QUESTION 1 (25 MARKS)

Merbau Furniture is a main manufacturer of custom-made office furniture in Ipoh, Perak. The company applies job order costing system, where each clients order is treated as separate job. The company currently uses the single rate of overhead absorption rate based on direct labour cost. Given below is the data for the period ended 31 January 2021:

	Machining Department	Finishing Department
Budgeted direct labour hours	85,000 hours	65,000 hours
Budgeted machine hours	38,000 hours	35,000 hours
Budgeted manufacturing overhead	RM820,000	RM660,000
Actual direct labour hours	80,000 hours	62,000 hours
Actual machine hours	32,000 hours	30,000 hours
Actual manufacturing overhead	RM747,500	RM567,500

The labour rate per hour in Machining Department and Finishing Department is RM3.50 and RM3.00 respectively.

During January 2021, the company received 10 orders and one of the orders is known as Job No. 0121. The following data relates to the job:

	Job No. 0121
Direct materials: Machining Department Finishing Department	RM19,500 RM10,000
Direct labour: Machining Department Finishing Department	1,000 hours 900 hours
Hire of special machine: Machining Department	RM8,500
Administrative expenses	20% of manufacturing costs
Machine hours: Machining Department Finishing Department	700 hours 500 hours

Required:

a. Calculate overhead absorption rate (OAR) that is currently used by the company.

b. Assuming the company is now considering to apply departmental overhead absorption rate (OAR), calculate OAR for each department using the following basis:

Machining Department Machine hour

Finishing Department Direct labour hour

c. Calculate the amount of total overhead applied to Job No. 0121?

d.Prepare a job cost sheet for Job No. 0121 by showing prime cost, production cost and total cost. (Note: Production overhead is absorbed based on departmental OAR).

e.Calculate the selling price of Job No. 0121 if the profit margin is set at 25% on total cost.

f. Determine under or over absorption of overhead for each department using departmental rate as calculated in (b).