Question

Question 2 Alexia Muchala Ltd has two production departments, A and B, and two service departments, X and Y. The budgeted activity levels for June 2020 were thus: A 2000 hours N$ 80,000 B 12,000 hours N$ 48,000 The service departments are apportioned thus: X 70% to A 20% to B 10% to Y Y 50% to A 30% to B 20% to X During June 2020 the actual results were: A 2100 hours N$ 60,000 B 11,500 hours N$ 40,000 X N$ 25,000 Y N$ 15,000 2 Required: a) Calculate the budgeted overhead absorption rate per hour for each of the production departments. b) Calculate the amount of overhead to be charged to each of the production departments. c) Calculate the Actual overhead absorption rate per hour for each of the production departments. d) Calculate the amount of under or over absorption of overhead for each of the production departments. (Total 25 marks)

Answer 1

a) the budgeted overhead absorption rate per hour for each of the production departments is calculated as :

for department A:  total budgeted OH = 80000 + 70% of 25000 + 50% of 15000 = 105000

activity level budgeted = 2000

budgeted overhead absorption rate per hour = total budgeted overhead/activity level = 105000/2000 = 52.5

for department B:  total budgeted OH = 48000+20% of 25000+30% of 15000 = 57500

activity level budgeted = 12000

budgeted overhead absorption rate per hour = total budgeted overhead/activity level =57500/12000= 4.79

b) the amount of overhead to be charged to each of the production departments is calculated as :

for A: 70% of 257000+ 50% of 15000 + 60000 = 85000

for B: 20% of 25000+30% of 15000+40000 = 49500

c) the Actual overhead absorption rate per hour for each of the production departments is calculated as:

for A: 85000/ 2100 = 40.48

for B: 49500/11500 =4.3

d) the amount of under or over absorption of overhead for each of the production departments can be calculated as:

for department A:  total budgeted OH = 80000 + 70% of 25000 + 50% of 15000 = 105000

actual OH = 70% of 257000+ 50% of 15000 + 60000 = 85000

the amount of under or over absorption of overhead = actual OH - budgeted OH = 85000-105000 = -20000 over absorbed.

for department B:  total budgeted OH = 48000+20% of 25000+30% of 15000 = 57500

actual OH = 20% of 25000+30% of 15000+40000 = 49500

the amount of under or over absorption of overhead = actual OH - budgeted OH = 49500-57500 = -8000 over absorbed.

NOTE: If the absorbed overheads at predetermined rates are greater than actual overheads, this is known as OVER-ABSORPTION. Conversely, if absorbed overheads are less than the actual overheads, this is known as UNDERABSORPTION.