Cost Accounting Ltd manufactures three products. The company allocates overhead costs as a rate per total direct labour hour.

The following cost driver values have been identified:

Machine hours / unit Production units Percentage of expert work Number of orders packed Labour hours

Alpha

0.70 5 000 30% 4 1 200

Beta

0.30 3 500 20% 8 800

Gamma

0.50 8 000 50% 23 1 500

An analysis of the manufacturing overhead cost for the period shows the following:

Activities

Machine costs Expert consultation Packing Total

Overhead cost

265 000 98 500 15 000

378 500

Required		Marks
7.1	Calculate the overhead rate that they are currently applying to the products.	1.5
7.2	Allocate the manufacturing overhead costs using principles of activity based costing.	12
7.3	Why is activity based costing considered for manufacturing overhead cost allocation?