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4 Overhead to be assigned to film development chemical order, given a single predetermined overhead rate:
(a) Overhead assigned=$31.25 per machine hour @ 500 machine hours
=$15 625 in total
$15 625
(b) Overhead cost per box of chemicals= = $15.625 per box
1000 boxes
=$15.625 per box
5 The production of film development chemicals entails a relatively large number of machine setups, a large
amount of hazardous materials and several inspections. Thus, they are quite costly in terms of driving
overhead costs. Use of a single predetermined overhead rate obscures this characteristic of the production job.
Underestimating the overhead cost per box could have adverse consequences for Halifax. For example, it
could lead to poor decisions about product pricing. The simple activity-based costing system for overhead
will serve management much better than the system based on a single, predetermined overhead rate.
The net cash savings realised by Farm Fresh Ltds Service Division as a result of the JIT inventory program is $86
000, computed as follows:
Cash savings
(loss)
Funds released from inventory investment $800 000
Interest 0.15 $120 000
Insurance savings ($160 000 0.60) 96 000
Warehouse rental revenue [(8000 m 0.75) $5.00 per m ]
2 2 30 000
Warehouse rental cost: no effect
Transferred employees: no effect
Contribution of lost sales (3800 units at $20.00)* (76 000)
Overtime premium (7500 units at $11.20) (84 000)
Net cash savings $86 000
* Calculation of unit contribution margin:
Revenue ($12 320 000 280 000 units) $44.00
Less variable costs:
Cost of goods sold ($5 320 000 280 000 units) $19.00
Selling and administrative expenses ($1 400 000 280 000 units) 5.00 24.00
Contribution margin $20.00
The incremental cost of $11.20 per unit for overtime is less than the additional $20.00 per unit contribution for the
7500 units that would have been lost sales. Therefore, the overtime hours should be used.
(Acknowledgment: All questions are adapted from Langfield-Smith, 2012 Management Accounting 6E)