Advanced (40 minutes)

SOURCE: ADAPTED FROM ACCA LEVEL 2 MANAGEMENT ACCOUNTING (DECEMBER 1982)

Note: A basic knowledge of Chapter 6, Overhead allocation is useful in answering this question.

The Miozip Company operates an absorption costing system which incorporates a factory-wide overhead absorption rate per direct labour hour. For 2XX0 and 2XX1, this rate was R1,50 per hour. The actual xed factory overhead for 2XX1 was R600 000 and this would have been fully absorbed if the company had operated at full capacity, which is estimated at 400 000 direct labour hours.

Unfortunately, only 200 000 hours were worked in that year, so that the overhead was seriously under-absorbed. Fixed factory overheads are expected to be unchanged in 2XX2 and 2XX3.