Overheads Faculty Zaira Anees Overhead absorption rate OAR
Overheads Faculty: Zaira Anees
Overhead absorption rate (OAR) • Overhead Absorption Rate (OAR) is used to include overheads into the cost of the product. • it is calculated at the starting of the year and its based on budgeted overheads and budgeted activity level. • OAR = budgeted production overheads / budgeted activity level
Budgeted activity level • Non cost basis • A rate per machine hour • A rate per direct labour hour • A rate per unit • Cost basis • A percentage of direct materials cost • A percentage of direct labour cost • A percentage of prime cost • A percentage of conversion cost
In case of single product Company planned to produce 20, 000 units of a particular product in the coming year. Two types of materials are used in the production Material X = 3. 5 kg cost £ 2 per kg Material Y = 1 kg cost £ 4 per kg Two types of labour work in the manufacturing. Labour A manufacture product in 1. 5 hour and wage rate of labour A is £ 8 per hour Labour B manufacture product in 0. 5 hour and wage rate of labour B is £ 14 per hour Production overheads are estimated to be £ 50, 000 and it will be absorbed on the basis of production volume • Required: • Calculate manufacturing cost per unit. • •
In case of multiple products • Q 2. A company manufactures multiple products. Following information relates to two products manufactured by it. • A B • Direct material 2. 5 kg per unit 0. 8 kg per unit • Direct labour 2 hours per unit 1 hour per unit • Other information • Price of raw material is £ 5 per kg • Wage rate of direct labour is £ 6 per hour • Budgeted production overheads are estimated to be £ 300, 000 and labour hours are expected to be 75, 000 • Required: • Calculate manufacturing cost per unit
In case of multiple departments • Separate overhead absorption rate is calculated for each production department which require separate overheads for each cost centre along with separate activity level. • There are three stages involve in this process • Step 1: Allocation process: If overheads of each department can be identified separately, then whole cost items are charged directly to the cost centre. • Step 2: Apportionment process: in case of common overheads which cannot be identified with respect to departments separately, then it is distributed among all departments.
In case of multiple departments • Step 3 (optional) Reapportionment: redistribution of overheads related to service departments to other cost centres • Step 4: OAR • Step 5: Absorption of overheads: absorption of overheads means to include overheads into the cost of the products on the basis OAR and activity level.
Basis of apportionment • • • Building rent Building insurance Asset’s depreciation Heating Power Store department Maintenance cost Personnel department Supervision Canteen Indirect wages Floor area BV or WDV or BV m³ units consumed no of material requisition maintenance hours number of employees no of workers no of employees no of indirect employees
Example ABC Furniture Ltd - Data ABC Furnitire Ltd is a furniture manufacturer and has following four departments: • Cutting • Assembling • Maintenance • Stores PRODUCTION DEPARTMENTS SERVICE DEPARTMENTS
Example ABC Furniture Ltd - Data • Following are the direct overheads of each department of ABC Furniture Ltd: • Wages of the cutting department supervisor $6, 000 • Wages of the Assembling department supervisor $8, 500 • Wages of the maintenance department supervisor $3, 000 • Wages of the store department supervisor $3, 000 • Indirect materials consumed in cutting department $1, 050 • Rent of the premises shared by all departments $1, 000 • Electricity of premises shared by all departments $400, 000
Example ABC Furniture Ltd - Allocation Department • • • Cutting Allocated Overhead Supervisor’s wages $6, 000 Indirect material $1, 050 Allocated overheads $7050 Assembling Maintenance Stores $8, 500 0 8, 500 3, 000
Example ABC Furniture Ltd - Apportionment ABC Furniture Ltd has following common overheads which need to be apportioned among the departments: • Rent • Electricity $1, 000 $400, 000
Example ABC Furniture Ltd - Apportionment Following data is available for the apportionment of common overheads among departments: Department Cutting Assembling Maintenance Stores Area (Sq. Yds) 1500 2500 600 400 Labour Hours 800 550 60 Machine Hours 500 1600 25 Power Usage 20% 60% 10%
Example ABC Furniture Ltd - Apportionment Following data is available for the apportionment of common overheads among departments: Department Cutting Assembling Maintenance Stores 1500 2500 600 400 10000 1, 500 0 0 Machine Hours 500 10, 000 120 0 Power Usage 20% 60% 10% Area (Sq. Yds) Direct Labour Hours
Example ABC Furniture Ltd - Apportionment RENT • Cutting • Assembling • Maintenance • Stores (1, 000 x 1500/5000) (1, 000 x 2500/5000) (1, 000 x 600/5000) (1, 000 x 400/5000) $300, 000 $500, 000 $120, 000 $80, 000
Example ABC Furniture Ltd - Apportionment ELECTRICITY • Cutting • Assembling • Maintenance • Stores (400, 000 x 20%) (400, 000 x 60%) (400, 000 x 10%) $80, 000 $240, 000 $40, 000
Example ABC Furniture Ltd – overheads sheet Department Rent Cutting Assembling Maintenance Stores $300, 000 $500, 000 $120, 000 $80, 000 $240, 000 $40, 000 $380, 000 $740, 000 $160, 000 $120, 000 Department Cutting Assembling Maintenance Stores Direct Overheads (Allocation) $7, 500 $8, 500 $3, 000 Common Overheads $380, 000 $740, 000 $160, 000 $120, 000 Total Departmental Overheads before reallocation $387, 500 $748, 500 $163, 000 $123, 000 Electricity Total Apportioned Overheads
Example ABC Furniture Ltd - OAR Working hours at all these departments are as follows: Department Cutting Assembling Direct labour hours 10, 000 Cutting Overhead Absorption Rates (387, 500/10, 000) $38. 75/labour hour Assembling (748, 500/10, 000) $74. 85/ machine hour
Example ABC Furniture Ltd – Absorption ABC Furniture Ltd produces two products X and Y. Both the products require the following number of hours in each department: Cutting Assembling X 2 1 Y 1 2 Overheads Absorbed: • X • Y (2 x 38. 75+ 1 x 74. 85) (1 x 38. 75 + 2 x 74. 85) Maintenance Stores - - These overhead rates do not - OVERHEAD-COSTS cover OF SERVICE DEPARTMENTS $152. 35 per unit $188. 45 per unit
Example ABC Furniture Ltd – Reapportionment Services of Support Departments are provided to Production Departments in the following ratios: Maintenance Stores Cutting 60% 30% Assembling 40% 70%
Cutting Assembling Maintenance Stores $387, 500 $748, 500 $163, 000 $123, 000 Maintenance Department 97, 800 65, 200 -163, 000 Store Department 36, 900 86, 100 522, 200 899, 800 Total Overheads Re-apportionment Total Overheads after re-allocation OAR $52. 22/ hour $89. 98/ hour -123, 000 0 0
Example ABC Furniture Ltd Overheads Absorbed: • X (2 x 52. 22 + 1 x 89. 98) • Y (1 x 117. 7 + 2 x 89. 98) These Overhead rates include the OVERHEAD COSTS OF SUPPORT DEPARTMENTS $194. 42 per unit $232. 18 per unit
Question
Question 1
Practice questions (MCQs)
Q 1 • A reasonable allocation base for building rental cost may be • Quantity of material used • Volume occupied • Space occupied • None of above
Q 2 • Cost apportionment involves • A. The sharing out of costs to product • B. The sharing out of common costs to department. • C. The allocation of direct costs to departments. • D. The sharing out of overheads to production department to service department only.
Q 3 • It is possible for an item of overhead expenditure to be shared amongst many departments. It is also possible that this same item may relate to just one specific department. • If the item was charged specifically to a single department this would be an example of: • A apportionment • B allocation • C re-apportionment • D absorption.
Q 4 • There are three production departments in a company; cutting, machining and packing. Machine maintenance cost is expected to be £ 50, 000. Following information is also available • Cutting Machining Packing • Machine hours 40, 000 80, 000 5, 000 • Maintenance hours 2, 000 3, 000 0 • Calculate total maintenance cost apportioned to cutting department • ________
Q 5 • A manufacturing company is operating in a factory which has two production departments (cutting and finishing department) and one service department. Indirect labour cost is expected to be £ 320, 000 for the coming year. Following are further information related to the departments Cutting Finishing Service • Total labour hours 20, 000 23, 000 2, 000 • Number of indirect labours 25 15 10 By choosing appropriate base for apportionment of indirect labour cost, what will be total share of finishing department? ______.
Q 6 • A company incurred the following indirect costs in a period. • Power £ 35, 000 • Rent expense £ 45, 000 • Power cost is to be distributed on the basis of machine hours however rent costs are to be apportioned to department A and department B on the basis of floor area occupied. Department A occupies 10, 000 square meters and expected to work 12, 000 machine hours. Department B occupies 5, 000 square metres and is expected to work 8, 000 machine hours in coming period. How much power cost will be apportioned to department A? £_______. •
Q 7 • • • A company has estimated following overheads £ Maintenance of building 30, 000 Maintenance cost of machinery 12, 000 Supervision cost 24, 000 Following details are also available about three departments of company Cutting finishing packing Floor area (m 2) 2, 400 3300 1800 Number of employees 36 42 22 Machine hours 4, 000 9, 000 2, 000 Calculate total overheads of finishing department _______.
Q 8 • The overheads of two service departments (SCC 1 and SCC 2) in a factory require reapportionment to the two production departments (PCC 1 and PCC 2): • Total overhead % to PCC 1 % to PCC 2 • SCC 1 £ 32, 170 35 65 • SCC 2 £ 24, 850 65 35 • What is the total re-apportionment to production department PCC 2? • A £ 19, 957 B £ 27, 412 C £ 29, 608 D £ 37, 063
Q 9 • A factory consists of two production cost centres (P and Q) and two service cost centres (X and Y). The total allocated and apportioned overhead for each is as follows: • P Q X Y • £ 100, 000 £ 82, 000 £ 25, 000 £ 45, 000 • It has been estimated that each service cost centre does work for the other cost centres in the following proportions • P Q • Percentage of service cost centre X to 60 40 • Percentage of service cost centre Y to 65 45 • What is the total overhead for production cost centre P? • _________.
Q 10 • A manufacturing company is operating in a factory which has two production departments (cutting and finishing department) and one service department. Following are further information related to the departments • Q Cutting Finishing Store • Overheads before apportionment £ 85, 000 £ 70, 000 £ 20, 000 • Number material requisition 250 150 • What will be total overheads after reapportionment of cutting department? • ________.
Q 11 • Following are details given about two production departments (cutting and finishing) and two service departments (store and maintenance) of a company. • Cutting Finishing Store Maintenance • £ £ • Allocated overheads 25, 000 42, 000 11, 000 8, 000 • Apportioned overheads 24, 000 35, 000 7, 000 4, 000 • It is expected that store department will send 1, 800 requisitions to cutting department and 1, 200 requisitions to finishing department • It is expected that maintenance department will work 2, 000 hours for cutting department and 3, 000 hours for finishing department • Total overheads of cutting department will be £_______.
Q 12 • Phoebe Ltd manufactures many different products which pass through two production cost centres (P 1 and P 2). There also two service cost centres (S 1 and S 2) in the factory. The following information has been extracted from the budget for the coming year: • P 1 P 2 S 1 S 2 • Allocated and apportioned • production overheads £ 477, 550 £ 404, 250 £ 132, 000 £ 96, 000 • Number of employees 30 65 10 15 • Total machine hours 68, 000 11, 400 • Total direct labour hours 4, 000 14, 000 Service cost centre S 1 costs are reapportioned to all other cost centres based on the number of employees. Service cost centre S 2 only does work for P 1 and P 2 and its costs are reapportioned to these centres in the ratio 5: 3 respectively • Calculate OAR of P 1 and P 2 • HINT: ignore employees of S 1 in reapportionment of S 1 overheads
• A company has three production cost centres (P 1, P 2 and P 3) and two service cost centres (S 1 and S 2) in its factory. The budgeted production overhead costs for a period, totalling £ 487, 430, have been allocated and apportioned to cost centres as follows: • Production cost centre Service cost centre • P 1 P 2 P 3 S 1 S 2 • Allocated and • apportioned overheads £ 176, 860 £ 96, 250 £ 134, 770 £ 42, 150 £ 37, 400 • Overheads of S 1 are reapportioned on the basis of the number of materials requisition notes (MRN) raised in the period. • The overheads of S 2 are reapportioned on the basis of the number of employees in the other cost centres. • The following additional actual information is available for the period: • Cost centre Number of employees Number of MRNs • P 1 20 4, 970 • P 2 25 3, 550 • P 3 50 5, 680 • S 1 8 • S 2 5 • Reapportion the service cost centre overheads. • HINT: ignore employees of S 2 in reapportionment of S 2 overheads
Q 13 • Machine hours are used to absorb overheads in a production cost centre. Overheads allocated and apportioned to the cost centre are: • £ • Allocated 13, 122 • Apportioned 7, 920 • Reapportioned from service cost centres 2, 988 • 216, 000 units of product are manufactured at a rate of 120 units per machine hour. • What is the overhead absorption rate per machine hour? • A £ 7· 29 B £ 11· 13 C £ 11· 69 D £ 13· 35
Q 14 • A company manufactures two products P 1 and P 2 in a factory divided into two cost centres, X and Y. The following budgeted data are available: • Cost centre • X Y • Allocated and apportioned fixed • overhead costs £ 60, 000 £ 84, 000 • Direct labour hours per unit: • Product P 1 2· 0 2. 5 • Product P 2 4. 0 1. 0 • Budgeted output is 8, 000 units of each product. Fixed overhead costs are absorbed on a direct labour hour basis. • What is the budgeted fixed overhead cost per unit for Product P 2? • £_______ per unit (8)
Q 15 • A company manufactures two products, X and Y, in a factory divided into two production cost centres, Primary and Finishing. The following budgeted data are available: • Cost centre Primary Finishing • Allocated and apportioned fixed • overhead costs £ 96, 000 £ 82, 500 • Direct labour minutes per unit: • – product X 36 25 • – product Y 48 35 • Budgeted production is 6, 000 units of product X and 7, 500 units of product Y. • Fixed overhead costs are to be absorbed on a direct labour hour basis. • What is the budgeted fixed overhead cost per unit for product Y? • A £ 11 B £ 12 C £ 14 D £ 15
Q 16 • The following information is available for two production cost centres in a factory for a period: • Cost centre X Cost centre Y • Budgeted costs $28, 556 $54, 264 • Budgeted hours 1, 210 MHrs 6, 460 LHrs • Predetermined absorption rate $23· 60 /MH $8· 40 / LH • Actual costs $29, 609 $52, 567 • Actual hours 1, 235 MHrs 6, 395 LHrs • Calculate the over or under absorption of overhead for the period in each cost centre. • Note: MH = machine hour, LH = labour hour
Q 17 • Machine hours are used to absorb overheads in a production cost centre. Overheads allocated and apportioned to the cost centre are: • £ • Allocated 13, 122 • Apportioned 7, 920 • Reapportioned from service cost centres 2, 988 • It is expected that there will be approximately 15, 000 machine hours • What is the overhead absorption rate per machine hour? • ________
Q 18 • A company manufactures two products P 1 and P 2 in a factory divided into two cost centres X and Y. the following budgeted data are available • COST CENTRE • X Y • Overhead absorption rate £ 5 per hour £ 7 per hour • Direct labour hours per unit • Product P 1 3. 0 1. 0 • Product P 2 2. 5 2. 0 • What is the absorbed overheads cost per unit for Product P 2? • £______ per unit
Q 19 • 2. 5 kg of raw material is expected to consume in manufacturing of one unit of product X. Labour cost is expected to be £ 18 per unit. Price of plastic is £ 10 per kg. It will pass through three production departments; Cutting, Machining and Finishing. Overhead absorption rate of Cutting department is £ 6 per labour hour, Machining Department is £ 7. 56 per machine hour and Finishing department is £ 0. 7 per labour hour. It is expected that product will consume 2. 5 machine hours in cutting, 0. 75 machine hours in Machining and 30 minutes in Finishing. • What will be cost per unit of one unit of product X? • ______
Q 20 • 21. 3 kg of plastic is expected to consume in manufacturing of one unit of chair. Labour is expected to consume 5 hours. Price of plastic is £ 10 per kg and wage rate of labour is £ 6 per hour. Overhead absorption rate of Production Department 1 (PD 1) is £ 9 per labour hour and Production Department 2 (PD 2) is £ 12 per machine hour. It is expected that product will consume 2 labour hours in PD 1 and 0. 75 hours in PD 2. • What will be cost per unit of one unit of Chair? • ______
Q 21 • A company manufactures two products P 1 and P 2 in a factory divided into two cost centres. Following budgeted data are available: • q Cost centre • X Y • Allocated and apportioned fixed • overhead costs £ 60, 000 £ 84, 000 • Direct labour hours per unit: • Product P 1 2· 0 2. 5 • Product P 2 4. 0 1. 0 • It is expected that total labour hours will be 45, 000 in department X and 25, 000 in department Y • What is the budgeted fixed overhead cost per unit for Product P 2? • £_______ per unit (8)
Q 22 • Carrell produces two types of jacket, Blouson and Bomber, in its factory that is divided into two departments, cutting and stitching. The firm wishes to calculate a fixed overhead cost per unit from the following budgeted data. • Cutting dept Stitching dept • Allocated and apportioned fixed overheads $120, 000 $72, 000 • Blouson 0. 05 hours 0. 20 hours • Bomber 0. 10 hours 0. 25 hours • Labour hours per unit • It is expected that total labour hours will be 30, 000 in cutting department and 20, 000 in stitching department • If overheads are absorbed by reference to labour hours, the fixed overhead cost of a Bomber would be: • A $5. 33 B $6. 67 C $12. 00 D $20. 00
Q 23 • 1. Identify correct definition (allocation, apportionment, reapportionment or absorption) • i. Distribution of overheads related to service department to production departments. • ii. Charging of an item of overhead to a specific department. • iii. Distribution of common overheads between different departments • iv. Charging of overheads to different products on the basis of overhead absorption rate.
Q 24 Z Corporation has two production departments, Moulding and Finishing. Moulding department Finishing department The budgeted overheads are £ 210, 000 £ 200, 000. Machine hours 60, 000 5, 000 Labour hours 4, 000 14, 000 Departmental overhead absorption rate should be based upon A. Machine hours only B. Labour hours only C. Machine hours for the moulding department and labour hours for finishing department • D. Labour hours for the moulding department and machining hours for finishing department • • •
Q 25 • The prime cost details relating to the manufacture of Product X are as follows: • Direct material 1. 3 kg @t £ 6. 20 per kg • Direct labour 0. 75 hours at £ 8. 00 per hour • Production overheads are absorbed at a rate of £ 6 per direct labour hour. • What is the total cost per unit of Product X? ______
Under / over absorption of overheads • Budgeted overheads are estimated overheads which are calculated at the starting of the year • Absorbed overheads is the amount of overheads which has been included into the cost of the product and which can be charged from customer • Actual overheads is simply the sum of actual IDM IDL IDexp • Over absorption means that the overheads charged to the cost of sales are greater then the overheads actually incurred. • Under absorption means that insufficient overheads have been included in the cost of sales.
Format of under / over absorption • Absorbed overheads = OAR * Actual Activity level • Actual overheads • Under / over absorption of overheads = XX (XX) xx • Absorbed overheads is more than actual overheads - over absorption • Absorbed overheads is less than actual overheads – under absorption
Q 26 • Overheads are absorbed at a pre-determined rate based on direct labour hours. The following additional information is available for a period: • Budget • Actual £ 164, 000 overhead expenditure 10, 000 direct labour hours £ 158, 000 overhead expenditure 9, 800 direct labour hours • What was the overhead over/under-absorption in the period? • A £ 2, 720 over-absorbed B £ 3, 224 over-absorbed • C £ 3, 280 under-absorbed D £ 6, 000 under-absorbed
Q 27 • A company uses an overhead absorption rate of £ 3· 50 per machine hour, based on 32, 000 budgeted machine hours for the period. During the same period the actual total overhead expenditure amounted to £ 108, 875 and 30, 000 machine hours were recorded on actual production. • By how much was the total overhead under or over absorbed for the period? • _______3875 under_____.
Q 28 • A management consultancy recovers overheads on chargeable consulting hours. Budgeted overheads were $615, 000 and actual consulting hours were 32, 150. Overheads were under-recovered by $35, 000. • If actual overheads were $694, 075 what was the budgeted overhead absorption rate per hour? • A $19. 13 B $20. 50 C $21. 59 D $22. 68
Q 29 • One of the cost centres in a factory is involved in the final stage of production. Budgeted fixed overhead costs for the cost centre for a period were: • Apportioned costs $74, 610 • Allocated costs $98, 328 • A predetermined machine hour rate is established for the absorption of fixed production overhead into product cost. Budgeted machine hours for the cost centre in the period were 1, 900. Actual overheads allocated and apportioned in the period were $173, 732. Actual machine hours in the period were 1, 950. • 40. The predetermined fixed overhead absorption rate is: • A $39. 27 B $88. 62 C $91. 02 D $93. 42 • 41. The over/under absorption of fixed overhead is: • A $794 under absorbed B $794 over absorbed • C $3, 757 under absorbed D $3, 757 over absorbed
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