Problem:
Overhead analysis sheet and calculation of overhead rates
Dunstan Ltd manufactures tents and sleeping bags in three separate production departments. The principal manufacturing processes consist of cutting material in the pattern cutting room, and sewing the material in either the tent or the sleeping bag departments. For the year to 31 July cost centre expenses and other relevant information are budgeted as follows:
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Raw
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Cutting
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Sleeping
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Material
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Can-
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Main-
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Total
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room
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Tents
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bags
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stores
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teen
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tenance
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(£)
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(£)
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(£)
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(£)
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(£)
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(£)
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(£)
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wages
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147200
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6400
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19500
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20100
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41200
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15000
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45000
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Consumable materials
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54600
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5300
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4100
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2300
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18700
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24200
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Plant depreciation
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84200
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31200
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17500
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24600
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2500
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3400
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5000
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Power
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31700
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Heat and light
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13800
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Rent and rates
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14400
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Building insurance
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13500
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Floor area (sq. ft)
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30000
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8000
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10000
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7000
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1500
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2500
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1000
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Estimated power usage (%)
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17
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38
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3
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8
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2
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Direct labour (hours)
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112000
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7000
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48000
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57000
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Machine usage (hours)
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87000
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2000
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40000
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4500
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Value of raw material
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issues (%)
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100
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62.5
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12.5
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12.5
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12.5
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Requirements:
(a) Prepare in columnar form a statement calculating the overhead absorption rates for each machine hour and each direct labour hour for each of the three production units. You should use bases of apportionment and absorption which you consider most appropriate, and the bases used should be clearly indicated in your statement.
(b) 'The use of pre-determined overhead absorption rates based on budgets is preferable to the use of absorption rates calculated from historical data available after the end of a financial period.'
Discuss this statement insofar as it relates to the financial management of a business.