Overhead Analysis

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A Case Study On Managerial Accounting for Planning and Control Star Engineering Company Star Engineering Company Star Engineering Company (SEC) produces electrical accessories like meters, transformers, switchgears and automobile accessories like taximeter and speedometers. SEC buys the electrical components but manufactures all mechanical parts within its factory which is divided into four Production department (Machining, Fabrication, Assembly, and Painting) and three Service department (Stores, Maintenance and Work Office). Though the Company prepared annual budgets and monthly financial statements, it had no formal cost accounting system. Prices were fixed based on what the market can bear. Inventory of finished stocks was valued at 90 of the market price assuming a profit margin of 10%. In March, 2010, the company received a trial order for a Government Department for sample transformer on a cost-plus-fee-basis. They took up the job (numbered by the company as Job No. 8210) in the early April and completed all manufacturing operations before the end of the month. Since Job No. 8210 was very different from the type of transformers they had manufactured in the past, the company did not have a comparable market price for the product. The purchasing officer of the Government department asked SEC to submit a detailed cost sheet for the job, giving as much detail as possible regarding material, labor and overhead cost. SEC, as part of the routine financial accounting system had collected the actual expenses for April, 2010, by the 5th of May. Some of the relevant data are given in Exhibit I. The company tried to directly assign as many expenses as possible to the production department. However, it is not possible in all cases. In many cases, an overhead cost, which was common to all departments had to be allocated to the various departments using

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