Intermediate: Various overhead absorption rates and under/over recovery A factory with three departments uses a single production overhead absorption rate expressed as a percentage of direct wages cost. It has been suggested that departmental overhead absorption rates would result in more accurate job costs. Set out below are the budgeted and actual data for the previous period, together with information relating to job No. 657

After adding production overhead to prime cost, one-th1rd is added to production cost for gross profit. This assumes that a reasonable profit is earned after deducting administration, selling and distribution costs.
You are required to:

(a) calculate the current overhead absorption rate;

(b) using the rate obtained in

(a) above, calculate the production overhead charged to job No. 657 and state the production cost and expected gross profit on this job;

(c) (i) comment on the suggestion that departmental overhead absorption rates would result in more accurate job costs;
and (ii) compute such rates, briefly explaining your reason for each rate;
{d) using the rates calculated in

(c) (ii) above show the overhead, by department and in total, that would apply to job No. 657;

(e) show the over/under absorption, by department and in total, for the period using:
(i) the current rate in your answer to

(a) above, and (ii) your suggested rates in your answer to

(c) (ii) above.

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Direct Direct wages labour Machine Production overhead (000) hours hours (2000) Budget: Department: A 25 10000 40 000 120 B 100 50 000 10000 30 C 25 25 000 75 Total: 150 85 000 50 000 225