Paragraph Styles During the year it expects to make 200,000 unils of its product

Question

Paragraph Styles During the year it expects to make 200,000 unils of its product. This is expected to take 80,000 machine hours in the machining department and 120,000 labour hours in the hand fineshing department The costs and activity are expected to arse eventy throughout the year, and the budget has been used as the basis of calculating the company's absorption rales During March the monthly profits statement reported 0) That the actual hours worked in each department were Machining 6,000 hours Hand finishing 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 (n) That the actual production was 15,000 units Required: (a) Calculate appropriate pre-determmined absorption rates for the year ended 31 December (b) Calculate the underiover absorption of overhead for each department of the Company for March Comment on the problems of using of overhead costs with regard to comparisons of actualtarget pertormances predetermined absorption rates based on the arbitrary apportionment ic) State the reasons why absorption costing is used by companies ia) Justity vhy budgeted overhead rates shouid be used in preterence to actual overhead rales

Explanation / Answer

a) Predetermined overhead absorption rate = Total budgeted manufacturing overheads ÷ Total budgeted machine hours Budgeted Manufacturing Overhead Fixed Variable Cost Machining $600,000.00 $480,000.00 Finishing $360,000.00 $400,000.00 Rate for Machining department (Fixed + Variable) = ($600,000 + $480,000)/80,000 hours $13.50 Rate for hand finishing department (Fixed + Variable) = (360000 + 400,000) / 120,000 hours $6.33 b) Under/over absorption of overhead = Actual manufacturing overheads absorbed - Manufacturing overheads incurred Actual manufacturing overheads absorbed= Actual machine hours × Predetermined overhead absorption rate Machining Department = 6000 hours x $13.50 $81,000.00 Hand Finishing Department = 9600 hours x $6.33 $60,800.00 Manufacturing overheads incurred Machining Department (Fixed + Variable) $84,500.00 Hand Finishing Department (Fixed + Variable) $67,100.00 Under/over absorption of overhead = Machining Finishing Actual manufacturing overheads absorbed $81,000.00 $60,800.00 Less Manufacturing overheads incurred $84,500.00 $67,100.00 Manufacturing overheads under-absorbed -$3,500.00 -$6,300.00 ii) Overheads that are apportioned to cost centres tend to be on an arbitrary basis and are unlikely to be controllable by the cost centre manager. Managers should be held accountable for only those overheads that they can control. c) Absorption costing is used by companies to ensure that all products/services bear an equitable share of company overheads and to allocate overheads to products in order to meet financial accounting requirements

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