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Dear John Moffat,
Could you please explain below question and solution.Thanks in advanceProduction overheads will be incurred in the production of new desks,and the following data has been ascertained from two months in the factory.
Total production overhead / Total assembly labour hours
Month1 — $148800 / 19000
Month2 — $168000 / 23000Fixed production overheads are absorbed on an assembly hour basis based on the normal activity levels.On average there are 20000 assembly hours worked per month.(Each desk takes 45 minutes to produce)
What are the total overheads per desk that James Limited should include in their costing for the desks (to the nearest cent)
Using the high-low method on the two months, the variable cost is
(168000 – 148800) / (23000 – 19000) = $4.80 per hour.
The fixed cost is 168,000 – (23000 x 4.80) = $57600.
Therefore the fixed overhead absorption rate is 57,600/20000 = $2.88 per hourTherefore the variable over heads per desk are 45/60 x $4.80 = $3.60, and the fixed overheads per desk are 45/60 x 2.88 = $2.16
So the total overheads per desk are 3.60 + 2.16 = $5.76
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