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 percentaMakers 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.

 

Â	Direct wages RM	Direct labour hours	Machine hours	Production RM overheads
Budgeted costs:	Â	Â	Â	Â	Â
Department A	25,000	10,000	40,000	120,000	Â
Department B	100,000	50,000	10,000	30,000	Â
Department C	25,000	25,000	-	75,000	Â
Total	150,000	85,000	50,000	225,000	Â
    Actual costs:   Â	Â	Â	Â	Â	Â
Department A	30,000	12,000.	45,000	130,000	Â
Department B	80,000	45,000	14,000	28,000	Â
Department C	30,000	30,000	- ____	80,000	Â
Total	140,000	87,000	59,000	238,000	Â

 

During the period job no. 567 was completed and actual costs and actual hours of the job incurred in each department are shown below:

 

Â	Direct materials RM	Direct wages RM	Direct labour hours	Machine hours
Department A Department B Department C	120 60 10	100 60 10	20 40 10	40 10 -

 

 

Required:
a) Calculate the overhead absorption rate currently in use.
[5 mark]

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

[6 marks]

 

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.
[10 marks]

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
[10 marks]

e) Discuss the treatment of over or under absorption production overheads.

[6 marks]ge of direct labour cost for