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Please tell me how can I calculate the Overhead Absorption rate in the ABC costing when we are given units and batches.
Should we calculate OAR based on Units per Batches?
It depends on what the question asks for. Ultimately it will be per unit, but the workings might be done in batches first and then divided by the number of units per batch.
Have you watched my free lectures on ABC?
Sorry to ask such a long question but I’m having a problem when we are given units & batches in ABC questions. I have seen your video on ABC topic.
A manufacturing business makes two products A1 and A2.
Products————————-A1————–A2
Demand————————8000———-10000
Number of Setups————-60————-250
Production Batch size—–2000 units—–100 units
Setups per Batch————–2—————-3
Special Handling per unit—-2—————-8ALL Overheads:
Setup cost = $98,600 (number of setups)
Material Handling cost = $60,000 (number of batches)
Special Handling cost = $120,000 (Number of Sales Orders)
Total Overheads = $278,600OAR is calculated by taking the units per batch (units/batch) and then multiply it with the overhead costs per cost driver (Overhead / Number of Setups)?
I don’t know where you found this question, but it does not make any sense at all for it to give ‘number of set-ups’ and ‘number of set-ups per batch’. It is simply not a valid question as you have typed it.
In addition, for the question to say that the special handling cost has a driver of ‘number of sales orders’ is impossible because the question gives no information as to the number of sales orders.
The set-up costs should be split in total based on the number of set-ups (so 98,600/310 per set-up, multiplied by 60 for A1 and multiplied by 250 for A2).
The material handling cost should be split based on the number of batches (so 60,000/104 per batch multiplied by 4 for A1 and multiplied by 100 for A2).
The special handling cost can only be based on the cost per unit as given in the first table (so 120,000/96000, multiplied by 16,000 for A1 and 80,000 for A2).
Having got the total overhead for each product, the cost per unit for each is arrived at by dividing by the number of units of each.
Hi, Can it be said that traditional absorption costing tends to over-estimate overhead costs for high volume products?
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