Outlane Limiteds overhead budget for a certain period is as follows: 000 Administration 100 Depreciation of machinery 80 Employees National insurance 10 Heating and lighting 15 Holiday Pay 20 Indirect labour Cost 10 Insurance: Machine 40 Property 11 Machine maintenance 42 Power 230 Rent and rates 55 Supervision 50 The company has four departments: L, M, N and O. the following information relates to each department. Department L M N O Total number of employees 400 300 200 100 Number of indirect Workers 20 15 10 5 Floor space (square metres) 2,000 1,500 1,000 1,000 Kilowatt hours' power consumption 30,000 50,000 90,000 60,000 Machine maintenance hours 500 400 300 200 Machines running hours 92,000 38,000 165,000 27,000 Capital cost of machines () 110,000 40,000 50,000 200,000 Depreciation rate of machines (on cost) 20% 20% 20% 20% Cubic capacity 60,000 30,000 10,000 50,000 Previously, the company has absorbed overhead on the basis of 100 per cent of the direct labour cost. It has now decided to change to separate machine-hour rate for each department. The company has been involved in two main contracts during the period, the details of which are as follows: Department Contract 1: Direct labour hours and Contract 2: Direct labour hours machine hours and machine hours L 60 20 M 30 10 N 10 10 O -- 60 100 100 Direct labour cost in both department was 3.00. Required: (a) Calculate the overhead to be absorbed by both contract 1 and contract 2 using the direct labour cost method. (b) Calculate the overhead to be absorbed using a machine-hour rate for each department.

Question 2: Indirect Costing Outlane Limited's overhead budget for a certain period is as follows: Outlane Limited's overhead budget 000 100 Administration Depreciation of machinery Employee's National insurance Heating and lighting Holiday Pay Indirect labour Cost Insurance: Machine Property Machine maintenance Power Rent and rates Supervision Total overheads= 55 50 663 2,000 The company has four departments: L, M, N and O. the following information relates to each department Department M L M N Total number of employees 400 300 200 Number of indirect Workers 2015 10 Floor space square metres) 1,500 1,000 Kilowatt hours' power consumption 30,000 50,000 90,000 Machine maintenance hours 500 400 300 Machines running hours 92,000 38,000 165,000 Capital cost of machines 110,000 40,000 50,000 Depreciation rate of machines (on cost) 20% 20% 20% Cubic capacity 60,000 30,000 10,000 O 100 5 1,000 60,000 200 27,000 200,000 20% 50,000 Previously, the company has absorbed overhead on the basis of 100 per cent of the direct labour cost. It has now decided to change to separate machine-hour rate for each department. The company has been involved in two main contracts during the period, the details of which are as follows: Department Contract 1: Direct labour hours and machine hours Contract 2: Direct labour hours and machine hours 100 Direct labour cost in both department was 3.00. Required: (a) Calculate the overhead to be absorbed by both contract 1 and contract 2 using the direct labour cost method. (b) Calculate the overhead to be absorbed using a machine-hour rate for each department. Solutions to question 2: (a) Overhead charge - direct labour cost method: Contract 1: Contract 2: Direct labour hours and Direct labour hours and machine Department machine hours hours Direct labour hours (DHL)= Direct labour cost = Therefore, overhead to be absorbed (100%) = (b) Overhead charge - machine hour rate method: Overhead absorption schedule: M Apportionment Method Department N 000 000 000 000 Administration Overhead to be absorbed - XXXX =overhead absorption rate Contract 1 Contract 2 Absorption rate Machine Hours Absorption rate Department Machine Hours Total Total N O Total overhead to be absorbed