TABLE OF CONTENTS
CONTENTS PAGE
Abstract 2
1.0 Introduction 3
2.0 Analysis of the results 4
2.1 Allocation and Apportionment
2.2 Overhead Absorption Rates
2.3 Cost Determination
2.4 Pricing for Potential Orders
2.5 Profit Analysis
2.6 Sensitivity Analysis
2.6.1 Scenario 1: Increase/Decrease in Direct Material Costs
2.6.2 Scenario 2: Increase/Decrease in Direct Labour Costs
2.6.3 Scenario 3: Increase/Decrease in Profits
2.6.4 Summary
3.0 Conclusions 8
3.1 Issues
3.2 Recommendations
Abstract
Malaysian based glove manufacturer Super Glove Ltd faced problems with its costing
systems and financial reporting. From the past 5 year financial results, 20% of its total
glove production is exported to other Asian countries and mainly to the USA, and the UK.
However, there has been an occurrence of unsystematic approaches toward its costing
methods. This lead to inaccurate cost allocation which questions the integrity of its
financial statements for decision making purposes. This report provides the review of the
costing system computed using the excel spreadsheet using the Overhead Absorption
Costing Method. Recommendations are to increase profits so that there will be a greater
profit margin for the business.
1.0 Introduction
As an active player in the industrial sector, Super Glove Ltd should incur different types of
indirect costs. Therefore it is crucial to allocate the costs correctly to determine correct
pricing of products and profit measurement. The methodology here is to provide a
spreadsheet computation and provide analyses for the overall costing system.
OAR = Budgeted Overhead
Basis
2.0 Analyses of Results
2.1 Allocation and Apportionment
Unlike direct costs which can be traced directly to the activity, indirect costs are not easily
charged therefore, they are indirectly charged using allocation bases which are significant
determinants. In the Overhead Analysis Sheet, the budgeted overheads are allocated and
apportioned to both production and service departments and finally re-apportioned to the
production department with Latex Dipping amounted with the highest overhead of RM 93
535 or 30% and Leaching with the lowest of RM 72 992 or 23%.
2.2 Overhead Absorption Rate
Overhead absorption rate are attributing overheads to a product or service. It is computed
bytaking the Budgeted amount of each relevant department and dividing it with the
appropriate basis.
The bases used are machine hours for the entire production department except for the
Beading department which was based on labour hours. From the spreadsheet the respective
rates for Latex Dipping, Beading, Leaching and Drying are RM 2.92, RM 2.54, RM 3.32
and RM 2.15 respectively.
2.3 Cost Determination
Once the Overhead Absorption Rates are derived, the production costs are computed by
summing both variable and fixed cost. In Appendix 2, Surgical Gloves consumed the most
