Calculation of overhead absorption rates and product costs Bookdon Public Limited Company manufactures three products in two production departments, a machine shop and a fitting section; it also has two service departments, a canteen and a machine maintenance section. Shown below are next year’s budgeted production data and manufacturing costs for the company.

It has been estimated that approximately 70% of the machine maintenance section’s costs are incurred servicing the machine shop and the remainder incurred servicing the fitting section.
Required:

(a) (i) Calculate the following budgeted overhead absorption rates:
A machine hour rate for the machine shop.
A rate expressed as a percentage of direct wages for the fitting section.
All workings and assumptions should be clearly shown. (12 marks)
(ii) Calculate the budgeted manufacturing overhead cost per unit of product X.
(2 marks)

(b) The production director of Bookdon PLC has suggested that ‘as the actual overheads incurred and units produced are usually different from the budgeted and as a consequence profits of each month end are distorted by over-/under-absorbed overheads, it would be more accurate to calculate the actual overhead cost per unit each month end by dividing the total number of all units actually produced during the month into the actual ‘overheads incurred.’
Critically examine the production director’s suggestion.

Transcribed Image Text:

Product X Product Product Y Z Production 4200 units 6900 units 1700 units Prime cost: Direct materials 11 per unit 14 per unit 17 per unit Direct labour: Machine shop 6 per unit 12 per unit Fitting section Machine hours per unit 6 hours per unit 3 hours per unit 2 per unit 21 per unit 4 hours per unit 4 per unit 3 per unit