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Sir,
1.why do we calculate OAR either by machine hours or labour hours instead of production units if more products are produced?2. In ABC after calculating total cost pool, why we calculate OAR by production units of each product instead of machine hours or labour hours of each product.
For example.
product A total OH= 78040
units = 20000
machine hours=40000So, here, why we calculating OAR by prodn units instead of machine hrs?
Ultimately we always want the overheads on a per unit basis (in order to be able to complete the cost card).
With traditional absorption there are no rules – we can calculate an absorption rate in whatever way we think it most sensible, but in the exam it is almost always either per labour hour or per machine hour (and the question will say which). The reason is that if one product takes (say) 1 hour per unit, whereas another product takes (say) 4 hours per unit, then it would seem only sensible to give 4 times as much overheads to the second product than to the first.
(The free Paper F2 lectures on overheads will help you on this – traditional absorption is Paper F2).In ABC, we calculate the total overheads applicable to each product. If we know the total overheads applicable to one product and we know how many units of that product are produced, then the overhead per unit can only be the total overhead divided by the units.
(The free lecture on ABC should clear up your doubts on this)
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