Intermediate: Analysis of under/over¬ recovery of overheads and a discussion of blanket versus department overheads

(a) One of the factories in the XYZ Group of companies absorbs fixed production over¬ heads into product cost using a pre¬ determined machine hour rate.

In Year 1, machine hours budgeted were 132 500 and the absorption rate for fixed production overheads was £18.20 per machine hour. Overheads absorbed and incurred were £2442440 and £2 317461 respectively.

In Year 2, machine hours were budgeted to be 5% higher than those actually worked in Year 1. Budgeted and actual fixed production overhead expenditure were £2 620 926 and £2 695 721 respectively, and actual machine hours were 139260.

Required:

Analyse, in as much detail as possible, the under/over absorption of fixed production overhead occurring in Years 1 and 2, and the change in absorption rate between the two years. (15 marks)

(b) Contrast the use of

(i) blanket as opposed to departmental over¬ head absorption rates;

(ii) predetermined overhead absorption rates as opposed to rates calculated from actual activity and expenditure.