IM3,7-Intermediate: Calculation of overhead absorption rates and under-/over-rec
ID: 2339383 • Letter: I
Question
IM3,7-Intermediate: Calculation of overhead absorption rates and under-/over-recovery of overheads. BEC Limited operates an absorption costing system. Its budget for the year ended 31 December shows that it expects its production overhead expenditure to be as follows: Fixed Variable Machining department Hand finishing department 600000 480000 360000 400000 During the year it expects to make 200000 units of its product This is expected to take 80000 machine hours in the machining department and 120000 labour hours in the hand finishing department. The costs and activity are expected to arise evenly throughout the year and the budget has been used as the basis of calculating the company's absorption rates. During March the monthly profit statement reported: 0 that the actual hours worked in each department were: Machining 6000 hours Hand finishing 9600 hours (n) that the actual overhead costs incurred were: Fixed Variable Machining Hand finishing 48500 33600 36000 33500 (iin) that the actual production was 15000 units. Required: a) Calculate appropriate pre-determined absorption rates for the year ended 31 December (4 marks) ) Calculate the under/over-absorption of overhead for each department of the company for March.(4 marks) ii) Comment on the problems of using predetermined absorption rates based on the arbitrary apportionment of overhead costs, with regard to comparisons of (e) State the reasons why absorption costing is used by (3 marks) Total 15 marks) CIMA Stage 1 AccountingExplanation / Answer
A) Calculation of pre determined absorption rate = Fixed + variable / hours
Machining department = ( 600000 + 480000 ) / 80000 = 13.5 per hour
Hand finishing dept = ( 360000 + 400000) / 120000 = 6.33 per hour
B)
1)
2) Problem with absorption costing is that it is uncertain. Ther can be huge gape between absorbed and actual overhead recorded in books.Also since it is based on pre determined rate it does not show actual condition of affairs of company. Also ther can be difference in fixed variable cost and fixed cost.
C) We can calculate overall cost of an department to decide absorption cost. It helps in making plans and estimating future cost and expense revenue of the company.
Dept Absorbed Actual Over/under Machining (6000*13.5) 81000 (48500+36000) 84500 Underabsorbed by 3500 Hand finishing (9600*6.33) 60800 (33600+33500) 67100 Underabsorbed by 6300