Page 73 - BA2 Integrated Workbook STUDENT 2018

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

You must read each question to establish the basis on which production overheads
are absorbed. This is often labour hours, machine hours or units. In the above
example we will assume that department 1 would absorb overheads 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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