Question: Shown below is next year's budget for the Forming and Finishing departments of Tooton Ltd. The departments manufacture three different types of component which are incorporated into the output of the firm's finished products.
The Forming Department is mechanized and employs only one grade of labour, the Finishing Department employs several grades of labour with differing hourly rates of pay.
Required: (a) Calculate suitable overhead abort ion rates for the Forming and Finishing Departments for next year and include a brief explanation for your choice of rates.
(b) Another firm has offered to supply next year's budgeted quantities of the above components at the following prices: Component A £30. Component B £65. Component C £60 Advise management whether it would be more economical to purchase any of the above components from the outside supplier. You must show your workings and, considering cost criteria only, clearly state any assumptions made or any aspects which may require further investigation.
(c) Critically consider the purpose of calculating production overhead absorption rates.