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OAR – Role of Budgeted Labor Cost

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › OAR – Role of Budgeted Labor Cost

  • This topic has 1 reply, 2 voices, and was last updated 1 month ago by John Moffat.
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  • June 14, 2022 at 7:22 pm #658748
    menpagalhoon
    • Topics: 4
    • Replies: 1
    • ☆

    I came across a question. If budgeted overheads are $450,000 and budgeted labor cost is $200,000 then calculate absorption rate on the basis of labor cost.

    I calculated this in percentage.

    $450,000 / $200,000 = 2.25 $

    $2.25 * 100 = 225 % of direct labor cost

    The correct answer is 225 % of direct labor cost.

    But I don’t quite understand this. Why doesn’t the question provide a level of activity such as budgeted labor hours. And now that it has provided us with labor cost, what is the relationship between labor cost and labor hours? Why are we calculating this answer as a percentage?

    Thank you for your help!

    June 15, 2022 at 6:54 am #658783
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49902
    • ☆☆☆☆☆

    It is because the question says that is to be absorbed as a % of labour cost. The company can absorb on any basis they think is suitable, more commonly it will be on labour hours but it certainly does not have to be 🙂

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