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Overhead absorption rate

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Overhead absorption rate

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • December 23, 2016 at 5:15 pm #364346
    accaed
    Member
    • Topics: 23
    • Replies: 0
    • ☆

    A company has established the following budgeted fixed overheads for the forthcoming period:

    …………………………. £’000 ……… Bases of apportionment
    Heating and Lighting … 12 …………….. Cubic capacity ……
    Welfare costs …………. 7 ………….. Number of employees
    Power ………………….. 42 ……………….. Kwh usage ……..
    …………………………… –– ………………………………………..
    ………………………… Total 61
    …………………………… –– ………………………………………..

    Other information:

    …………………………… Department 1 .. Department 2 .. Maintenance … Total
    Cubic capacity (m3) ……… 6,000 ………… 7,500 ………….. 2,500 ……. 16,000
    Employees (number) ………. 20 …………….. 30 ………………. 6 ………….. 56 ..
    Power
    (kwh usage) ………………. 35,000 ………. 25,000 …………………………. 60,000
    Labour hours ……………… 28,000 ………. 48,500 …………………………. 76,500
    Machine hours ……………. 40,000 ………. 39,000 …………………………. 79,000

    The maintenance department splits its time between Department 1 and Department 2 on a ratio of 2:3.

    The management accountant has partially completed an allocation and apportionment statement:

    …………………. Department 1 .. Department 2 …. Maintenance
    ……………………….. £ ………………… £ ……………….. £ …….
    Heat and Light ….. 4,500 …………… 5,625 ………….. 1,875 …
    Welfare …………… 2,500 …………………………………………….
    Power ……………. 24,500 …………………………………………….
    ……………………. ––––––– ……………………………………………
    ………………… Total 31,500 ………………………………………….
    ……………………. ––––––– ……………………………………………

    What would be the overhead absorption rate in Department 1 (to 3 decimal places)?
    A £0·788/machine hour
    B £0·814/machine hour
    C £1·125/labour hour
    D £1·163/labour hour

    The answer is B but I can’t see where this has come from; e.g. 31,500/40,000 machine hours would give A…

    December 23, 2016 at 10:29 pm #364361
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54704
    • ☆☆☆☆☆

    But maintenance is a service department and therefore needs recharging to departments 1 and 2 as per the question (i.e. in the ratio 2:3).

    Have you watched my free lecture on the recharging of service departments?

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