BEC Limited operates an absorption costing system. Its budget for the year ended 31 December shows that

Question:

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:

During the year it expects to make 200 000 units of its product. This is expected to take 80 000 machine hours in the machining department and 120 000 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:
(i) That the actual hours worked in each department were: Machining 6000 hours Hand finishing 9600 hours
(ii) That the actual overhead costs incurred were:

(iii) That the actual production was 15 000 units.

Required:
(a) Calculate appropriate pre-determined absorption rates for the year ended 31 December;
(b)
(i) Calculate the under/over absorption of overhead for each department of the company for March;
(ii) Comment on the problems of using predetermined absorption rates based on the arbitrary apportionment of overhead costs, with regard to comparisons of actual/target performance;
(c) State the reasons why absorption costing is used by companies.