A company produces just one standard product. The company's budgeted overheads for the next financial year are £80000.
Other relevant information includes:
Budgeted Production: 16000 units
Cost of Raw Material per unit: £4
Cost of Direct Labour per unit: £4
Standard Machince Hours per unit: 4
Required:
Calculate three different overhead absorption rates.
Can someone please help me because I don't have an idea how I can arrive to these rates?
To calculate the overhead absorption rates, you need to consider three different factors that can be used as bases for absorption: direct labor hours, direct labor costs, and machine hours.
1. Overhead Absorption Rate based on Direct Labor Hours:
The formula for this absorption rate is:
Overhead Absorption Rate = Total Overhead Costs / Total Direct Labor Hours
Step 1: Find the total direct labor hours:
To do this, multiply the number of units by the standard direct labor hours per unit.
Total Direct Labor Hours = Budgeted Production * Standard Direct Labor Hours per Unit
Step 2: Calculate the overhead absorption rate:
Divide the total budgeted overheads by the total direct labor hours.
Overhead Absorption Rate (based on Direct Labor Hours) = Budgeted Overheads / Total Direct Labor Hours
2. Overhead Absorption Rate based on Direct Labor Costs:
The formula for this absorption rate is:
Overhead Absorption Rate = Total Overhead Costs / Total Direct Labor Costs
Step 1: Find the total direct labor costs:
To do this, multiply the number of units by the standard direct labor cost per unit.
Total Direct Labor Costs = Budgeted Production * Standard Direct Labor Cost per Unit
Step 2: Calculate the overhead absorption rate:
Divide the total budgeted overheads by the total direct labor costs.
Overhead Absorption Rate (based on Direct Labor Costs) = Budgeted Overheads / Total Direct Labor Costs
3. Overhead Absorption Rate based on Machine Hours:
The formula for this absorption rate is:
Overhead Absorption Rate = Total Overhead Costs / Total Machine Hours
Step 1: Find the total machine hours:
To do this, multiply the number of units by the standard machine hours per unit.
Total Machine Hours = Budgeted Production * Standard Machine Hours per Unit
Step 2: Calculate the overhead absorption rate:
Divide the total budgeted overheads by the total machine hours.
Overhead Absorption Rate (based on Machine Hours) = Budgeted Overheads / Total Machine Hours
By following these steps and plugging in the relevant figures, you can calculate the overhead absorption rates based on direct labor hours, direct labor costs, and machine hours.