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Hi sir, The question is – production cost centers are Moulding and Painting and uses a single production OAR based on direct labour hrs.
Labour hrs. Machine hrs. Overhead
Moulding-4,000. 12,000. 180,000
Painting- 10,000. 1000. 100,000Question – It has been suggested that appropriate cost centre oar may be more realistic, Find OAR in Moulding and painting cost centre.
This question is taken from Japan study text illustration no. 3.
Solution – painting- 180,000/12,000 = 15
Moulding – 100,000 / 1000 = 10My doubt is, it is mentioned in question in first paragraph/line that “The company uses a single production OAR based on direct labour hour”. Then why it used machine hour. Obviously, the reply must be that – ” painting is machine intensive cost centre and painting is labour intensive”. But it’s stated in question that the company uses direct labour hours to calculate single production OAR. Please clear the doubt.
My Overhead concepts are very clear but it only takes a confusing line to mislead and get 0 mark out of a question.
Is single production OAR mean
Cost centre OARs
or
Blanket/ single factory wide OAR?I think I was wrong/confused at this stage.
Although the question says that currently they are using a single OAR (which means a blanket OAR) based on labour hours, it then says that it would be more realistic to use an appropriate OAR for each cost centre.
So it is asking you calculate an OAR for each cost centre and to do it in the most sensible way, which would be to use machine hours for moulding and to use labour hours for painting.
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