Practice Question 2: Basil Ltd You have been asked to suggest a method of deducing the full cost of various production orders of Basil Ltd. This method will be used as a basis for setting prices. The production orders vary greatly in size and nature from one to the next. The following information has been taken from the budget for the forthcoming financial year: Direct labour Direct materials Overheads 400,000 100,000 450,000 Direct materials Direct labour hours 10,000 kg 50,000 hours 45,000 hours Machine hours The business is not departmentalised for accounting purposes. All direct labour is paid the same hourly rate. Basil Ltd has currently received a new order which has the following costs: Direct materials 450 kg 2.000 hours Direct labour hours Machine hours 500 hours Required: (a) Prepare full costings for new order using the following methods allocating total overheads: - overhead rate based on labour hour basis - overhead rate based on machine hour basis (b) State briefly which of the two bases of overheads you prefer and why. 2