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How to calculate Overhead Absorption rate (OAR) in ABC when we are given Units and Units are made in Batches?
Should we calculate the Units per Batch by taking Total Units divided by Total Batches?
And then we divide Total Overheads by Units per Batch to get OAR?
Is that correct?
It depends on the wording of the question and on what the cost drivers are.
Have you watched my free lectures on ABC?
Yes 🙂 I saw your lecture but could you please help with this question I cannot really work out here!
There are two products R and S that a company is making:
R: 80,000—S: 60,000
Batch size units:
R: 100——-S: 50
Machine setup per batch:
R: 3———-S: 3
Processing time per unit (min)
R: 3——— S: 5
Overhead costs for two activities:
Machine set-up $180,000
For the machine set-up costs, the cost driver in the number of batch setups (R: 80,000/100 x 3 = 2,400; S: 60,000/50 x 3 = 3,600) So 6,000 in total and therefore $30 per batch.
This would mean a total of $72,000 for R and $108,000 for S.
For the processing cost, the cost driver is the total processing time (R: 80,000 x 3 = 240,000 minutes; S: 60,000 x 5 = 300,000 minutes. So the cost per minute is $0.20.
This means a total of $48,000 for R and $60,000 for S.
Therefore the total for each product is the two added together.
If the question requires an overhead cost per unit, then divided the total for each product by the number of units.