Find Out Overhead Application Rate
The given is the budget of Superb Engineering Works for the 2002 year
|
Factory overheads
|
Kshs 62,000
|
|
Direct labour cost
|
Kshs 98,000
|
|
Direct labour hours
|
155,000
|
|
Machine hours
|
50,000
|
|
Actual labour hours were
|
40,000
|
|
Actual machine hours were
|
30,000
|
|
Actual direct labour costs were
|
Kshs 50,000
|
|
Actual direct material costs were
|
Kshs 45,000
|
Required
a) Find out the overhead application rate on the basis of
i. Direct labour hours
ii. Overhead costs
iii. Machine hours, and
iv. Direct labour cost
v. Production cost
Solution
i. Direct labour hours method
Overhead application rate (OAR) = 62,000/15,500
= Shs.0.4/labour hour
ii. Direct labour cost method
OAR = (62,000/98,000) * 100
= 63.27 percent
iii. Machine hour method
OAR = (62,000/50,000) * 100
Shs.1.24/machine hour
b) Overhead costs utilizing
i. Direct labour hours = 0.4 x 40000 = Shs 16000
ii. Direct labour cost = 63.27% x 50000 = Shs 31630
iii. Machine hours = 30,000 x 1.24 = Shs 37200
c) Production cost utilizing each of the methods
|
|
Prime cost
|
Overheads
|
Total cost
|
Cost/unit
|
|
i. Direct labour hours
|
95,000
|
16,000
|
111,000
|
111.00
|
|
ii. Direct labour cost
|
95,000
|
31,630
|
126,630
|
126.63
|
|
iii. Machine hours
|
95,000
|
37,200
|
132,200
|
132.20
|