Coverdrive Ltd Case Study

Coverdrive Ltd Case Study, Overhead Recovery When John Thistle, the management accountant, joined Coverdrive one of his early projects was a review of the treatment of production overhead and the impact of ABC – Activity Based Costing. Prior to John’s appointment a single overhead recovery rate had been used for the charging of production overhead to the company’s range of products. In a recent meeting with Steve Ambrose, the MD, John discussed the need for separate overhead recovery rates for each producing cost centre. John had prepared a number of schedules based on the current year’s budget. These illustrate the procedure of allocation of apportionment of overhead to the expense centres and the use of this process in determining the recovery rates for each. John had identified the following cost centres: Schedule 1 10 20 30 40 50 60 70 80 Machining Finishing Packing Maintenance Stores Production Control and Inspection Canteen Building occupancy costs

(for all costs associated with the building)

OVERHEAD RECOVERY

Schedule 2 130.00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Production Overheads Indirect Material Indirect Labour Employers NI Employer’s Pension Contribution Repairs and Maintenance (Plant) Repairs and Maintenance (Buildings) Depreciation Plant Depreciation Buildings Small Tools and Consumables Insurance Plant Insurance Buildings Rent and Rates Heat and Light Power Workshop Administration

Schedule 3 Budgeted Production Overhead 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 £ 25,500 95,000 97,700 58,620 40,000 9,375 210,000 20,000 5,750 13,125 10,000 18,275 10,100 75,500 3,200 £692,145

OVERHEAD RECOVERY

Budget Manual Data
Cost Centre Machining Finishing Packing Maintenance Stores Production Control Canteen

Number of employees Direct wages (£) Indirect wages (£) Employers NI 10% of wages Pension contribution 6% of wages Plant and equipment values (£) Indirect materials (£) Area occupied (sq metres) Repairs to plant (£) Direct labour hours Machine hours Maintenance hours Ratio of power consumption Estimated stores requisitions

23 352,800

21 308,700

15 220,500

2

2

3

2

25,000

24,500

37,500

8,000

900,000 7,750 937 18,000 55,200 55,200 3,250 60 5,500

600,000 5,500 750 10,000 50,400 50,400 1,000 30 4,375

200,000 8,500 313 4,000 36,000 12,000 550 9 2,250

300,000 2,500 250 6,200

90,000 100 275 1,000

750 50 -

10,000 400 50 800

1,000

-

100

1 100

OVERHEAD RECOVERY

Coverdrive Ltd Overhead Analysis Sheet
Overhead 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 Indirect material Indirect labour Employer’s NI Pension Plant repairs Building repairs Depreciation (Plant) Depreciation (Build) Consumables Insurance Plant Insurance buildings Rent/rates Heat and light Power Workshop admin Total 25500 95000 97700 58620 40000 9375 210000 20000 5750 13125 10000 18275 10100 75500 3200 692145 Re-apportionment Build Occ Re-apportionment Canteen Re-apportionment Prod Control Re-apportionment Stores Re-apportionment maintenance Area No of Emp No of Emp Stores Req Maint hrs Build Occ “ “ Ratio Cons No of Emp 45300 1247 226612 24184 4735 17994 19525 54159 £347209 22650 1139 154478 19357 4323 16429 15531 16664 £226782 6795 814 78100 8078 3088 11735 46593 7987 9166 £118154 3550 79989 (79989) (46593) 69575 6452 412 39083 7098 412 44250 1290 618 46158 (46158) 12297 1291 13588 (13588) 67750 (67750) 755 Basis Allocated Allocated Total wages “ Allocated Build Occ 10% SL Build Occ DL Hrs 2242 5625 2047 3750 1461 1250 1875 563 62 10000 18275 10100 90000 60000 20000 30000 9000 1000 20000 M’c 7750 35280 21168 18000 FIN 5500 30870 18522 10000 Pack 8500 22050 13230 4000 Maint 2500 25000 2500 1500 6200 Store 100 24500 2450 1470 1000 Prod Cont 750 37500 3750 2250 Can 400 8000 800 480 800 Build Occ 9375

OVERHEAD RECOVERY

Production Overhead Recovery Rates per Cost Centre Machining on the basis of machine hours £347209 55200 = £6.29 per machine hour Finishing on basis of machine hours £226782 50400 = £4.50 per machine hour

Packing on the basis of labour hours £118154 36000 = £3.28 per direct labour hour

The previous recovery rate had been established for the factory as a whole and would have been: £692145 141600 = £4.88 per direct labour hour £6.29

The individual rates are in the range £3.28 Compared with £4.88 for the blanket rate.

OVERHEAD RECOVERY