Edward company (Dec 2007)

Using either of the two months, since we know the variable cost per hour then the rest of the cost must be the fixed cost. So using month 1, the total variable cost is 19,000 x $20 = $380,000. So the fixed cost = 620,000 - 380,000 = $240,000 This is the fixed cost per month. The normal activity level is 240,000/12 = 20,000 hours per month, Therefore the absorption rate = $240,000/20,000 = $12 per hour.

Still not clear why we have to take out for whole month and qstn didn’t Tell so how I know??

But the question says that the costs given are for Month 1 and for Month 2. Therefore the fixed overheads of $240,000 are the cost per month. The question also says that the normal activity level is 240,000 hours per year. So to get the absorption rate either divide the monthly overheads by the monthly hours (as in my previous reply), or, if you prefer, divide the yearly overheads (12 x $240,000) by the yearly hours (240,000). Either way gives the same result of $12 per hour.

Thank you so much sir. I understood second method is ok for me. Thanks again

You are welcome :-)