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Overhead cost

Forums › FIA Forums › MA1 Management Information Forums › Overhead cost

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by Ken Garrett.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • February 21, 2024 at 7:45 pm #700820
    abdulrahmanbakhtani@gmail.com
    Participant
    • Topics: 8
    • Replies: 12
    • ☆

    Hello sir
    Hope this massage finds you well
    Can you please assist me with this question MA1 chapter 7 (overhead costs)

    A business has two production departments, , assembly and polishing. One of the products made in these departments is the Stun. Details for these departments and the Stun are as follows:

    For assembly cost center

    Overhead 94800
    Labour hours 20000
    Machine hours 60000
    Stun labour hour per unit 3 hour
    Stun machine hour per unit 4 hour

    For polishing cost center

    Overhead 74800
    Labour hours 40000
    Machine hours 15000
    Stun labour hour per unit 5 hour
    Stun machine hour per unit 2 hour

    Overheads in the assembly department are to be absorbed on the basis of machine hours and in the polishing department on the basis of labour hours.
    How much overhead in total would be included in the cost of a Stun?

    A. $3.45
    B. $8.48
    C. $10.06
    D. $15.67

    Actually sir I correctly calculate the overhead obsorption rate for both polishing and assembly department

    Which overhead obsorption rate for assembly department is 1.58$ per machine hour
    And for polishing department it’s 1.87$ per labour hour

    But when I calculate the overhead in total for stun I assume that stun take 4 machine hour in assembly department and also 2 machine hour in polishing department
    So I multiply the 6 machine hour by 1.58
    I make the same assumption for labour hours and multiply the 8 by 1.87$

    But book calculate like this
    Overhead to be absorbed
    Assembly $1.58 x 4 hours
    Polishing $1.87 × 5 hours

    What’s the logic behind this calculation

    Thank you for your attention and I am sorry If it becomes too long

    February 21, 2024 at 11:24 pm #700830
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10585
    • ☆☆☆☆☆

    Each unit in assembly takes 4 machine hours and each unit in polisking takes 5 labour hours.

    In the assembly dept the absorption rate is 1.58 per machine hour so overheads in that department would be 4 x 1.58 per unit.

    In the polishing dept the absorption rate is 1.87 per labour hour so overheads in that department would be 4 x 1.87.

    Hence, overheads for a unit going through both departments in sequence amount to: 4 x 1.58 + 1.87 x 5.

    February 22, 2024 at 9:10 am #700862
    abdulrahmanbakhtani@gmail.com
    Participant
    • Topics: 8
    • Replies: 12
    • ☆

    I am sorry sir but I am still confused
    We just ignore 3 labour hour of assembly department and 2 machine hour of polishing department

    February 22, 2024 at 12:08 pm #700880
    Ken Garrett
    Keymaster
    • Topics: 10
    • Replies: 10585
    • ☆☆☆☆☆

    Yes. If you decide to base your overhead absorption rate on, say labour hours then it is only labour hours you use to absorb in that department. Similarly, if you have an overhead absorption rate per machine hours, only machine hours are important when absorbing the overheads.

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