The following information has been obtained for Product R2-X that has been completed throughout a given period:

Skilled labour	112 hours at 10.00
Unskilled labour	90 hours at 7.50
Raw materials	1,110 units at 3.00 per unit

Product R2-X goes through two processes: mixing and refining. Budgeted overheads and budgeted activity for the two production departments the Mixing Department and the Refining Department - are detailed below:

	Overheads	Planned Activity
Mixing Department	30,000.00	5,000 machine hours
refining Department	25,000.00	4,000 machine hours

Product R2-X is made in batches of 1,500 litres.

Required:

a) Calculate an overhead absorption rate for the Mixing Department and the Refining Department using a suitable basis.

b) Calculate the total manufacturing cost per litre of Product R2-X, assuming that it required 200 machine hours in the Mixing Department and 300 machine hours in the Refining Department.

c) Assume that actual overheads at the end of the year amounted to 27,000 in the Mixing Department and 36,000 in the Refining Department, while 4,000 machine hours were worked in the Mixing Department and 6,000 machine hours were worked in the Refining Department. Calculate the amount of under-/over-absorbed overhead in each of production departments. d) Explain the reason behind under-/over- absorption and the associated adjustments that are needed to be made to the cost of sales. e) When allocating Service Cost Centre overheads to Production Departments, the direct method or the step-down method can be used. Briefly explain both methods and identify conditions that limit/enhance their suitability.