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STL Co has two production departments (Processing and Packing) and two service departments (Maintenance and Canteen).
The following are budgeted production overhead costs for next period: –
Factory rent 20,000
Factory heat 5,000
Processing Dept – supervisor 5,000
Packing Dept – supervisor 10,000
Depreciation of equipment 7,000
Factory canteen expenses 18,000
Welfare costs of factory employees 5,000
total 80,000
processing packing maintenance canteen
cubic space 50,000 m3 25,000 m3 20,000 m3 5,000 m3
nbv equipment $20000 $200000 $200000 $100000
no of employees 40 30 20 10
Processing
Labour hours 20,000
Machine hours 50,000Packing
Labour hours 40,000
Machine hours 15,000Calculate the OAR for each of the two production departments (to two decimal figures).
Explanation
Processing OAR = Budgeted overheads / budgeted actual level
= 47745 / 50000
= 0.95 / machine hourPacking OAR = Budgeted overheads / budgeted actual level
= 32257 / 40000
= 0.81 / labour hourCould you please explain how he calculate the budgeted overheads?
Thank you in advance for your help
DespinaFor each department separately, they have divided the total budgeted overheads by the total budgeted hours.
For processing they used machine hours because more of the work is done on machines rather than by labour. For packing they used labour hours because more of the work is done by labour than by machines.Do watch my free lectures on overheads because this is all explained in the lectures.
The lectures are a complete free course for Paper F2 and cover everything needed to be able to pass the exam well.
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