TABLE OF CONTENTS
Introduction 3 2.0
Analysis of the results 4 2.1 Allocation and Apportionment
2.2 Overhead Absorption Rates
2.3 Cost Determination
2.4 Pricing for Potential Orders
2.5 Profit Analysis
2.6 Sensitivity Analysis
2.6.1 Scenario 1: Increase/Decrease in Direct Material Costs 2.6.2 Scenario 2: Increase/Decrease in Direct Labour Costs 2.6.3 Scenario 3: Increase/Decrease in Profits
Conclusions 8 3.1 Issues
Malaysian based glove manufacturer Super Glove Ltd faced problems with its costing systems and financial reporting. From the past 5 year’s financial results, 20% of its total glove production is exported to other Asian countries and mainly to the USA, and the UK. However, there has been an occurrence of unsystematic approaches toward its costing methods. This lead to inaccurate cost allocation which questions the integrity of its financial statements for decision making purposes. This report provides the review of the costing system computed using the excel spreadsheet using the Overhead Absorption Costing Method. Recommendations are to increase profits so that there will be a greater profit margin for the business.
As an active player in the industrial sector, Super Glove Ltd should incur different types of indirect costs. Therefore it is crucial to allocate the costs correctly to determine correct pricing of products and profit measurement. The methodology here is to provide a spreadsheet computation and provide analyses for the overall costing system.
Analyses of Results
2.1 Allocation and Apportionment
Unlike direct costs which can be traced directly to the activity, indirect costs are not easily charged therefore, they are indirectly charged using allocation bases which are significant determinants. In the Overhead Analysis Sheet, the budgeted overheads are allocated and apportioned to both production and service departments and finally re-apportioned to the production department with Latex Dipping amounted with the highest overhead of RM 93 535 or 30% and Leaching with the lowest of RM 72 992 or 23%.
2.2 Overhead Absorption Rate
Overhead absorption rate are attributing overheads to a product or service. It is computed by taking the Budgeted amount of each relevant department and dividing it with the appropriate basis.
The bases used are machine hours for the entire production department except for the Beading department which was based on labour hours. From the spreadsheet the respective rates for Latex Dipping, Beading, Leaching and Drying are RM 2.92, RM 2.54, RM 3.32 and RM 2.15 respectively.
2.3 Cost Determination
Once the Overhead Absorption Rates are derived, the production costs are computed by summing both variable and fixed cost. In Appendix 2, Surgical Gloves consumed the most production costs with a total of RM 25 850.08 or 40% of the total production cost and Industrial/Household Glove consumed the lowest amount of RM 16 928 or only 26%.
2.4 Pricing for Potential Order
Recently, the company was approached by prospective buyers from the USA wanting to purchase three of the products with the following quantity of 15 000, 10 000 and 13 000 units. A quotation for the potential orders was derived and the pricing quoted was RM 1.91 per unit for Surgical, RM 1.88 for...
References: 1. Drury, C., 2004. Management and Cost Accounting. 6th Edition. Thomson Learning. Italy: G Ganale & C
2. Drury, C., 1998. Costing: An Introduction. 4th Edition. London: Thomson Business Press
3. Izhar R., Hontoir J., 2001. Accounting, Costing, and Management. 2nd Edition. New York: Oxford Unversity Press
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