Overhead Allocation, Apportionment and Absorption

Ssideline16y ago

Can anyone do question 4 on chapter 3 on open tuition notes, my brain is gone and I can' figure it out..
A company manufacturers two products L and M in a factory divided into two cost centres, X and Y. The following budgeted data are available:
Cost centre
X Y
Allocated and apportioned fixed
overhead costs $88,000 $96,000

Direct labour hours per unit:
Product L 3.0 1.0
Product M 2.5 2.0
Budgeted output is 8,000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis.
What is the budgeted fixed overhead cost per unit for Product M?

((deleted)16y ago#1

2.5 + 2.0 = 4.5

so, 2.5/4.5*88000 + 2.0/4/5*96000

Total cost =$ 91555.56/8000U

So cost per Unit is 11.4

M i rite..:S even m not sure..:S do let me kw plz if m wrong.......

Ssideline16y ago#2

No sorry this is not the correct answer

Aaam200916y ago#3

@zforall said:
2.5 + 2.0 = 4.5
so, 2.5/4.5*88000 + 2.0/4/5*96000
Total cost =$ 91555.56/8000U
So cost per Unit is 11.4
M i rite..:S even m not sure..:S do let me kw plz if m wrong.......

Unfortunately I think you're wrong.

Here's my attempt:

We need to apportion fixed overheads to each unit of production i.e. divide overheads by the number of units fairly.

We do this by seeing how many labour hours were spent in cost centres X and Y.

In centre X: 3 hours were spent on each unit of product L, 2.5 hours on each unit of product M = 5.5 hours spent in total on 1 unit of L and M.

In centre Y: 1 hour on each unit of product L, 2 hours on each unit of product M = 3 hours spent in total on 1 unit of L and M.

Now the question tells us 8000 units are produced of EACH unit.

So:

Centre X: 5.5hrs x 8000 units = 44,000 hours of labour. Now we apportion $88,000 overheads incurred in X to each labour hour by $88,000 / 44,000 hours = $2 per labour hour spent in cost centre X.

Similarly Centre Y: 3hrs x 8000 units = 24,000 hours of labour. Apportion $96,000 overheads incurred in Y to each labour hour by $96,000 / 24,000 hours = $4 per labour hour spent in cost centre Y.

So each hour of labour in centre X cost $2 and each hour of labour in centre Y costs $4.

We can work out the overhead cost per unit of M now using these figures:

(2.5 hours x $2) + (2 hours x $4) = $13. Which is option D and I believe the right answer given in the back of the notes.

If I’ve got the working out wrong please let me know! I hope this helps.

Ssideline16y ago#4

I have it thanks to Zforall for starting me well I think I am right
add labour hour of product x 5.5 then 2.5/5.5*88000 =40000
add labour hour of product y 3.0 then 2.0/3.0*96,000 = 64000
40000 + 64000 = 104000
104000/8000 units = $13 per hour

((deleted)16y ago#5

thanks alot for correcting me:)