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A company is preparing its overhead budgets for the December 2020 period. The entity makes a product that passes through three production department and is
A company is preparing its overhead budgets for the December 2020 period. The entity makes a product that passes through three production department and is also affected by two service departments. The three production departments are milling, processing and packaging, and two service departments are stores and inspections. The following budgeted overheads and budgeted activity levels have been produced: Milling Processing Packaging Stores Inspections Overhead cost $300,000 $360,000 $630,000 $240,000 $160,000 Labour hours 50,000 40,000 80,000 Overhead is absorbed on a labour hour basis. It has been estimated that service department usage is as follows: Stores Milling 25% 40% Processing 35% 20% Packaging 20% Stores Inspections Inspections 20% 30% 10% During the period actual overheads in the production departments were milling, processing and packaging were $290,000, $390,000 and $700,000 respectively while, actual activity levels for all three were 50,000, 57,000 and 78,000 labour hours respectively. Required: (a) Use the simultaneous equation method to derive the re-allocated overheads to production departments and derive the overhead absorption rates for these departments. (Use two decimal places for OAR). (17 marks) (b) Calculate the over/under absorption of overheads in each department. (6 marks) (c) Calculate the selling price of a unit of product (to the nearest $) based on the estimates below and using the absorption rates calculated in (a). The company requires a profit of 25% of the selling price. (8 marks) Material 80 kilos at $15 per kilo 20 hours at $14 per hour Direct Labour: Milling Direct Labour: Processing 10 hours at $14 per hour Direct Labour: Packaging 15 hours at $14 per hour (d) Explain the terms 'overhead allocation' and 'overhead apportionment
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