araglapn Styles Azzion Enterprises operates as absorption costing system Its bud

Question

araglapn Styles Azzion Enterprises operates as absorption costing system Its budget for the year ended 31 December shows that it expects its production overhead expenditure to be as follows Machining department Hand finishing department Exed (S) Variable (s) 480,000 Fixe 600,000 360,000 400,000 During the year it expects to make 200,000 units of is product. This is expected to take 80,000 machine hours in the machining department and 120,000 labour hours in the hand finishing department The costs and activity are expected to arise evenly throughout the year, and the budget has been used as the basis of calculating the company's absorpbion rates During March the monthly profits statement reported 0 That the actual hours worked in each department were Machining Hand finishing 6,000 hours 9,600 hours () That the actual overhead costs incurred were- Variable Machining department Hand finishing department Fixed 48,500 33,600 36,000 33,500 (ii) That the actual production was 15,000 units Required (a) Calculate appropriate pre-determined absorption rates for the year ended 31 December (b) Calculate the underlover absorption of overhead for each department of the Company for March: (0 Comment on the probiems of using predetemined absorption rates based on the arbitrary apportonment cf overhead costs, with regard to comparisons of actual/target performances State the reasons why absorption costing is used by companies (c)

Explanation / Answer

a

b

Machining Hand finishing Fixed 600000 360000 Variable 480000 400000 Total Overhead Cost 1080000 760000 Budgeted Hour 80000 120000 Predetermined overhead Rate                    13.50                     6.33

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