Question 1 (8 Marks)

Tasty Oman is a date processing company in Sur, Oman. The company produces varieties of date products and sells through different food stores throughout Oman. The company gives one month vacation for the staff during December every year. The manufacturing overhead of the company consists of air conditioning costs and the depreciation charged on machineries on straight line basis. To allocate the manufacturing overhead company uses direct labour hours as a basis.

Recently the CEO of the company Ms. Aseela Al Majrafi, approved a new accounting software and said to Mr. Amjad Al Yahyai, controller, that the new software will be helpful to save time to prepare all the reports.

Mr. Amjad agreed with Ms. Aseela and added that having more information just a click away will help the company to control the cost and make better decision. Moreover it is required to consider how to use the new software to improve company practices.

Mr. Amjad has been complaining about the difficulties to predict weather months in advance to estimate air-conditioning costs for including in the calculation of predetermined overhead absorption rate.

Aseela suggested that it is appropriate to calculate the predetermined overhead absorption rate on a monthly basis.

But Amjad is not sure this is a good idea.

Required:

1. What are the advantages and disadvantages of Aseelas proposal? (4 Marks)
2. Should Tasty Oman compute its predetermined overhead absorption rate on annual basis or monthly basis? Explain. (4 Marks)