Industrial Transformers Ltd. manufacture large step-down transformers for public
ID: 2776954 • Letter: I
Question
Industrial Transformers Ltd. manufacture large step-down transformers for public utilities at their plant in Newtown. They have 2 models X and Y of different capacity, and while the manufacturing takes place within the same facility, the processes for each are slightly different. The total direct overheads at the Newtown plant are 10,000 per week. This is made up of 2 costs: machine set-up costs of 8000, and product testing costs of 2,000. The company manufactures 20 of each product each week. You are given the following information: Calculate the overhead recovery charge that should be made to each product, based on: Absorption costing based on Direct Labour Hours. The ABC method based on machine set-up costs and product testing costs. Show the comparison of each method and write a short note explaining why the difference occurs.Explanation / Answer
Solution:
(a.)
Direct Labor Hours
b.
Overhead Recovery Charge Total Model X Model Y Total Direct Labors 200 150 50 Total Overheads 10,000 7,500 2,500 Working (150/200)*10,000 (50/200)*10,000 Per Hour Rate 50 50