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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 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • December 6, 2021 at 9:45 am #642692
    shahreel
    Participant
    • Topics: 3
    • Replies: 8
    • ☆

    Good Day, Mr. John.

    I hope you are well, I am a bit lost with the below topic on calculating OAR per batch & kindly requesting to help me with this, please.

    Marz Co has decided to use the direct method to re-apportion service center costs to its two
    production departments, mixing, and stirring. As calculated previously, this resulted in allocated overheads of $177,444 and $84,556 to the mixing and stirring departments respectively.
    During the year, the following data has been collected:

    Mixing Stirring

    Direct labour hours 12,500 4,000

    Direct machine-hours 2,000 10,000
    Number of batches of Marz
    cakes (each batch consists
    of 1,000 cake) 2,500 2,500

    Direct materials cost $75,000 $30,000
    Direct labour cost $62,500 $20,000

    Note that Marz cakes are just one of many products produced by Marz Co in this factory.

    Appropriate absorption base is labor hour for mixing and machine hour for stirring, therefore when calculated based on overhead, the answer should be $14.2 for mixing & $8.5 for stirring (177444/12500) & (84556/10000), however, the answer is.

    Total overheads = $70.98 (mixing) + $33.82 (stirring) = $104.80 per batch of marz cakes.

    that is overhead is being divided by a number of batches. (12500/2500) & (10000/2500)

    which later gets multiplied with OAR ($14.20*5)= OAR 71 & ($8.5*4)=34

    Not able to understand why this is being done since it does not mention anything about subdividing the batches. Thank you.

    December 6, 2021 at 3:48 pm #642730
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54662
    • ☆☆☆☆☆

    They are not subdividing the batches, they are calculating the overheads per batch.

    The absorption rate for mixing is 177,444/12,500 = $14.1955 per labour hour.

    Each batch takes 12,500/2,500 = 5 labour hours to make.

    Therefore the overhead per batch is 5 hours x 14.1955 per hour = $70.98.

    Similarly each batch takes 10,000/2,500 = 4 machine hours of stirring.
    The absorption rate for stirring is $8.4556 per machine hour.

    Therefore the overhead per batch is 4 hours x 8.4556 = $33.82.

    December 7, 2021 at 6:24 am #642847
    shahreel
    Participant
    • Topics: 3
    • Replies: 8
    • ☆

    Thank you, Mr. John, Now I got it, The overhead is calculated hourly basis first, Later we allocate these hours to the total number of batches based on its cost base. Thank you Again.

    December 7, 2021 at 8:37 am #642882
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54662
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Overhead absorption Rate’ is closed to new replies.

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