Himilton Limited has budgeted for the following production overheads for its production and service cost centres for the year ending 30 June 2010:

Cost centreK000

Machining 360

Assembly 320

Paint shop260

Maintenance shop (Service)168

Stores (service)104

Canteen (service)150

The product passes through the machining, assembly and paint shop cost centers and the following data relates to the cost centers.

	Machining	Assembly	Paint Shop	Maintenance	Store
No. of employees	162	102	78	60	48
Maintenance service
Hours	36 000	24 000	20 000	-	-
Stores (orders)	360	270	180	90	-

The following budgeted data relates to the production cost centers:

MachiningAssemblyPaint Shop

Labour costK80 000K176 000K90 000

Labour hours 16 00022 50018 000

Machine hours 18 40016 20013 200

Required:

(i) Apportion the production overhead costs of the service cost centers to the production cost centers and calculate the predetermined overhead absorption rate for the three (3) production cost centers on the following basis:

Machinery machine hours

Assembly labour hours

Paint shop labour costs

(ii) Actual results for the production cost centers were:

MachiningAssemblyPaint shop

Actual overheadK580 000K334 000K310 000

Labour hours 9 00015 60013 800

Labour costK50 000K84 000K70 000

Machine hours 20 00016 40013 200

Prepare a statement showing the under/over assumption per cost centre for the year ending 30 June 2010.

(iii) Briefly explain why overheads need to be absorbed using pre-determined bases.