COSTING PROCEDURES FOR RIO GOLD LTD
Rio Gold Ltd produces standard dining-room tables and chairs on a production line that includes a cutting department, a shaping department, a construction department and a finishing department. This dining-room furniture is sold to mid-priced retailers around the country. They are a standard product and over 25 000 dining-room settings are produced and sold each year.
Rio Gold Ltd also takes special one-off orders for custom-built dining-room settings that are produced to the customer’s specifications in consultation with the company’s master carpenter. This furniture is hand-finished and French-polished, and is not made on the company’s production line.
Required:
1. Should the company use the same costing procedures for materials used in the production of both products? Would this always be necessary?
2. Why would the company use a predetermined overhead application rate for costing the production of custom-built dining-room settings?
3. When would it be necessary to use a predetermined overhead application rate in costing the production of the standard dining-room settings? Would there be some circumstances where actual overhead costs could be used rather than a predetermined overhead application rate? Explain.
