MAA262 – Management Accounting Assessment Task 1

Question 5

Sleep Well Inc. has a production budget of 600 beds for the current year and for allocating the manufacturing overhead (i.e., indirect cost pool). Sleep Well Inc. uses the direct labour-hours for assembly and woodwork (carpenter) to allocate manufacturing overhead. Koren and Jingran are not sure whether the production budget will be met and some of its consequences.

Required

a) If the quantity produced in the current year reaches the budgeted amount of 600 beds whereas in the past year the production was 500 beds, Jonathan says the per unit product cost in the current year will increase when compared to the previous year because the production has increased. Is Jonathan right or wrong in his statement and why? Use calculations for supporting your argument. (Chapter 2, 10 marks)

b) Considering Sleep Well Inc. uses budgeted indirect costs during the year, if the quantity produced in the current year is only 400 beds whereas the production budget for the current year is 600 beds, Jonathan says there will be an overallocation of indirect costs. Is Jonathan right or wrong in his statement? What could lead to an overallocation or underallocation of indirect costs specifically for the beds? Use calculations for supporting your argument. (Budgeted indirect costs and end-of-period adjustments, Chapter 3, 10 marks)