Problem: Makers Ltd is a manufacturing company that has three production departments known as Department A, B and C. The production overhead is absorbed on the basis of a percentage of direct labour cost for the factory as a whole. It has been suggested that a departmental overhead absorption rate would result in more accurate job costs.
Below are the budgeted and actual data for the year ended 31’ October, 2008.
Direct Direct labour Machine Production
wages hours hours Overheads
$ $
Budgeted
costs:
Department A 25,000 10,000 40,000 120,000
Department B 100,000 50,000 10,000 30,000
Department C 25,000 25,000 __-___ 75,000
Total 150,000 85,000 50,000 225,000
Actual costs:
Department A 30,000 12,000. 45,000 130,000
Department B 80,000 45,000 14,000 28,000
Department C 30,000 30,000 - ____ 80,000
Total 140,000 87,000 59,000 238,000
During the period job no. 567 was completed and actual costs and actual hours of the job incurred in each department are shown below:
Direct materials $ Direct wages $ Direct labour hours Machine hours
Department A 120 100 20 40
Department B 60 60 40 10
Department C 10 10 10 -
a) Calculate the overhead absorption rate currently in use.
b) Calculate the departmental overhead absorption rate for each department using the following basis:
Department A - machine hours
Department B - direct labour hours
Department C - direct wages
c) Using the overhead absorption rates calculated in part (b) above, determine the total cost for job no. 567 and its selling price if a profit margin is to be maintained at 20% of the selling price.
d) Show the over/under absorption of production overheads for each department using:
i the OAR calculated in part (a) above
ii. the OAR calculated in part (b) above