in Process | |||
Opening Balance | $ 82,000 | Transferred to Finished Goods | ₹ 31,650 |
Raw Material Inventory | $ 11,250 | | |
Direct Labour | $ 30,600 | | |
Manufacturing Overheads | $ 35,255 | Closing Balance | $ 1,27,455 |
Finished Goods Inventory | |||
Opening Balance | $ 2,46,000 | Cost of Goods Sold | $ 15,825 |
WIP Inventory | $ 31,650 | Closing Balance | $ 2,61,825 |
Manufacturing Overheads | |||
Raw Material Inventory | $ 10 | Work in Proceed Inventory | $ 35,255 |
Factory Payroll | $ 11,950 | | |
Accumulated Depreciation | $ 14,950 | | |
Rent | $ 1,130 | | |
Insurance | $ 2,960 | | |
Property Tax | $ 2,260 | | |
Accounts Payable | $ 1,995 | | |
Total | $ 35,255 | Total | $ 35,255 |
5. Calculation of the over applied or under applied overhead for March.
Total Overheads = Manufacturing Overheads + Selling and Administrative Overhead
Total Overhead = $35,255+$8,300=$43,555
Actual Overhead Rate = Total Overheads/Number of Hours
Number of Hours = 800+900= 1700 Hours
Actual Overhead Rate = $43,555/1600 = $25.62
Over applied Overhead rate = $25.62-$20.00 = $5.62 per hour
6. Schedule of cost of goods manufactured for March.
Direct Material | Amount |
Opening Balance | $ 1,49,000 |
Purchases | $ 13,300 |
Less: Closing Balance | $ -1,51,040 |
Cost of Raw Material (A) | $ 11,260 |
Direct Labour | |
800*18 | $ 14,400 |
900*18 | $ 16,200 |
Cost of Direct Labour (B) | $ 30,600 |
Prime Cost (A)+(B) | $ 41,860 |
Indirect Material | $ 10 |
Indirect Labour | $ 11,950 |
Depreciation- Building | $ 11,300 |
Electricity | $ 1,995 |
Insurance | $ 2,960 |
Property Tax | $ 2,260 |
Add: Opening WIP Balance | $ 82,000 |
Less: Closing WIP Balance | $ -1,27,455 |
Works Cost | $ 26,880 |
Depreciation- Fire Equipment | $ 3,650 |
Cost of Production | $ 30,530 |
Add: Opening Finished Goods Balance | $ 2,46,000 |
Less: Closing Finished Goods Balance | $ -2,61,825 |
Cost of Goods Manufactured | $ 14,705 |
7. Schedule of cost of goods sold for March.
Cost of Goods Manufactured | $ 14,705 |
Warehouse Rent | $ 1,130 |
Salaries to Sales and Administrative staff | $ 7,300 |
Other Selling Expenses | $ 1,000 |
Cost of Goods Sold | $ 24,135 |
8. Income Statement
Revenue (35*$800) | | $ 28,000.00 |
| | |
Less: Expenses | | |
Cost of Raw Material | $ 11,260 | |
Cost of Labour | $ 30,600 | |
Indirect Material | $ 10 | |
Indirect Labour | $ 11,950 | |
Depreciation- Building | $ 11,300 | |
Electricity | $ 1,995 | |
Insurance | $ 2,960 | |
Property Tax | $ 2,260 | |
Change in WIP | $ -45,455 | |
Depreciation- Fire Equipment | $ 3,650 | |
Change in Finished Goods | $ -15,825 | |
Warehouse Rent | $ 1,130 | |
Salaries to Sales and Administrative staff | $ 7,300 | |
Other Selling Expenses | $ 1,000 | $ 24,135 |
Profit | | $ 3,865 |
9. Management team of Sami Design with the issue could occur apply the current traditional manufacturing overhead costing system
After assessing the given case study, it could be inferred that the Sami Design Company has been bifurcating or distributing its overhead on the hourly basis (ODO, 2018). There has not been set any program or cost drivers for the proper bifurcation of the total overhead of the company which may lead to misleading of the overall process costing of the organization. Therefore, the main issue which Sami Design might face would be recording of the wrongful costing of the units in the particular process system while adopting the traditional manufacturing costing system (Hanif, & Mukherjee, 2018).
10 analysing and describing the benefits of deploying the ABC costing method
The main problem which Sami Design Company has been facing in its business process is related to its wrong allocation of the cost overhead in the different process department. With the implication of the ABC costing method, the proper allocation of the overhead is done with the use of the cost drivers set for the particular cost. The cost drivers decides the basis of the cost allocation or absorption of the cost in the process department which helps in determining the process costing in effective manner. It helps in deciding the effective strategic planning and determine the rightful pricing policy in the business process.
