Intermediate: Make or buy decision. Shown below is next year’s budget for the forming and finishing departments of Tooton Ltd. The departments manufacture three different types of component, which are incorporated into the output of the firm’s finished products.

The forming department is mechanized and employs only one grade of labour, the finishing department employs several grades of labour with differing hourly rates of pay.
Required:

(a) Calculate suitable overhead absorption rates for the forming and finishing departments for next year and include a brief explanation for your choice of rates.
(6 marks)

(b) Another firm has offered to supply next year’s budgeted quantities of the above components at the following prices:
Component A £30 Component B £65 Component C £60 Advise management whether it would be more economical to purchase any of the above components from the outside supplier. You must show your workings and, considering cost criteria only, clearly state any assumptions made or any aspects that may require further investigation.
(8 marks)

(c) Critically consider the purpose of calculating production overheads absorption rates. (8 marks)
ACCA Foundation Costing

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Production (units) Prime cost ( per unit): Direct materials Forming dept Direct labour Forming dept Finishing dept Manufacturing times (hours per unit); Machining Forming dept Direct labour Forming dept Finishing dept Component A B C 14000 10000 6000 8 00 7 16 9 12 22 10 15 8 24 31 29 A 3 2 2 3 4 3 10 12 Variable overheads Fixed overheads Forming department () 200900 401800 Finishing Department () 115500 231000 602 700 346 500 Machine time required and available 98000 hours Labour hours required and available 82 000 hours 154000 hours