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Blunt is considering a new project but is unsure how much overhead to include in the
calculations to help him decide whether or not to proceed. Existing fixed overheads are
absorbed at the rate of $8 per hour worked. Blunt is certain that the project will involve an incremental 500 labour hours.The project will involve extra machine running costs and these variable overheads cost him $4 per hour. The number of extra machine hours is expected to be 450 hours. The
difference between this figure and the 500 labour hours above is expected idle time.
The project will require a little more temporary space that can be rented at a fixed cost of $1,200 for the period of hire. This overhead is not included in the fixed overhead
absorption rate above.What is the overhead to be charged against the project decision?
A $3,000
B $3,200
C $7,000
D $7,200i only understand Extra variable overheads: 450 hours × $4/hr $1,800 and fixed cost part as additional fixed costs caused by a decision of renting are relevant but what about incremental 500 labour hours and idle time ?
The questionably asks for the overheads to be charged (not how much should be charged for labour).
why we didn’t calculate the Idle time as the project will take 500 labour hour in total
As we have said above, and my previous response.
This question asks:
What is the overhead to be charged against the project decision?So the overheads to be charged, thus not how much should be charged for labour as this is not included in the overhead calculation …..because it does not incur additional costs that need to be charged against the project.
The focus is on the costs that will be directly incurred due to the project.
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