PRACTICE EXERCISES – I

MANAGEMENT INFORMATION
CHAPTER 2 & 3
Notes: Student uses two decimals in your answers and must provide detailed solution to
get the full mark.
CHAPTER 2
EXERCISE 1
New Appliance plc makes the following purchases and sales:
10 July Purchases 2,500 units for £14,750
31 July Purchases 1,000 units for £6,000
15 August Sales 2,800 units for £29,120
31 August Purchases 1,500 units for £9,150
29 September Sales 500 units for £5,300
Requirement:
1) Using FIFO method, calculate the cost of units sold in August and September.
2) Using FIFO method, calculate the Gross profit in August and September.
3) Using LIFO method, calculate the cost of units sold in August and September.
4) Calculate closing inventory valuations at 30 September using FIFO.
5) Calculate closing inventory valuations at 30 September using LIFO.
CHAPTER 3
EXERCISE 2

Big Co has incurred the following overhead costs.

£'000
Depreciation of factory 120
Factory repairs and maintenance 50
Factory office costs
120
(treat as production overhead)
Depreciation of equipment 40
Insurance of equipment 10
Heating 19.5
Lighting 5
Canteen 45
409.5

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Information relating to the production and service departments in the factory is as follows.
Department
Production M Production N Service X Service Y
Floor space (square metres) 1,400 1,400 600 600
Volume (cubic metres) 1,500 3,000 1,200 800
Number of employees 15 15 10 10
Book value of equipment £25,000 £25,000 £10,000 £20,000
Requirement: Apportion all overheads to the cost centres.

EXERCISE 3
LS Ltd has two production departments (Assembly and Finishing) and two service
departments (Maintenance and Canteen).
The following are budgeted costs for the next period:
Indirect materials 26,000
Rent 22,000
Electricity 15,000
Machine depreciation 8,000
Indirect labour 17,500
Direct labour 125,000
The following information is available:
Assembly Finishing Maintenance Canteen
Area (sq. metres) 1,000 2,000 500 500
KW hours consumed 2,750 4,500 1,975 775
Machine value 45,000 35,000 11,000 9,000
Number staff 20 30 10 2
Direct labour hours 3,175 3,800
Indirect materials budget 9,500 9,000 4,500 3,000
Indirect labour budget 2,330 2,470 11,200 1,500

Requirement:
1. Which of the budgeted costs will be allocated or apportioned?
2. Using the overhead analysis sheet calculate the total budgeted overheads for each
department.

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EXERCISE 4
A company's packing department has budgeted labour hours of 3,900 and budgeted
overhead costs of £35,880. The actual labour hours were 3,175 and actual overheads were
£35,544.
Requirement:
1. Calculate absorbed overhead?
2. Calculate under or over-absorbed overhead?

EXERCISE 5
Apple Ltd’s production budget and actual results for quarter 1 of year 2023:
Budget Actual
Direct materials cost $20,000 $22,000
Direct labour cost $14,400 $17,280
Direct expenses $10,600 $11,870
Production overhead cost $18,000 $20,900
Machine hours 5,000 5,500
Direct labour hours 9,000 9,900
Units of production 1,000 1,100
Requirement:
1. Calculate budgeted and actual prime cost per unit.
2. Calculate production overhead absorption rates using the various bases of apportionment:
a. Percentage of direct materials cost.
b. Percentage of direct labour cost.
c. Percentage of prime cost.
d. Rate per machine hour.
e. Rate per direct labour hour.
f. Rate per unit.
3. If the company absorbs production overhead using rate per direct labour hour, calculate the
following requirements:
a. Absorbed production overhead in the period.
b. Total production cost in the period.
c. Production cost per unit.
d. Under or over-absorbed of production overhead.

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 SOLUTIONS
EXERCISE 1

1. Cost of units sold (FIFO)

August = 14,750 + 300 x (6,000/1,000) = £16,550
Sep = 500 x (6,000/1,000) = £3,000

2. Gross profit (FIFO)

Gross profit = Sales - Cost of units sold
August = 29,120 - 16,550 = £12,570
Sep = 5,300-3,000 = £2,300

3. Cost of units sold (LIFO)

August: = 6,000 + 1.800 x (14,750/2,500) = £16,620
Sep: = 500 x (9,150/1,500) = £3,050

4. Closing inventory (FIFO)

Closing inventory in units
= (2,500 + 1,000 + 1,500 - 2,800 - 500) = 1,700 units
Method 1
Value of closing inventory = 9,150 + 200 x (6,000/1,000) = £10,350
Method 2
Value of closing inventory = Opening balance + Purchases - Cost of units sold
Value of closing inventory = (14,750 + 6,000 + 9,150 -16,550-3,000) = £10,350

5. Closing inventory (LIFO)

Closing inventory in units
= (3,000 + 1,000 + 1,500 - 3,000 - 500) = 1,700 units
Method 1
Value of closing inventory = 1,000 x (9,150/1,500) + 700 x (14,750/2,500) = £10,230
Method 2
Value of closing inventory = Opening balance + Purchases - Cost of units sold
Value of closing inventory = (14,750 + 6,000 + 9,150 -16,620-3,050) = £10,230

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EXERCISE 2
To department

Item of cost Basis of apportionment Total cost Production M Production N Service X Service Y

£ £ £ £ £

Factory depreciation (floor area) 120,000 42,000 42,000 18,000 18,000

Factory repairs and maintenance (floor area) 50,000 17,500 17,500 7,500 7,500

Factory office costs (number of employees) 120,000 36,000 36,000 24,000 24,000

Equipment depreciation (book value) 40,000 12,500 12,500 5,000 10,000

Equipment insurance (book value) 10,000 3,125 3,125 1,250 2,500

Heating (volume) 19,500 4,500 9,000 3,600 2,400

Lighting (floor area) 5,000 1,750 1,750 750 750

Canteen (number of employees) 45,000 13,500 13,500 9,000 9,000

Total 409,500 130,875 135,375 69,100 74,150

EXERCISE 3
Overhead Basis of apportionment Assembly Finishing Maintenance Canteen Total
Indirect materials Allocated 9,500 9,000 4,500 3,000 26,000
Rent Area 5,500 11,000 2,750 2,750 22,000
Electricity KW hours 4,125 6,750 2,963 1,163 15,000
Machine depreciation Machine value 3,600 2,800 880 720 8,000
Indirect labour Allocated 2,330 2,470 11,200 1,500 17,500
Direct labour Not an overhead 0
Total 25,055 32,020 22,293 9,133 88,500

EXERCISE 4
1)
BUDGETED OVERHEAD = £ 35,880
BUDGETED LABOUR HOURS = 3,900
OVERHEAD ABSORPTION RATE
= BUDGETED OVERHEAD/BUDGETED LABOUR HOURS
= 35,880/3,900 = £ 9.20
ACTUAL LABOUR HOURS = 3,175
ABSORBED OVERHEAD
= OVERHEAD ABSORPTION RATE x ACTUAL LABOUR HOURS
= 9.2 x 3,175 = £ 29,210
2)
ACTUAL OVERHEAD = £ 35,544
ACTUAL OVERHEAD > ABSORBED OVERHEAD
=> UNDER-ABSORBED OVERHEAD

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 = 35,544 - 29,210 = £ 6,334

EXERCISE 5
1. Calculate budgeted and actual prime cost per unit.
Prime cost = Direct materials + Direct labour + Direct expenses
Budgeted prime cost = 20,000 + 14,400 + 10,600 = $45,000
Budgeted prime cost per unit = 45,000/1,000 = $45
Actual prime cost = 22,000 + 17,280 + 11,870 = $51,150
Actual prime cost per unit = 51,150/1,100 = $46.50
2. Calculate production overhead absorption rates using the various bases of apportionment:
a. Percentage of direct materials cost.
= Budgeted production overhead cost/Budgeted direct materials cost
= 18,000/20,000 = 90%
b. Percentage of direct labour cost.
= Budgeted production overhead cost/Budgeted direct labour cost
= 18,000/14,400 = 125%
c. Percentage of prime cost.
= Budgeted production overhead cost/Budgeted prime cost
= 18,000/45,000 = 40%
d. Rate per machine hour.
= Budgeted production overhead cost/Budgeted machine hours
= 18,000/5,000 = $3.6/hour
e. Rate per direct labour hour.
= Budgeted production overhead cost/Budgeted direct labour hours
= 18,000/9,000 = $2/hour
f. Rate per unit.
= Budgeted production overhead cost/Budgeted units of production
= 18,000/1,000 = $18/unit
3. If the company absorbs production overhead using rate per direct labour hour,
calculate the following requirements:
a. Absorbed production overhead in the period.
= 9,900 x $2 = $19,800
b.Total production cost in the period.
= Direct materials cost + Direct labour cost + Direct expenses + Production overhead absorbed
= 22,000 + 17,280 + 11,870+ 19,800 = $70,950
c. Production cost per unit.
= 70,950/1,000 = $64.50
d.Under or over-absorbed of production overhead.
Actual production overhead > Production overhead absorbed
Under-absorbed = 20,900 - 19,800 = $1,100

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