Question
The main distributer of natural juices uses two processes for its production process. The fruit juices pass through a distillery and a canning department. Both
The main distributer of natural juices uses two processes for its production process. The fruit juices pass through a distillery and a canning department. Both departments incur overheads; however, management wants to assess the total overheads absorbed in each department. The information below relates to the budgeted overheads for each department prepared by the cost controller:
Cost | Distillery | Canning |
Machining | $4,000,000 | $12,000,000 |
Production set-up costs | $16,000,000 | $12,000,000 |
Material handling cost | $14,000,000 | $4,000,000 |
Inspection | $6,000,000 | $4,000,000 |
Machine hours | 800,000 | 4,000,000 |
Direct labour hours | 20,000,000 | 2,000,000 |
For the period ended 30 June 2020 the actual overheads incurred amounted to $100,000,000 of which 60% relates to distillery and the remainder to canning. The production manager also provided data for the period which indicates that total direct labour hours are 20% more than expected. Meanwhile machine hours are 200,000 and 1,400,000 more than planned for distillery and canning respectively. The budgeted direct wages were the same as planned.
Required:
(a) Outline the two main factors that may result in an under/over absorption of overheads at the entity. (4 marks)
(b) Calculate the overhead absorption rates for both departments. (6 marks)
(c) Calculate the under/over absorption of overheads for each department. (6 marks)
(d) Distinguish between overhead apportionment and allocation (4 marks)
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