Question

Gae S.p.A. is an Italian company which fabricates two kinds of cars: model A and model B. The overhead costs are applied based on machine hours. For this accounting period, Vidoni S.p.A. estimated that 41,000 machine hours and incur in a manufacturing overhead equal to $455,000 . The capacity of the company is 50,000 machine hours. The following are the financial data for this accounting period:

Indirect materials $ 35,000

Direct labor 127,500

Indirect manufacturing labour $ 115,000

Factory depreciation $ 285,000

Administrative depreciation $ 75,000

Factory insurance $ 13,750

Administrative insurance $ 8,000

Administrative salaries $ 205,000

General selling expenses $ 23,000

Factory energy costs $ 48,000

Advertising $ 185,000

Fixed revenues $23,000

The information about the two models are the following:

	MODEL A	MODEL B
Units sold	5000	2700
Price	700	1000
Units produced	5500	2500
Direct materials (per unit)	90	130
Direct labour (per unit)	15	18
Machine hours (per unit)	3	10
Sales commission	5%	8%

Please, keep in consideration that direct labour is FIXED ( according to Italian legislation) and indirect materials are considered variable.

Tasks:

1. Determine the (i) predetermined rate; (ii) effective overhead rate ; (iii) correct and effective fixed cost rate assuming 30% of Factory energy cost is variable.

2. Compute the effective cogs under absorption costing (assume same level of efficiency and production for the past accounting period).

3. Provide COGS income statement.

4. Provide CONTRIBUTION MARGIN income statement.

5. Find the BEP in $ for the company.

Answer 1

Ans: Gae Spa fabricate two car models Model A and Model B

Basic Information

Particular	Model A	Model B
Sales (unit)	5,000	2,700
Production (unit)	5,500	2,500
Sale Price ($)	700	1,000
Prime Cost (Direct labor + direct material) per unit	105	148
sales commission per unit ($) { (700*5%):(1,000*8%)}	35	80
Machine hour per unit ( hours)	3	10
Machine Hours for production	16,500	25,000

i) a)Predetermined overhead rate = Total estimated manufacturing overhead rate\ Machine hour allocated

= $4,55,000+$75,000+$8,000+$205,000+$23,000+$185,000-$23,000\ 41,000 hours

= $ 22.63

b) Effective overhead rate = Actual overhead cost \ machine hour

Machine hour used = (5,500*3)+(2,500*10)

= 41,500 hrs

Overhead costs = $35,000+$115,000+$285,000+$13,750+$48,000+$75,000+$8,000+$205,000+$23,000+$185,000-$23,000

= $ 969,750

Effective overhead rate = $ 969,750\41,500

= $ 23.36

c) Computation of Fixed Cost

Particulars	Amount($)
Indirect manufacturing labour	115,000
Factory depreciation	285,000
Administrative depreciation	75,000
Factory insurance	13,750
Administrative insurance	8,000
Administrative salaries	205,000
General selling expenses	23,000
Factory energy costs ($ 48,000*(1-30%))	33,600

Advertising	185,000
Total Fixed cost	9,43,350

Fixed cost Rate = Total fixed cost\ Normal machine hours

= $ 9,43,350 \ 41,000

= $ 23

2) Computation of COGS under Absorption costing

Particulars	Model A	Model B
unit sold	5,000	2,700
Prime cost per Unit	105	148
Prime cost ((5,000*$105):(2,700 *$148))	525,000	399,600
Fixed cost per unit
(15,000*$23)	345,000
(27,000*$23)		621,000
Total COGS	870,000	1,020,600

Machine hour for Unit sold

Model A = 5,000* 3 = 15,000 hrs

Model B = 2700* 10 = 27,000 hrs

3) COGS in Income Statement

Particulars	Amount ($)
Opening Inventory
Model A
Model B (200*(148+(23*10)))	75,600
add: Production {( 5,500*(105+(23*3)))+(2,500*(148+(23*10))}	1,902,000
less: closing Stock of model A  ( 500*(105+(23*3)))	87,000
COGS	1,890,600

4) Contribution Margin Income statement

Particulars	Model A	Model B
Sale Price ($)	700	1,000
less
Prime Cost (Direct labor + direct material) per unit	105	148
Sales commission	35	80
contribution per unit	560	772
contribution	2,800,000	2,084,400

Contribution = $2,800,000 + $2,084,400 - ($48000*30%)- $35000

= $ 4,835,000