A factory with three departments uses a single production overhead absorption rate expressed as a percentage of
Question:
A factory with three departments uses a single production overhead absorption rate expressed as a percentage of direct wages cost. It has been suggested that departmental overhead absorption rates would result in more accurate job costs. Set out below are the budgeted and actual data for the previous period, together with information relate to job No. 657.
During this period job No. 657 incurred the actual costs and actual times in the departments as shown below:
After adding production overhead to prime cost, one third is added to production cost for gross profit. This assumes that a reasonable profit is earned after deducting administration, selling and distribution costs.
You are required to:
a. calculate the current overhead absorption rate;
b. using the rate obtained in (a) above, calculate the production overhead charged to job No. 657 and state the production cost and expected gross profit on this job;
c.
i. comment on the suggestion that departmental overhead absorption rates would result in more accurate job costs; and
ii. compute such rates, briefly explaining your reason for each rate;
d. using the rates calculated in (c) (ii) above, show the overhead, by department and in total, that would apply to job No. 657;
e. show the over/under absorption, by department and in total, for the period using:
i. the current rate in your answer to (a) above, and
ii. your suggested rates in your answer to (c) (ii) above.
Elementary Statistics
ISBN: 978-0538733502
11th edition
Authors: Robert R. Johnson, Patricia J. Kuby