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(14) A company makes two products, Reds and Blues. Total fixed overheads to absorb
during May are $60,000. Budgeted production levels for Reds for May are 10,000
units. Twice as many Blues as Reds are to be produced. Each Red takes 1 hour of
labour and each Blue takes 0.25 hours. Overheads are to be absorbed on a labour
hour basis.
What is the overhead absorption rate for each finished Blue?I think question is not correct. production unit of blue is not given.
I am right?
The question says:
Twice as many Blues as Reds are to be produced.
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So we produce 20 000 units of Blues (2 x 10 000 units).
For Blues we need 5 000 hours (0.25 x 20 000 units), for Reds we need 10 000 hours (1 x 10 000 units). One third of overheads goes for Blues.
So overheads absorbed to Blues: $20 000, and it is $1 per unit.Red= 10000 units
Hours for Red=10000*1hour/Red= 10000 hoursBlue=20000units
Hours for Blue= 20000* 0.25 hour/ Blue= 5000 hoursTotal Budgeted OH =$60000
Total Budgeted hours= 15000hoursOAR per hour =$60000/15000 =$4 per hour
Now convert OAR per hour to OAR per reds units
OAR/reds units = $4/hour * 0.25/Reds units
=$1/reds units
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