Mandevu Enterprises Ltd (MEL) makes and sells furniture. The company has two production departments: Cutting and Assembly, and two support departments: Stores and Machine Maintenance.
MEL uses a traditional absorption costing system to allocate production overheads to products. The following budgeted cost information is available for the month:

Production departments
Service departments

Total costs
Cutting
Assembly
Stores
Maintenance

K
K
K
K
K

Direct materials
742,960
167,760
403,200
78,000
94,000

Indirect wages
138,000
42,000
30,000
30,000
36,000

Factory Insurance
24,800

Factory security
21,000

Factory rent and rates
72,400

Machine depreciation
13,200

Light and heat
12,480

Canteen expenses
43,800

Supervisors salaries
32,960

Power
56,720

Administrative costs
24,600

MEL prepared the following additional information:

Cutting
Assembly
Stores
Maintenance

Machine hours
77,200
61,760
15,440

Direct labour hours
48,000
14,400
33,600

Kilowatt hours (% usage)
60
25
5
10

Floor area (square metres)
600
800
400
200

Number of employees
16
36
6
6

Value of stores issues (K)
372,800
279,600
93,200

Value of machinery
480,000
200,000
80,000
40,000

Required:
Explain the terms direct costs and indirect costs, giving examples.
(4 marks)
Prepare a schedule of the total budgeted overheads for each of the four departments, clearly showing the basis of apportionment.
(11 marks)

Calculate the total budgeted overheads for each of the production departments after the service departments have been re-apportioned.
(3 marks)

Compute the budgeted overhead absorption rates for each of the production departments. (4 marks)

Calculate the selling price for a piece of furniture given the following cost information.
Direct materials
K30.50

Direct labour hours:

Cutting
0.25 hour

Assembly
0.75 hour

Machine hours:

Cutting
0.25 hour

Assembly
0.25 hour

Profit mark-up is 25%
(9 marks)

At the end of the period the actual production overhead cost incurred by the Cutting department was K234,480. Actual labour hours worked in that department were 14,100 and actual machine hours recorded were 63,000. Calculate the under or over absorbed production overhead for the Cutting department.
(2 marks)
Describe the following costing systems:
Marginal
Absorption costing
(4 marks)
Explains the effect on profit of using variable (marginal) and absorption costing.

(5 marks)
Explain TWO advantages and TWO disadvantages of both marginal and absorption costing systems.
(8 marks)
[Total 50 marks]