Introduction

Charm Lady is a new and developing promptly fashion company. Its specialty is
producing fashion clothes for young and middle ages women. The companys product
range is diversiform, including from jackets, dresses, trousers, coats, shirts to accessories
and shoes. The companys products are popular in the UK and some European countries.
Its product systems and distribution channels are extensive in these markets. In addition,
the company also has a new plant in Malaysia, which specializes in fulfilling the increase
of demand for the companys products in South Asia market, including Malaysia and
other Asian countries.
With the role as a new management accountant of Charm Lady and required by
manager, I prepare this report to interpret the costing systems as well as budget of the
company, and give some evaluations and suggestions that attend to decision making. The
contents of the report are particularly presented as follows.

Contents
I. Different types of costs within Charm Lady
Before doing any further analysis, costs must be categorized, which means that
arranging costs into groups of similar items.
Depending on different uses; particularly, the needs of information for making
stock valuation, profit measurement, planning, decision-making and control purposes,
costs could be categorized based on different basis. (Course book, 2004, p.6)
1. Manufacturing cost:
For the uses of stock evaluation and profit measurement, costs are divided into
three elements in the classification of manufacturing cost; namely,

Direct material cost is the cost of the material that is an integral part of

finished product and holds a significant portion of the total cost of product and can be
easily traced to products. (Course book, 2004, p.7) Direct material cost of Charm Lady
could be listed such as fabric to make jackets, dresses, trousers, coats, shirts and shoes, or
leather to make shoes and coats and so on.

Direct labor cost is the cost of labor that is an integral part of finished product

and occupies a significant portion of the total cost of product and can be traced to
products in an easy way. (Course book, 2004, p.8) Direct labor cost of Charm Lady could
be set such as wages of workers who take part directly in the process to make products in
Cutting, Sewing and Finishing departments.

Manufacturing overhead costs are the costs that are incurred on a specific

product other than direct material cost and direct labor cost. (Course book, 2004, p.8)
Some examples of manufacturing overhead cost are heating and lighting the plant,
maintaining sewing machine, salary for supervisors, servers at Canteen or staffs in
Quality Control department, depreciation on plant and equipment, overtime premium and
cost of idle time and so on.
Direct materials and direct labor costs are charged to the product as part of the
prime cost. (Course book, 2004, p.7-8) Direct labor and manufacturing overhead costs are

charged as conversion cost, which incurred to convert raw materials into finished
product.
2. Traceability:
Classifying direct and indirect costs is essential for using appropriate costing
systems in costing and pricing decision of the company. Rely on traceable basis; cost is
categorized into two types.

Direct costs are the costs that can be directly and easily traced to a cost object.

(Course book, 2004, p.6) Total direct cost is often referred to as prime cost, which
includes direct materials and direct labor. Some examples of direct cost, as previously
mentioned, are fabric to make dresses or coats, and wages of workers in Sewing
department and so on.

Indirect costs or overheads are the costs that cannot be directly and easily

traced to a cost object. (Course book, 2004, p.7) Examples might be the wage of servers
at Canteen department, advertising and sale promotion, office salaries and so on.
Direct or indirect depends entirely on what the cost object is.
3. Timing of expense:
Classifying costs relying on timing of expense helps managers identify the flow of
manufacturing costs toward balance sheet and income statement.

Product costs consist of manufacturing costs: direct materials, direct labor,

and manufacturing overhead. These costs become expenses only when the stock is sold.
(Course book, 2004, p.10) Examples of product cost are mentioned in the part of
manufacturing cost.

Period costs consist of selling and administrative expenses. (Course book,

2004, p.10) They might include the costs of marketing and sales the products and
delivering the Charm Ladys products from the factory to the stores in the UK cities or
from the stores to customers; and, the costs of managing the company that are not directly
related to the manufacturing or selling functions such as rent and rates of general offices,
audit fees and so on.
In balance sheet, direct materials that are unused become material inventory,
unfinished goods become work in process inventories and finished products are finished
goods inventories, and after they are sold, they turn into cost of goods sold in income
3

statement. On the other hand, period costs turn directly into operating expenses in income
statement.
4. Behavior:
Basis principles of cost behavior refer to how and how much the cost for an item
reacts to changes in the level of production. Based on behavior basis, costs could be
classified into three types.

Fixed cost remains unchanged in total for a given time period. Fixed costs are

a period charge. However, in long-term fixed cost could change. Although fixed cost is
invariable in total, fixed cost per unit do change because of economic of scale. (Course
book, 2004, p.12) The more products are made, the lower fixed cost per unit is. Examples
of fixed cost in Charm Lady are the rent of factories (per month or per annum), the salary
of managing director (per month or per annum) and so on.

Variable cost is the cost that varies with the volume of product. The more

products are made, the higher variable cost is. In spite of this, variable cost per unit is the
same amount for each unit produced. (Course book, 2004, p.13) Take some instances for
variable cost at Charm Ladys plant, the cost for raw materials such as fabric and leather
or sales commission that varies with the volume of sales.
Thus, as the level of production increases the total costs per unit (fixed cost plus
variable cost) will decrease.

Mixed cost is a cost which contains both fixed and variable components.

Thus, it is partly affected by changes in the level of production. (Course book, 2004,
p.14) Some instances of mixed cost could be electricity, which is a basic charge plus a
charge per unit of consumption or the salary of sales staffs, which are a fixed monthly
salary component and a percentage of sale revenue.
5. Controllability:
One of the purposes of classifying cost based on controllability is that limiting the
controllable range and the responsibility of the managers. Moreover, this classification
might be an appropriate way to evaluate the performances of manager. According to this
basis, cost could be categorized into two types.

Controllable cost is a cost that could be controlled or influenced significantly

by management decisions and actions. (Course book, 2004, p.11)

Uncontrollable cost is any cost that a manager could not have control or

significant influence within a given time span. (Course book, 2004, p.11)
For instance, purchasing raw materials such as fabric or leather is under the
control of the manager of purchase department but not the manager of production
department. Another example, sales revenue is under the control of the manager of sales
department but not the manager of human resource department.
6. Value chain:
For similar purposes as the classification of costs into manufacturing and nonmanufacturing costs, the categorization of costs relying on value chain divides costs into
three types.

Upstream costs include Research and Develop costs for garment market as

well as fashion tendencies and so on.

Manufacturing costs is as previously mentioned.

Downstream costs include the costs of advertisement, promotion, sales and

distribution as well.

II. Possible costing systems that Charm Lady is currently using

To begin with, the costing system could be recognized according to the
presentation in income statement (as mentioned previously). As can be seen from the
income statement of the company, the possible costing system that company is currently
using is absorption costing system (or full costing), which complies with the general
accepted accounting principles. This costing system concerns more about fixed overhead
costs for production. Fixed cost is shared to each product. A full production cost is valued
in closing stocks, including the fixed cost. Thus, cost of sales in the current period
includes part fixed cost of previous period and exclude part fixed cost of current period.
This fixed cost will be charged in the next period. (Course book, 2004, p.71) For a
fashion company as Charm Lady, us

ing this costing system helps avoid the fluctuation of profit seasonally because
sharing fixed cost. Moreover, determine whether it is profitable or not is possible by
using this system. Yet, the volume of production and sales might not be concerned.
Another costing system that could be identified from the income statement is
marginal costing system (or variable costing). Marginal costing system include only
variable costs as product costs and fixed costs are charged in full against profit of the
period they are incurred. (Course book, 2004, p.71) This system might not be not using
by Charm Lady (although the given information from company is not sufficient to prove
this) but it could be possible to consider. However, the arguments for using one of these
systems and the obstacles of using current costing system of Charm Lady will be
discussed deeply later in the follow parts.
On the other approach, According to the nature of the manufacturing operation on
each circumstance, the company could choose between two basis types of costing
accounting available, which are job costing and process costing. (Hogget and Edward,
1996) Frequently, Charm Lady produces the products that range from jackets, dresses,
trousers, coats, shirts to accessories and shoes for young and middle ages women. These
products are made continuously. They are gone through some processes to become a
mass of indistinguishable products with the same average cost per unit. The output of one
process becomes the input to the next until finished product made in the final process.
This is process costing system. (Course book, 2004, p.136) For instance, jackets and
trousers after coming out Cutting department will become the inputs of Sewing
department, and then being processed in Finishing department to made finished products.
The closing work in process usually has to be valued. For this costing system, just-intime processing philosophy to minimize time and cost needs to be noticed.
In some other circumstances, as Charm Lady receives the orders from specific
customers or firms, the job costing system is applied. Many different products are
produced for each order. An estimate or budget of the orders cost using predetermined
overhead rate will be determined, and then if accepted by customers, the production will
be processed. Tracing and allocating costs to each job and maintaining cost records for
each job is essential because after the completion of job, the difference between selling
price and total actual cost will be the profit or loss of the company. (Course book, 2004,

p.107) For example, Luxury Wear has ordered a number of jackets and dresses for the
autumn season with particular price. This is considered as a job order for Charm Lady.
Another costing system that Charm Lady could apply in some cases is batch
costing, which is a refinement of job costing and the batch is treated as a job during
production. This costing is used as Charm Lady produces lots of volume of products and
they are divided into batches such as the batches of winter coats or fall dresses to stores
or branches in cities in the UK or to European market. Cost per unit in a batch is
calculated by total cost of batch divided by the number of units in the batch. (Course
book, 2004, p.118)

III.

Overhead cost allocation

1. Overhead analysis sheet for forthcoming period

The process to apportion overheads to the production departments consists of two
stages.

First stage: apportioning general overheads

Identifying all overhead costs which have to be allocated to general overhead cost
centers based on allocation bases. In the most ideal way, cost allocation bases should be
apportioned based on the cause-and-effect relationship with costs. In other words, this
means that which factors causing costs are to incur. (Course book, 2004, p.52)
At Charm Ladys plant, heat and light spread out entirely the factory, so the
allocation base of heat and light is floor areas. In the similar way, all departments in the
plant need cleaning. Additional, cleaning and the rent of factory are calculated based on
the square of the plant. Thus, the basis to apply these overheads to the departments is also
floor areas. Another overhead, maintenance, is attached to machine. The more machines
operate, the higher the cost of maintenance is. Therefore, maintenance cost is apportioned
to departments by machine hour basis. Plant insurance obviously depends on the value of
plant. Personnel cost is charged for each employee, so the number of employees is
evidently the allocation base of this cost.
The overhead costs and their allocation bases are listed in the follow table.
Overhead to which the basis applies
Heating and lighting
Cleaning

Basis
Floor areas
Floor areas
7

Rent
Maintenance
Plant Insurance
Personnel costs

Floor areas
Machine hour
Plant value
No of employees

Costs are apportioned using the following general formula:

(Total overhead cost Total value of apportionment base) x Value of
apportionment of cost center
For instance, heating and lighting for Cutting dept = 52,000 (1,200 + 4,500 +
2,000 + 100 + 200) x 1,200 = 7,800
Calculate similarly, the figure of overhead costs allocated to the departments is
presented in the follow table.
Item of cost

Total

Cutting

Sewing

Finishing

Quality

cost ()

department department department Control

Canteen

department
650
1,300

Heating and 52,000

7,800

29,250

13,000

lighting
Cleaning
Rent
Maintenance
Plant

47,000
60,000
42,000
360,000

7,050
9,000
6,087
88,207

26,438
33,750
32,261
176,413

11,750
15,000
3,652
94,087

587
750

1,175
1,500

588

705

Insurance
Personnel

320,000

50,000

187,500

75,000

3,125

4,375

costs
Total ()

881,000

168,144

485,612

212,489
5,700
9,055
(Round the number to the nearest pound)

Second stage: service cost centre cost apportionment

Only the production departments, including Cutting, Sewing and Finishing

department, are directly involved in the manufacturing of the units. Thus, apportioning
the costs of service cost centers to production is necessary. All the overheads have to be
located in the product departments. (Course book, 2004, p.52-53)
Because workers and all administrative staffs in the plant are served with lunches
in the Canteen of the company, the allocation base of the overheads of Canteen to the
8

production departments is evidently the number of employees. Quality Control

department is only responsible for overseeing quality of three production departments.
The quality of process could be evaluated through the volume of outputs

. Alternatively,

the volume of output at each department could be relatively rated by the number of
employees. Thus, in these allocation bases, the number of employees is appropriate to use
in absorbing the overhead of Quality Control department to the production departments.
Choosing an allocation base to absorb the overheads to departments is a way so that the
overheads could be apportioned. Thus, the result of allocation is relative compare with
actual process.
Department

Basis

of Total

apportionment
Canteen
No of employees
Quality Control
No of employees
Total
Previously allocated

cost ()
9,055
5,700
14,755

and apportioned costs

Indirect materials
Indirect labor
Total overhead ()

Cutting

Sewing

Finishing

dept
1,449
912
2,361
168,144

dept
5,433
3,420
8,853
485,612

dept
2,173
1,368
3,541
212,489

24,000
15,000
35,000
5,000
6,000
6,300
199,505 515,465 257,330
(Round the number to the nearest pound)

2. Overhead absorption rates for each department

An absorption basis should reflect realistically the characteristics of a cost center.
In Sewing department, production is heavily based on machinery then overhead in this
department is absorbed by using a machine hour rate, while and in Cutting and Finishing
departments, the work is done mainly by manual work then direct labor hours is applied.
Thus, overhead absorption rate of each department is calculated based on the
corresponding allocation base.
Therefore, overhead absorption rate for:

Cutting dept = Total overhead costs of Cutting dept Total direct labor hour
of Cutting dept
= 199,505 25,000
= 7.98 (/DLH)

Sewing dept = Total overhead costs of Sewing dept Total machine hour of
Sewing dept
= 515,465 53,000
= 9.73 (/MH)

Finishing dept = Total overhead costs of Finishing dept Total direct labor
hour of Finishing dept
= 257,330 35,000
= 7.35 (/DLH)

3. Difficulties in implementing this allocation method and other options for

allocating overhead costs
a. Difficulties in implementing this allocation method
The allocation method using departmental overhead rates, which Charm Lady is
applying, reflects equitably and representatively the efforts and resources putting into
making the costs due to using a separate absorption rate for each department. However,
this is a complex method to implement because identifying the allocation bases seems to
be difficult; moreover, calculating overhead rate in each department and applying
overhead costs to each department using its separate rate is intricate.
There are two alternative options for allocating overhead costs that manager of the
company could consider. First, instead of using separate manufacturing overhead rates for
Cutting, Sewing and Finishing departments, manager could examine to use a plant-wide
overhead rate (or blanket overhead absorption rate). According to this method, all
overhead costs form a single cost pool and one overhead rate is calculated for the entire
production plant. After identifying the only one cost driver for all costs, applying
overhead costs to departments is calculated based on this rate. However, such a rate could
be not appropriate as departments do not spend an equal amount of allocation base. For
example, Sewing department spends less labor hours than the other ones, so it is not fair
to use labor hours as a cost driver for Sewing department.
The most considerable method is ABC (Activity-based costing). ABC identifies
cost drivers that directly link production activities or departments, which cause the costs.
Moreover, ABC concerns about the range of activities in manufacturing process and type
of cost driver in allocation process such as numbers of orders (Fatseas, Bisman and

10

Williams, 2001). ABC is the method that is used popularly nowadays and allocation base
of this method based on transactions or activities. However, ABC system does not
appreciate the benefits to management decision making.

IV.

The costs and price for Luxury Wears order

Luxury Wear, which is a big retailer, has ordered a large quantity of jackets and
evening dresses for the fall season from Charm Lady Company. The cost of this order is
total product costs, which is calculated by formula:
Product costs = Direct materials + Direct labor + Manufacturing overheads
Where:

Direct materials = 105,000

Direct labor = (Direct labor rate x Direct labor hours) at departments

= 9 x 2,400 + 10 x 500 + 9 x 3,200
= 55,400

Manufacturing overheads = (Overhead absorption rate of Cutting dept x

Direct labor hours of Cutting dept) + (Overhead absorption rate of Sewing dept x
Machine hours of Sewing dept) + (Overhead absorption rate of Finishing dept x Direct
labor hours of Finishing dept)
= 7.98 x 2,400 + 9.73 x 200 + 7.35 x 3,200
= 44,618
(As can be seen in the table of estimated work on the order, the labor hours are
much more in Cutting and Finishing departments. It means that the work is done mainly
by manual work then the labor hour rate is applied. Otherwise, the machine hour rate is
applied for Sewing department.)
Thus,
Product costs = 105,000 + 55,400 + 44,618
= 205,018
Company is to make profit of 50% mark-up from costs for this order
Therefore,
Price of this order = Total costs + Net Profit
11

= 205,018 + 50% x 205,018

= 307,527

V. Plan of production and sales, costing and pricing decision of new plant
in Malaysia
1. The number of units to be sold to break-even and the margin of safety
Variable cost per unit = Direct material + Direct labor + Variable manufacturing
overhead+ Variable selling and administrative expenses
= 2.5 + 5 + 3 + 0.05 x 30
= 12
Contribution margin per unit = Selling price Variable cost per unit
= 30 12
= 18

Break-even point is the number of sales at which the total revenues is equal

the total costs. At this point, there is no profit as well as loss made. (McLaney, 2010)
Break-even point (units) = Fixed costs Contribution margin per unit
= 220,000 18
= 12,223 (units)
At the break-even point, fixed costs and the contribution margin are equal.

Margin of safety = Expected Sales BEP

= 35,000 12,223
= 22,777 (units)
Margin of safety = 22,777 x 30
= 683,310
Margin of safety = 22,777 35,000
= 65%

2. Bonus scheme to motivate managers of the new plant

a. Project income statement for the next year

Sales

Absorption costing:

1,050,000

12

Less: Cost of goods sold

451,500

((2.5+5+3+120,00050,000)x35,000)
Gross profit
Less: Selling and administrative expenses

598,500
152,500

(100,000+0.05x3500x30)
Net profit

446,000

Marginal costing:

Sales
Less: Variable costs
Variable COGS

1,050,000
367,500

((2.5+5+3)x35,000)
Variable selling and administrative 52,500
expenses (0.05x35,000x30)
Contribution margin
Less: Fixed expenses
Fixed S&A expenses
Fixed manufacturing overhead
Net profit

630,000
100,000
120,000
410,000

b. The implication of the bonus scheme on the choice of manager on production

plan
As can be seen in the above calculation, the net profit under absorption costing
system is 446,000 and the net profit under marginal costing system is 410,000. Thus,
because the bonus scheme is based on net profit, the manager would use absorption
costing system which reports a higher profit. The plant can produce at maximum 50,000
units of product per year; yet, market research shows that for the first year, company can
sell only 35,000 units. Thus, the volume of production is greater than the volume of sales.
This makes an increase in inventory. Under absorption costing, some factory overhead
will be deferred as product costs (which reduces cost of sales). Therefore, net profit under
absorption costing is higher than net profit under marginal costing. At a higher net profit,
managers expected a greater bonus.
However, using this costing system brings some obstacles. One of them is that
production that does not base on the actual demands of market. The number of production
is often greater than the volume of sales. Thus, ending inventory is large. Absorption
13

costing does not adjust the stock level leading to profit manipulation. Furthermore, the
absorption rate is only estimation. Thus, there will be an under/over-absorbed overhead
that lead to an under/over profit.
c. Suggestions to avoid adverse effect of the bonus scheme on companys
operation
The current bonus scheme based on the net profit would encourage the manager
to use absorption costing. To avoid the adverse effect of the bonus scheme on companys
operation, the value of closing stock under absorption costing and marginal costing is
equal. On the other word, the net profit under both costing systems is equal. Thus, the
volume of production should be equal that of sales. That means opening stock is equal
closing stock. Therefore, the production should base on the demands of market. This way
is optimal. However, it seems to be difficult to carry out in reality or only adjust at a
relative scope.
Using marginal costing to replace the current costing system is worth to consider.
Marginal costing seems to be a better assessment of performance that can measure efforts
of management; especially in correcting problems created by the current assessment
system that is heavily affected by the allocation of fixed production costs.
On the other hand, as the level of production gain maximum at 50,000 units, more
fixed cost is hidden in ending inventory (though the number of sales does not increase).
Thus, the part of fixed cost that is in cost of goods sold decreases, leading the reduction
of cost of goods sold. Therefore, the net profit in current period, which is based on to
motivate managers, increases. However, the remaining stocks are large and not ensured to
be able to be sold in the future period.
Besides, managers should control the absorption rate to increase the bonus.
Moreover, managers should concern to saving-materials and saving-labor as well as other
expenses to control costs. This management is carried out by controlling the process of
purchasing and using materials, idle time and so on.
4. Factors that affect product costs and pricing decision of manager for
products to be sold in Asian market
a. Factors that affect product costs:

14

There are three main factors that influence product costs; namely, direct materials,
direct labor and manufacturing overheads. In Asian market, these factors might be little
different with in European and UK markets. Obviously, they are worth to consider as
making decision in production.

Direct materials in Asian market might are at lower prices comparing with

European and UK markets excluding the materials that have to be certainly imported
from European. Materials in Asian also have special characteristics. Thus, the costs for
materials in Asia might be lower than European and UK. However, the quality of
materials needs to be concerned.

Direct labor in Asian market is certainly cheaper than in European and UK

markets. However, the quality of labor force in Asian might be not as high as that in
European and UK in product specialization.

Manufacturing overheads include many parts in which the costs for

managers and supervisors as well as experts might be higher in European. Because of the
lack of experiences in production and the quality of labor force is not high, the costs for
experts and supervisors who inspect and train employees and monitor the processes and
the quality of products is higher.
b. Factors that affect pricing decision:
There are many factors that influence pricing decisions. 5 main factors at Asian
market are interpreted as follows.

Customer value is the difference between the value from owning and using

the product and price paid for the product. Customers affect a products price through
their demand for the product. They perceive the benefits of the product and their buying
decision bases on price. The extent of change in demand for goods following a change to
its price is measured by the price elasticity of demand. (Course book, 2004, p.85-86) For
garment market, demand is elastic. Thus, a decrease in price will bring an increase in
revenue. However, manager needs to consider whether increase the price of their products
or not to ensure both profit and trade name in an increasing demand market as Asian in
which the customers satisfaction is significantly different with that in European and UK.
Moreover, for a new market choosing to use penetration pricing to increase the market
share or skimming pricing to increase revenue is necessary.

15

Competitor pricing behavior could affect the companys pricing decisions.

For garment market in Asian, Charm Lady has a significant number of competitors,
including both domestic brand names and European trade names such as Mango, Zara
and so on. Therefore, Charm Lady needs to learn about competitors technologies, plant
capacities, operating strategies and exchange rates as well to estimate competitors costs
and pricing decisions.

Product costs affect indirectly prices through supply. In long term, ideally

product costs should be under selling price. Product costs are ground to determine price.
For Asian market, product costs of a European fashion company as Charm Lady is worth
to aware of (because of the previously mentioned factors).

Market positioning Charm Lady chooses its position itself in Asian market.

This influences product price. For instance, if the target market of Charm Lady in Asian
market is middle class, the prices of products will not be expensive also not too cheap.
Besides, Charm Lady should not underprice in difficult situations to be consistent with its
brand image and avoid the reduction of profitability.

Legal, political and ethical issues are worth to consider in setting price.

Managers have to comply with the laws of Asian market which is different as comparing
with the laws of European and UK markets. Generally, the law prohibits companies from
discriminating between customers in setting price.

Appendix
Calculation figures of allocated overheads
Heat and light for Sewing dept = 52,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 4,500 =
29,250

16

Heat and light for Finishing dept = 52,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 2,000
= 13,000
Heat and light for Quality Control dept = 52,000 (1,200 + 4,500 + 2,000 + 100 + 200) x
100 = 650
Heat and light for Canteen dept = 52,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 200 =
1,300
Cleaning for Cutting dept = 47,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 1,200 =
7,050
Cleaning for Sewing dept = 47,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 4,500 =
26,428
Cleaning for Finishing dept = 47,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 2,000 =
11,750
Cleaning for Quality Control dept = 47,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 100
= 587
Cleaning for Canteen dept = 47,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 200 =
1,175
Rent for Cutting dept = 60,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 1,200 = 9,000
Rent for Sewing dept = 60,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 4,500 = 33,750
Rent for Finishing dept = 60,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 2,000 =
15,000
Rent for Quality Control dept = 60,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 100 =
750
Rent for Canteen dept = 60,000 (1,200 + 4,500 + 2,000 + 100 + 200) x 200 = 1,500
Maintenance for Cutting dept = 42,000 (10,000 + 53,000 + 6,000) x 10,000 = 6,087
Maintenance for Sewing dept = 42,000 (10,000 + 53,000 + 6,000) x 53,000 = 32,261
Maintenance for Finishing dept = 42,000 (10,000 + 53,000 + 6,000) x 6,000 = 3,652
Plant Insurance for Cutting dept = 360,000 (750,000 + 1,500,000 + 800,000 + 5,000 +
6,000) x 750,000 = 88,270
Plant Insurance for Sewing dept = 360,000 (750,000 + 1,500,000 + 800,000 + 5,000 +
6,000) x 1,500,000= 176,413

17

Plant Insurance for Finishing dept = 360,000 (750,000 + 1,500,000 + 800,000 + 5,000
+ 6,000) x 5,000 = 588
Plant Insurance for Cutting dept = 360,000 (750,000 + 1,500,000 + 800,000 + 5,000 +
6,000) x 6,000 = 705
Personnel costs for Cutting dept = 320,000 (80 + 300 + 120 + 5 + 7) x 80 = 50,000
Personnel costs for Sewing dept = 320,000 (80 + 300 + 120 + 5 + 7) x 300 = 187,000
Personnel costs for Finishing dept = 320,000 (80 + 300 + 120 + 5 + 7) x 120 = 75,000
Personnel costs for Quality Control dept = 320,000 (80 + 300 + 120 + 5 + 7) x 5 =
3,125
Personnel costs for Canteen dept = 320,000 (80 + 300 + 120 + 5 + 7) x 7 = 4,375
Allocation the overheads of Canteen dept to:
Cutting dept = 9,055 (80 + 300 + 120) x 80 = 1,449
Sewing dept = 9,055 (80 + 300 + 120) x 300 = 4,375
Finishing dept = 9,055 (80 + 300 + 120) x 120 = 2,173
Allocation the overheads of Quality Control dept to:
Cutting dept = 5,700 (80 + 300 + 120) x 80 = 912
Sewing dept = 5,700 (80 + 300 + 120) x 300 = 3,433
Finishing dept = 5,700 (80 + 300 + 120) x 120 = 1,368

Reference
1. Horngren, C.T., Foster, G., Datar, S.M., Black, T. and Gray, P. (8 th ed) (1996),
Cost Accounting in Australia, Prentice Hall, Australia.

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2. Hilton, R.W., Maher, M.W. and Selto, F.H. (2000), Cost Management:
Strategies for Business Decisions, McGraw-Hill, United State of America.
3. Hoggett, J.R. and Edwards L. (3rd ed) (1996), Accounting in Australia,
Jacraranda Wiley, Australia.
4. McLaney E.J. and Atrill, P. (5th ed) (2010), Accounting: An Introduction,
Prentice Hall, Europe.
5. Fatseas, V.A., Bisman, J.E. and Williams, J.F. (2001), Management
Accounting for Costing and Control, McGraw-Hill, Australia.
6. BPP Professional Education, Mandatory Unit 9: Management Accounting (1 st
ed) (2004), London: Aldine Place.

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