Page 212 - P1 Integrated Workbook STUDENT 2018

Chapter 12

Solution

Firstly determine the overhead absorption rate for fixed production overheads:

Budgeted overheads
OAR =
Budgeted absorption basis
$200,000
OAR = = $10 per unit
20,000 units

Now create the standard cost card:

$
Direct materials 3 kg × $5/kg 15
Direct labour 1/3 of an hour × $24 per hour 8

Variable overheads 1/3 of an hour × $6 per hour 2
Fixed production overheads 10
––––
Total absorption cost 35

––––
The total closing inventory = opening inventory + actual production –
actual sales

= 3,000 + 21,000 – 18,000 = 6,000 units

The value of closing inventory = 6,000 units × $35 per unit = $210,000

Example 2

Calculate the over-/under-absorption for Limco.

Solution

Overheads absorbed = $10 per unit × 21,000 units = $210,000

Actual overheads were $200,000

Over-absorbed = $210,000 – $200,000 = $10,000

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