Holloway Print: Job 214 - Absorption Base and Normal Waste
Holloway Print runs a jobbing print shop. Job 214 is a batch of 5,000 A5 leaflets for a local gym. The job card shows: paper 5,250 sheets at £0.08 per sheet, the extra 250 sheets being normal setup waste; ink and plates £40; 12 direct labour hours at £14.00 per hour; 6 machine hours at £9.50 per hour. Production overhead is currently absorbed at £6.50 per direct labour hour. Actual good leaflets produced were 4,750. The print manager argues the overhead should be absorbed on machine hours at £14.00 instead, because the press rather than the staff limits output, and he wants the change applied to Job 214 before the quote goes out.
1. Calculate the total cost of Job 214 and the cost per good leaflet using the current labour-hour absorption rate. Explain how the 250 wasted sheets are treated.
Read the worked answer
Cost of Job 214 (labour-hour basis)
| Element | Working | £ |
|---|---|---|
| Paper | 5,250 × £0.08 | 420.00 |
| Ink and plates | given | 40.00 |
| Direct labour | 12 hrs × £14.00 | 168.00 |
| Machine cost | 6 hrs × £9.50 | 57.00 |
| Production overhead | 12 hrs × £6.50 | 78.00 |
| Total job cost | 763.00 |
Cost per good leaflet = £763.00 ÷ 4,750 = £0.1606, i.e. 16.06p per leaflet (£160.63 per 1,000).
Treatment of the 250 wasted sheets The waste is normal - it is an unavoidable consequence of setting the press up for this job. Normal waste is not a separate loss: its cost is simply borne by the good output. So all 5,250 sheets (£420) are charged to the job, and the divisor is good output (4,750), not sheets purchased (5,250).
Using 5,000 as the divisor would understate the unit cost at £763 ÷ 5,000 = £0.1526, and the gym would be quoted a price that does not recover the cost of the sheets actually consumed.
2. Recalculate the overhead and unit cost on the manager's proposed machine-hour basis, and advise whether the change should be made for this job.
Read the worked answer
Machine-hour basis Overhead = 6 machine hours × £14.00 = £84.00 (instead of £78.00). Total job cost = 420 + 40 + 168 + 57 + 84 = £769.00 Cost per good leaflet = £769 ÷ 4,750 = 16.19p (vs 16.06p).
Advice - do not retrofit the change to Job 214
- Principle: overhead should be absorbed on the factor that actually drives the overhead. If press time is the bottleneck (depreciation, power, press maintenance), machine hours are the fairer base and spread overhead between jobs in proportion to the resource consumed. The manager's underlying argument is sound.
- But: the £14.00 machine-hour rate is not justified in the scenario. A rate must be budgeted overhead ÷ budgeted machine hours. Simply picking £14.00 because it gives a similar answer is not a rate calculation, and it may be wrong for other jobs.
- Consistency: the base and rate must be set in advance and applied to all jobs in the period. Applying a new base to one job part-way through the year makes job costs non-comparable and means earlier jobs under-absorbed overhead, leaving an under/over-recovery balance later.
- Practical effect here is small (16.06p vs 16.19p, about 0.13p per leaflet), so the quote should not be delayed. The right approach is to review the absorption base for the next period, with a properly calculated rate, and tell the customer nothing about a mid-job change.
3. The production director says the 250 wasted sheets should be charged to the profit and loss account as a loss instead of to the job. Recalculate the job cost and unit cost on that basis and comment.
Read the worked answer
If the waste is treated as a separate loss
- Paper charged to the job = 5,000 sheets × £0.08 = £400.00
- Waste to loss = 250 × £0.08 = £20.00
- Total job cost = 400 + 40 + 168 + 57 + 78 = £743.00
- Cost per good leaflet = £743 ÷ 4,750 = 15.64p (vs 16.06p)
Comment - this is only correct for abnormal waste The distinction is whether the waste was expected:
- Normal waste (expected in the job specification, as here): the cost is a cost of production and must be recovered from the customer. Charging it to P&L would understate job cost by 0.42p per leaflet and lose the company £20 on every job of this type.
- Abnormal waste (e.g. a press fault ruining 250 sheets in excess of the norm): this is not a cost of the job and belongs in P&L as an abnormal loss, so the customer is not charged and the job's performance is judged fairly.
The director's treatment would flatter the job's margin and hide the true cost of quoting; it should be rejected for normal setup waste.