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There is an MCQ in ABC Practice questions on opentuition site which is confusing to me! I’m having a problem calculating the cost driver in the overhead absorption rate.
Should I calculate the Overhead Absorption rate based on Batch per Unit like this?
Batch per Units:
Product X = 1000 / 20,000 = 0.05 per unit
Product Y = 5000 / 50,000 = 0.10 per unit
Total Batch per Units = 0.15OAR = $30,000 / 0.15 = $200,000
Absorb Overhead:
Product X = $200,000 x 0.05 = $10,000
Product Y = $200,000 x 0.10 = $20,000Should I calculate the Overhead Absorption rate based on Units per Batch like this?
Units per Batch:
Product X = 20,000 / 1000 = 20 per batch
Product Y = 50,000 / 5000 = 10 per batch
Total Units per Batch = 30OAR = $30,000 / 30 = $1000
Absorb Overhead:
Product X = $1000 x 20 = $20,000
Product Y = $1000 x 10 = $10,000Which way is the correct one?
I am puzzled as to why you are asking, because when you review the quiz there are answers shown for each question.
However what you have typed is wrong in both cases!
The question says that the cost driver is the number of production runs. There is a production run each time a batch is made.
So for X there are 20,000/1,000 production runs, and for Y there are 50,000/5,000 production runs.
In total there are 30 production runs and so the cost is $1,000 per production run/batch.So as far as the numbers are concerned, your second answer gives the correct final figures, but the words you have typed make no sense. There are not 20 units per batch of X. The question specifically says that X is produced in batches of 1,000 units each time!!
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