the process of restructuring its operations

The Flying Airlines company has been operating for five years and is currently in the process of restructuring its operations due to the challenging conditions it is facing both in its local and international operations. To this end it has asked you to advise it on the best course of action and any concerns or problems it may encounter in each situation. At Sydney Airport the company has a three year old loader truck which it uses to load meals on to airplanes with the box being lifted hydraulically to the airplane’s side doors. The loader was bought three years ago at $100,000 and is depreciated straight line to zero over its four year life – so the loader has one year useful life remaining. This loader could be sold now for $5,000. In addition to its annual depreciation of $25,000, the Flying Airlines Company incurs $80,000 annually in variable operating costs to operate the loader. The Operations Manager, Jack Steele, is facing a decision about replacement of the loader. A new loader would cost $20,000 to purchase and would last for one year and would incur $50,000 in annual variable operating costs.


Based on the above costs what should the Flying Airlines do?

Question 2

Part A: Classifying costs

A manufacturer has the following cost estimates in their annual budget:

Required: (Show total cost for each cost category)

a) Identify budgeted PERIOD COSTS

b) Identify budgeted PRIME COSTS

c) Identify budgeted CONVERSION COSTS

d) Identify budgeted TOTAL PRODUCT COSTS

e) Identify budgeted OVERHEAD COSTS

Part B: Calculating Predetermined Overhead Rate (POHR)

Using the formula for each of the following potential cost drivers, calculate a PREDETERMINED OVERHEAD RATE to APPLY

OVERHEADS in each operation:

(i) The manufacturer estimates average direct labour cost per hour to be $30.00 per hour. (/DLH)

(ii) The manufacturer decides to allocate overheads based on Direct Labour COST. (/DL$)

(iii) The manufacturer estimates there will be 130,000 machine hours worked this year. (/MH)

(iv) The manufacturer decides to allocate overheads based on Direct Material COST. (/DM$)

Part C: “Normalising” Manufacturing Costs using a Predetermined Overhead Rate (POHR)

Using the POHR rates calculated above, calculate the APPLIED OVERHEAD if the following ACTUAL COST DRIVER ACTIVITY LEVELS occurred:

(i) Actual Direct labour hours were 11,500

(ii) Actual Machine Hours were 125,000


For each of the APPLIED OVERHEAD amounts calculated in Part C, if the ACTUAL Overheads were as follows, calculate the difference to the budgeted overhead and indicate whether the overheads were OVER or UNDER APPLIED:

Actual overheads were: $2,850,000

a. Using DLH shown

b. Using MH shown

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