A manufacturing company has prepared the following budgeted information for year 2:

K

Direct material 800,000

Direct labour 200,000

Direct expenses 40,000

Production overhead 600,000

Administrative overhead 328,000

Budgeted activity levels include:

Units

Budgeted production 600,000

Machine hours 50,000

Labour hours 40,000

It has recently spent heavily upon advanced technological machinery and reduced its workforce. As a consequence it is thinking about changing its basis for overhead absorption from a percentage of direct labour cost to either a machine hour or labour hour basis. The administrative overhead it to be absorbed as a percentage of factory cost.

Required:

(a) Prepare predetermined overheads absorption rates for production overheads based upon the three different basis for absorption mentioned above.

(b) Select the overhead absorption rate that you think the organisation should use giving reasons for your decision.

(c) The company has been asked to price job AX. This required the following:

Direct material K3,788

Direct labour K1,100

Direct expensesK 422

Machine hours 120

Labour hours 220

Compute the selling price for this job using the absorption rate selected in (b) above, given that the company profit margins is equal to 10% of the price.