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If Units and Batch size is given in an ABC question then how would we calculate the Overhead Absorption rate?
Units / Batch = Units per Batch?
For Example:
Production run overhead is $120,000If we produce 1000 units in the 4 batches for Product A and 2000 units are made in the 5 batches then the overhead absorption rate will be calculated on units per batch like this:
Units per Batch for Product A = 1000 / 4 = 250
Units per Batch for Product B = 2000 / 5 = 400
Total Units per Batch = 650Overhead Absorption rate = $120,000 / 650 = $184.62 per units batch
Allocate Overheads to each product on units per batch:
Product A : $184.62 x 250 = $46,155
Product B : $184.62 x 400 = $73,848Can you please tell me is that correct way? Sorry to ask this because I have watched the lecture on ABC 🙂
It depends what the question says is the cost driver for production runs. Most likely the cost driver is the number of batches and so the cost per batch = 120,000 / (4 + 5) = 13,333
The total cost for product A is therefore 4 x 13,333 = 53,332, and therefore the cost per unit for product A is 53,332 / 1,000 = $53.33.
The total cost for Product B is 5 x 13,333 = 66,665, and therefore the cost per unit for Product B is 66,665 / 2,000 = $33.33.
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