Page 65 - BA2 Integrated Workbook - Student 2017

Overhead analysis

Going back to our example:
Prod cost centre 1 Prod cost centre 2
Total overheads $111,090 $100,710
Labour hours 15,000 10,000
Machine hours 20,000 6,000

The overheads of production department 1 would be absorbed on the basis of
machine hours as it is more machine hour intensive, while production department 2
would use labour hours as it is more labour intensive.

OAR for production cost centre 1 = $111,090 ÷ 20,000 = $5.55 per machine hour

OAR for production cost centre 2 = $100,710 ÷ 10,000 = $10.07 per labour hour

3.3 Applying the overhead absorption rate

We now know that for every machine hour a unit uses in production cost centre 1, it
will pick up $5.55 and for every labour hour a unit uses in production cost centre 2, it
will pick up $10.07.

Consider the following data for product XX:

Prod cost centre 1 Prod cost centre 2
Labour hours per unit 5 3
Machine hours per unit 2 4

The overhead one unit of product XX will pick up is:

Production cost centre 1: 2 machine hours × $5.55 = $11.10

Production cost centre 2: 3 labour hours × $10.07 = $30.21

Remember: this is the overhead, or indirect cost, to be picked up by each unit
of XX. To find the total cost of a unit of XX the direct costs must be added on.

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