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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.
Direct wages
RM
Direct labour hours
Machine hours
Production
RM
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
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 t

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