Reference no: EM13496416

Makers Ltd is a manufacturing company that has three production departments known as Department A, B and C. The production overhead is absorbed on the basis of a percentaMakers Ltd is a manufacturing company that has three production departments known as Department A, B and C. The production overhead is absorbed on the basis of a percentage of direct labour cost for the factory as a whole. It has been suggested that a departmental overhead absorption rate would result in more accurate job costs.

Below are the budgeted and actual data for the year ended 31' October, 2008.

	Direct wages RM	Direct labour hours	Machine hours	Production RM overheads
Budgeted costs:
Department A	25,000	10,000	40,000	120,000
Department B	100,000	50,000	10,000	30,000
Department C	25,000	25,000	-	75,000
Total	150,000	85,000	50,000	225,000
Actual costs:
Department A	30,000	12,000.	45,000	130,000
Department B	80,000	45,000	14,000	28,000
Department C	30,000	30,000	- ____	80,000
Total	140,000	87,000	59,000	238,000

During the period job no. 567 was completed and actual costs and actual hours of the job incurred in each department are shown below:

	Direct materials RM	Direct wages RM	Direct labour hours	Machine hours
Department A Department B Department C	120 60 10	100 60 10	20 40 10	40 10 -

Required:

a) Calculate the overhead absorption rate currently in use.

b) Calculate the departmental overhead absorption rate for each department using the following basis:

Department A - machine hours
Department B - direct labour hours
Department C - direct wages

c) Using the overhead absorption rates calculated in part (b) above, determine the total cost for job no. 567 and its selling price if a profit margin is to be maintained at 20% of the selling price.

d) Show the over/under absorption of production overheads for each departmentusing:

i the OAR calculated in part (a) above

ii. the OAR calculated in part (b) above

e) Discuss the treatment of over or under absorption production overheads.