Reference no: EM13552694

Overhead analysis sheet and calculation of overhead rates

Dunstan Ltd manufactures tents and sleeping bags in three separate production departments. The principal manufacturing processes consist of cutting material in the pattern cutting room, and sewing the material in either the tent or the sleeping bag departments. For the year to 31 July cost centre expenses and other relevant information are budgeted as follows:

					Raw
		Cutting		Sleeping	Material	Can-	Main-
	Total	room	Tents	bags	stores	teen	tenance
	(£)	(£)	(£)	(£)	(£)	(£)	(£)
wages	147200	6400	19500	20100	41200	15000	45000
Consumable materials	54600	5300	4100	2300		18700	24200
Plant depreciation	84200	31200	17500	24600	2500	3400	5000
Power	31700
Heat and light	13800
Rent and rates	14400
Building insurance	13500
Floor area (sq. ft)	30000	8000	10000	7000	1500	2500	1000
Estimated power usage (%)		17	38		3	8	2
Direct labour (hours)	112000	7000	48000	57000
Machine usage (hours)	87000	2000	40000	4500
Value of raw material
issues (%)	100	62.5	12.5	12.5			12.5

Requirements:

(a) Prepare in columnar form a statement calculating the overhead absorption rates for each machine hour and each direct labour hour for each of the three production units. You should use bases of apportionment and absorption which you consider most appropriate, and the bases used should be clearly indicated in your statement.

(b) 'The use of pre-determined overhead absorption rates based on budgets is preferable to the use of absorption rates calculated from historical data available after the end of a financial period.'

Discuss this statement insofar as it relates to the financial management of a business.