Accounting Business Reporting for Decision Making

CHAPTER 11 Costing and pricing in an entity 489

11.2 Steelo Company is a steel fabricator, and Remote Gates has submitted an order for

900 steel gate frames. Estimates have been prepared, and direct labour costs are 150 hours

at $25 per hour, and direct materials are $3000. Steelo’s budgeted indirect manufacturing

costs for the year are $100 000. Costs are allocated using direct labour hours as the cost

driver. A total of 10 000 direct labour hours has been allowed in the budget to cover expected

demand.

Required

a. Estimate the total cost of the Remote Gates order.

b. What is the unit cost for each steel gate frame?

SOLUTION TO 11.2

a. Estimated total cost of the Remote Gates order

Direct labour (150 hours × $25)

Direct materials

Indirect manufacturing (150 hours × $10*)

$3 750

3 000

1 500

Total cost of order $8 250

*Indirect cost rate $100 000/10 000 direct labour hours = $10 per direct labour hour.

b. Unit cost

$8250/900 gates = $9.16 per gate

Comprehension questions

11.3 What is a cost object? Give three examples. LO1

11.4 Explain the difference between a direct cost and an indirect cost. LO2

11.5 Explain the difference between a full product cost and an inventoriable product cost. LO4, 5

11.6 Discuss the importance of selecting an appropriate cost driver in the cost allocation

process. LO3

11.7 Explain cost-based pricing and give an example that shows how prices would be

determined using this method. LO6

11.8 Explain market-based pricing and give an example that shows how prices would be

determined using this method. LO6

11.9 Differentiate between predatory pricing, dumping and collusive pricing. LO6

11.10 Explain the difference between short-run and long-run pricing. LO6

11.11 ‘Volume-based cost drivers are no longer appropriate in today’s business environment.’

Discuss. LO3

11.12 Identify two factors that influence pricing decisions. LO6

11.13 Assess the benefits to an entity of using a costing system. LO1

Exercises

 BASIC |   MODERATE |    CHALLENGING

11.14  LO2

Frida’s Tax Practice has two departments, tax and audit. The tax department has two product

lines, business returns and individual returns. A list of costs and three cost objects from Frida’s

Tax Practice are shown below.