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7AC002 Accounting And Finance

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Claret and Blue Ltd: Costing and Decision Making December 2017

Claret and Blue Ltd manufactures machinery components to customers’ exact specifications. The company operates on a ‘cost plus’ basis.

The following information relates to job number 339:

Direct Materials

34 metres of steel tubing at £10 per metre (list price) 300 kilos of aluminium at £4 per kilo (list price)

Assorted components, totalling £66 (net price)

A trade discount of 15% applies to all list prices for steel tubing and aluminium.

Direct Labour

Claret and Blue Ltd rewards their employees with a bonus system. Employees are paid a bonus equal to half of the time saved.

The company include these costs in the direct labour cost charged to the customer.

Production Overheads

Claret and Blue Ltd absorbs production overheads on an individual department basis.

150% of the direct labour cost is applied to the machining and assembly departments.

The finishing department absorbs overheads at a rate of £12 per direct labour hour.

All rates are applied in accordance with the actual labour costs charged to the customer.

Administration Overheads

Administration overheads are charged at a rate of 20% of total production costs.


The company operates to a margin of 20%


1. Claret and Blue Ltd are requesting guidance and support on costing and decision making.

2. Prepare a business report for Claret and Blue Ltd that includes a detailed statement showing the amount that should be charged for job number 339.

Effective absorption of overheads is an important element of any cost accounting system.

3. Evaluate the range of methods that can be used by companies such as Claret and Blue Ltd to absorb production overheads.

An individual is considering investing in a Limited Company, such as Claret and Blue Ltd.

4. Discuss the factors that the potential investor should consider.

The management of Claret and Blue Ltd are considering whether to purchase or lease a new warehouse.

5. Assess the benefits and limitations of the sources of funding that would be available to Claret and Blue Ltd for their new warehouse.

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