Three of the cost items that are included in the production overhead for a factory for a period are:
Machine maintenance labour
$33,600
Power
$26,000
Rent and rates
$39,800
Production overheads are currently absorbed using a single factory-wide rate.
It has been suggested that a separate overhead absorption rate should be calculated for each of the three groups of machines in the factory. The following additional budgeted data has been collected for the period:
Machine Group
Total
MG1
MG2
MG3
Floor area (m2)
1,600
1,400
1,000
4,000
Machine values (
320
250
230
800
Kilowatt hours ('000)
220
110
440
Machine maintenance (labour hours)
600
400
Number of indirect workers
4
2
10
Machine hours
8,200
5,600
4,900
18,700
Required
(b) Briefly explain one reason why a separate overhead absorption rate for each machine group would be preferable to a single factory-wide rate.
(c) Apportion each of the three items of budgeted overhead cost (machine maintenance labour, power and rent and rates) to the three machine groups.
The totals of all budgeted production overhead cost items, allocated and apportioned to the three machine groups, are as follows:
$129,560
$107,520
$119,070
(c) Calculate an appropriate absorption rate for each machine group.
(d) Calculate the production overhead that would be charged to job 121which requires five hours on MG1 machines two hours on MG2 machines and three hours on MG3 machines.