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Methods of Overheads Allocation

A company which makes sophisticated mobile telephones has designed a new casing for its product which requires a different finish to the previous casing because the material type is a recently developed synthetic material and much stronger and more scratch-resistant than the previous plastic material used for the product casing.

It is the first time the workforce will have to work with this new synthetic material. The design department selected a team of experienced workers to manufacture a trial batch of 10 mobile telephones using the new material. After due consideration, management has decided to assume an 80% learning curve for production of the product, which is given below:

X ( batches of 10 units) Y(%) X (continued) Y(%) (continued)
1 100 8 51.2
2 80 9 49.3
3 70.2 10 47.7
4 64.0 12 44.9
5 59.6 14 42.8
6 56.2 20 38.1
7 53.4 40 30.5

Also, a task analysis of the processes used to produce this first batch of calculators indicated the following direct inputs and average costs per mobile telephone:

Direct material £300
Direct labour £200
Each direct labour hour costs £90

1. Estimate how many direct labour hours will be required to produce the fourth batch of mobile telephones.
2. Discuss the suitability of the LC for cost estimation and calculate what is the prime cost per mobile telephone for the fourth batch.
3. Assume after completing and selling the first 4 batches, the company receives an order from a wholesaler for a batch of 100 of the products. How many direct labour hours will be required to produce this batch of the mobile telephones?
4. If the company uses a cost plus margin approach to price its products, what is the price per mobile telephone for the batch in part (c) if the company, in addition to material and labour costs also incurs variable overheads which are 75% of direct labour cost.
5. Critically assess some of the typical purposes for which learning curve estimations may be used by the management accounting department.

Solution Summary

The solution discusses the methods of overheads allocation.