TUTORIAL QUESTIONS OVERHEAD ABSORPTION
Question 1 Amis Brevel Biscuits Limited
Amis Brevel Biscuits Limited has three principal departments in its production process: mixing,
baking and packaging. In April 20X2 the company incurs the following production overheads which
it plans to allocate and apportion as follows between its three departments:
£ Basis of apportionment
Factory rental and business rates 7 910 Floor area
Factory cleaning 910 Floor area
Supervisory salaries 18 400 No. of employees
Other indirect labour 14 210 Floor area
Electricity 6 560 Actual
Building maintenance 632 Actual
Insurance 1 064 Floor area
Machinery depreciation 370 Machinery carrying amount
Total 50 056
The following information is relevant for the apportionment of overheads:
Total Mixing Baking Packaging
Floor area 7 000 sq. 2 500 sq. 2 500 sq. 2 000 sq.
m. m. m. m.
Employees 16 6 4 6
Machinery NBV £44 400 £18 240 £20 040 £6 120
Electricity £6 560 £2 160 £3 104 £1 296
Building maintenance £632 £360 - £272
Required: produce a schedule apportioning the overheads between the three departments
(cost centres).
Question 2 Bayleaf Manufacturing and Trading Company Limited
Bayleaf Manufacturing and Trading Company Limited produces several kitchen products, one of
which is a bayleaf grinder. One bayleaf grinder has a prime cost of £2.20, which includes 10 minutes
of direct labour (costed at £7.20 per hour). Each unit uses 15 minutes of machine time.
The company’s management accountant has estimated the following totals for the coming financial
year, 20X9:
Machine hours available in the factory 20 000 hours Direct
labour hours available 40 000 hours
Total production overheads £120 000
What is the estimated production cost of one bayleaf grinder if
a) production overheads are absorbed on the basis of machine hours?
b) production overheads are absorbed on the basis of labour hours?
Question 3 Lookin plc
The following information relates to Lookin plc. a manufacturing company that has two manufacturing
departments and two service departments:
Manufacturin Manufacturin Service Service Total
g g
Dept. 1 Dept. 2 Dept. 1 Dept. 2 £
£ £ £ £
Allocated Overheads 32,400 29,200 12,400 12,850 86,850
General Overheads
Indirect Labour 32,000
Heat & Light 48,600
Repairs & 34,700
Maintenance
Canteen Subsidy 5,100
Machine Depreciation 10,400
Machine Insurance 6,250
223,900
The following additional information was extracted from the company’s management accounting
records.
Manufacturin Manufacturin Service Servic
g Dept. 1 g Dept. 2 Dept. e Dept.
Floor area sq. m 2,500 4,000 1 2
1,000 500
Direct labour hours 30,000 5,000 - -
Indirect labour hours 30,000 5,000 - -
Direct labour rate per hour £/€ 12 8 - -
Number of staff 30 5 - -
Machine hours 2,500 25,000 - -
Machine value £/€ 40,000 200,000 10,000 -
Service Dept. overheads are
to be re-apportioned as
follows 20% 80%
Service Dept. 1 overheads
Service Dept. 2 overheads 50% 50%
Data on two jobs being undertaken by the company is as follows:
Job Eng230 Job Art490
Direct materials cost £ 240 £ 420
Machine hours 5 20
Direct labour hours
- Manufacturing Dept. 1 40 25
- Manufacturing Dept. 2 4 5
Required:
a) Prepare a statement showing the overhead cost for each department (include the basis of
apportionment, where appropriate).
b) Calculate a suitable overhead absorption rate for each department, using a basis that you deem
suitable.
c) Show the total cost of Job Eng230 and the total cost of Job Art490.
Question 4 Ash plc
The following information relates to the only product manufactured and sold by Ash plc.
£ per unit
Selling price 70
Direct material cost 25
Direct labour cost 20
Variable production overhead 5
Variable sales & marketing overhead 2
The following levels of activity took place over the first three months of the products life:
Sales Production
Units Units
September 4,750 5,000
October 5,500 6,000
November 6,500 7,000
Additional information is as follows:
1. Budgeted fixed production overhead was £300,000 per annum.
2. Actual fixed production overhead for the period was £25,000 per month
3. Sales and marketing overhead of £25,000 per month and administration
overhead of £18,750 per month were in line with the budget for that period.
4. All fixed overhead costs are budgeted on the basis of a projected volume of
75,000 units per year and all costs are expected to be incurred at a constant
rate throughout the year.
5. The business does not expect to have any inventory at 1 September
Required:
a) Prepare a profit statement for each month using each of the following bases:
i. Absorption costing
ii. Marginal costing
b) Calculate the (under)/over absorbed fixed production overhead for each month.
c) Explain the reason for any difference in the reported profit under the two
bases for each month.
d) Explain the reason for any difference in the reported profit under the two bases
for each month.