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.
|
Budgeted costs:
|
Direct
wages
$
|
Direct labour hours
|
Machine hours
|
Production Overheads $
|
|
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