Response to the following problem:
Kansomba Fabricators Limited produces various machine tools for the mining industry. It has four main Cost Centres.
It allocated overheads to the four departments as follows:
Dept: Cost (K)
A 672,000
B 420,000
Repairs 84,000
Maintenance 56,000
In addition, there are general overheads of K308, 000 which should be apportioned:
A: 40%
B: 30%
Repairs: 20%
Maintenance: 10%
A and B are production departments. Repairs and Maintenance service production as follows:
A B Repairs Maintenance
Repairs 60% 40% - -
Maintenance 40% 40% 20% -
Budgeted labour hours:
A: 40,000 hours; B: 8,000 hours
Budgeted machine hours:
A: 5,000hours; B: 60,000 hours
a) Calculate an overhead absorption rate for each production department.
b) Kasomba has budgeted overheads of K400,000 and budgeted labour hours of 50,000. Actual labour hours worked were 48,000 and actual overheads incurred were K410,000.
Calculate the pre-determined overhead absorption rate AND the amount of over- or under-absorption of overheads.
c) Explain the advantages and disadvantages of using direct labour hours as an absorption base for overheads.
d) Explain why Absorption costing and marginal costing methods give the same net profit figures if the units produced and units sold are same for that period, and why the two methods give different profit figures if the unit produced are different from the sold sold for that period.