Shown below is next year's budget for a small engineering factory manufacturing two different products in two production departments, namely a machine shop and an assembly department. A canteen is also operated as a separate department

Required:

(a) Establish an appropnate overhead absorption rate for each production department and calculate the total budgeted cost per unit of each product. You must clearly state and briefly justify the methods of overhead absorption used. (17 marks)

(b) Assuming the company operates a full absorption costing system, calculate the impact on budgeted profit if, next year, the actual results are as predicted except that sales and production of product A are 300 units higher than budget.

Transcribed Image Text:

Product Product A B Selling price ( per unit) 60 70 Sales volume (units) 1500 3000 Increase (decrease) in finished stocks (units) 500 (500) Material cost ( per unit) 8 5 Direct labour (hours per unit): Machine shop (3 per hour) 5 6 Assembly department (2 per hour) 4 Machining (hours per unit): Machine shop 3 8 Assembly department 1 Machine Assembly shop dept Canteen Total Production overhead (): Variable 26000 9000 35 000 Fixed 42000 30000 16000 88000 68 000 39 000 16000 123 000 Number of employees 15 9 Floor area (sq. ft) 4000 1000 1000