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Absorption Costing The following information relates to Ryan Ltd - Leaving Cert Accounting - Question 8 - 2007
Question 8
Absorption Costing The following information relates to Ryan Ltd. a small jobbing company, for the coming year. The business has two production departments, Departm... show full transcript
Worked Solution & Example Answer:Absorption Costing The following information relates to Ryan Ltd - Leaving Cert Accounting - Question 8 - 2007
Step 1
Apportion/divide the costs of Service Department C between Department A and Department B.
Answer
To apportion the costs of Service Department C:
- Total overhead costs for Service Department C: €12,000
- Department A allocation: 75% means 0.75 x €12,000 = €9,000
- Department B allocation: 25% means 0.25 x €12,000 = €3,000
Thus,
- Department A receives: €9,000
- Department B receives: €3,000
Step 2
Calculate the overhead absorption rate for Department A using Machine hours.
Answer
To calculate the overhead absorption rate for Department A:
- Total overheads (Department A + Service Department C allocation) = €16,000 + €9,000 = €25,000
- Total Machine hours = 800 hrs
The absorption rate = Total Overheads / Total Machine Hours
Thus, Overhead Absorption Rate for Department A = €25,000 / 800 hrs = €31.25 per Machine hour.
Step 3
Calculate the overhead absorption rate for Department B using Labour hours.
Answer
To determine the overhead absorption rate for Department B:
- Total overheads = €9,000 (Department B) + €3,000 (Service Department C allocation) = €12,000
- Total Labour hours = 500 hrs
The absorption rate = Total Overheads / Total Labour Hours
Thus, Overhead Absorption Rate for Department B = €12,000 / 500 hrs = €22 per labour hour.
Step 4
Calculate the cost of job no. 506.
Answer
To calculate the cost of job no. 506:
- Direct materials: €4,200
- Direct labour: €1,500
- Overhead for Department A using Machine hours:
- Hours in Dept A: 12 hrs
- Overhead from Department A: 12 hrs x €31.25 = €375
- Overhead for Department B using Labour hours:
- Hours in Dept B: 4 hrs
- Overhead from Department B: 4 hrs x €22 = €88
Total Cost of Job 506 = Direct Materials + Direct Labour + Overhead from Dept A + Overhead from Dept B
Total Cost = €4,200 + €1,500 + €375 + €88 = €6,163.
Step 5