Question

ZABZUGU TATALE produces a specialized product KANZO. The product passes through three (3) cost centers namely: machining, assembly and painting shop. Data relating to the cost centers is as below:

	Machining	Assembly	Painting shop	Engineering shop	Stores
Number of employees	81	51	39	30	24
Engineering shop-service	18,000	12,000	10,000	-	-
Stores (orders)	180	135	90	45	-

At a management meeting dated 24th September 20X0, the following overheads were budgeted for the production and service cost centers exclusively for the ensuing period:

Cost centers	GHS 000
Machining	180,000
Assembly	160,000
Painting shop	130,000
Engineering shop	84,000
Stores	52,000
Canteen	75,000

Equally, the following budgeted data relates to the production cost centers:

	Machining	Assembly	Painting shop
Machine hours	9,200	8,100	6,600
Labor hours	8,300	11,250	9,000
Labor cost (GHS)	40,000	88,000	45,000

Actual results for the production cost centers were:

	Machining	Assembly	Painting shop
Machine hours	10,000	8,200	6,600
Labor hours	4,500	7,800	6,900
Labor cost (GHS)	25,000	42,000	35,000
Actual overheads (GHS)	290,000	167,000	155,000

Required:

1. Apportion the production overhead costs of the service cost centers to the production cost centers and determine predetermined overhead absorption rates for the three (3) production cost centers on the following basis:

Machining - Machine hours.

Assembly - Labor hours.

Paint shop - Labor costs.

2. Prepare a statement showing the under/over absorption per cost center for the period under review.

Answer 1

answer a:

Canteen, stores and engineering shop are service cost senters, while others are procustion cost centers.

service center cost are allocated to production cost center in the basis of repeated distribution method, as you can see that canteen cost is first allocated to other service cost centers stores and engineering shop. then the cost of stores is allocated to engineering shop after that cost of engineering shop is allocated among production deparments.

Answer b

statement showing the under/over absorption

meaning of under absoption: when the actual overheads incurred by a cost center are more than budgeted overhead.

meaning of over absoption: when actual overheads incurred by the cost center are less than the budgeted overheads allocated to the center.

calculation of budgeted overheads:

we are given below mentioned table in question

further above in part a we had calculated OH absorption rate, now we would multiple machine hours to absorption rate of machining departmet 10000*11.55, 8200*11.55, 6600*11.55

similarly we would do it for assembly (multiply by labor hours), and for painting shop by labor cost.

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