Question 1

Value Fruit Ltd is preparing its overhead budgets for the December 2015 period. The entity makes a product that passes through three production department and is also affected by two service departments. The three production departments are milling, processing and packaging, and two service departments are stores and inspections.

The following budgeted overheads and budgeted activity levels have been produced:

Milling Processing Packaging Stores Inspections

Overhead cost $1,500,000 $1,800,000 $3,150,000 $1,200,000 $800,000

Machine hours 250,000 220,000 400,000

Overhead is absorbed on a machine hour basis.

It has been estimated that service department usage is as follows:

Milling Processing Packaging Stores Inspection

Stores 25% 35% 20% - 20%

Inspections 40% 20% 30% 10% -

However, during the period ended December 31, 2015, actual overheads in department milling, processing and packaging were as follow respectively: $1,450,000, $1,950,000 and $3,500,000; while, actual activity levels for all three were 250,000, 285,000 and 390,000 machine hours for milling, processing and packaging respectively.

Required:

1. Use the reciprocal (simultaneous equation) method to derive the re-allocated overheads to production departments and derive the overhead absorption rates for these departments
2. b. From the information calculated in part (a) above, derive the under/under absorption of overheads in each departments