Calculating unit costs (Part 2) Flashcards
Which of the following best describes a cost centre?
A - Units of a product or service for which costs are ascertained
B - Amounts of expenditure attributable to various activities
C - Functions or locations for which costs are ascertained and related to cost units for control purposes
D - A section of an organisation for which budgets are prepared and control is exercised
C - Functions or locations for which costs are ascertained and related to cost units for control purposes
Which of the following is a valid reason for calculating overhead absorption rates?
A - To reduce the total overhead expenditure below a predetermined level
B - To ensure that the total overhead expenditure does not exceed budgeted levels
C - To attribute overhead costs to cost units
D - To attribute overhead costs to cost centres
C - To attribute overhead costs to cost units
Which of the following is known as spreading common costs over cost centres on the basis of benefit received?
A - Overhead absorption
B - Overhead apportionment
C - Overhead allocation
D - Overhead analysis
B - Overhead apportionment
The process of overhead apportionment is carried out so that
A - costs may be controlled
B - cost units gather overheads as they pass through cost centres
C - whole items of cost can be charged to cost centres
D - common costs are shared among cost centres
D - common costs are shared among cost centres
The following information is available for the two production departments (machining and assembly)
and one service department (the canteen) at Wilmslow
Machining:
Budgeted overheads: £15,000
Number of staff: 30
Assembly:
Budgeted overheads: £20,000
Number of staff: 20
Canteen:
Budgeted overheads: £5,500
Number of staff: 5
After reapportionment of the service cost centre costs, what will be the overhead cost of the
machining department cost centre?
A - £3,300
B - £17,750
C - £18,000
D - £18,300
D - £18,300
The overheads of the canteen department are reapportioned on the basis of the number of staff
working in the production departments only.
Reapportionment of canteen overheads
To machining department = (30/50) × £5,500 = £3,300
Machining department total overheads = £15,000 + £3,300
= £18,300
The works manager of a company is fully occupied in running the production lines in the factory. The
logistics manager spends some time on production and some time organising distribution.
How would their salaries be dealt with when calculating a fixed overhead absorption rate for the factory?
Works manager:
A - Allocated to factory
B - Apportioned to factory
Logistics manager:
C - Allocated to factory
D - Apportioned to factory
A - Allocated to factory
The whole of the works manager’s salary can be allocated to the factory since the manager is fully
occupied in the factory cost centre
D - Apportioned to factory
Part of the logistics manager’s salary must be apportioned to the factory since some time is spent on production tasks
The following extract of information is available concerning the four cost centres of EG Limited.
Number of direct employees
Production cost centres:
Machinery: 7
Finishing: 6
Packing: 2
Service cost centre:
Canteen: 0
Number of indirect employees
Production cost centres:
Machinery: 3
Finishing: 2
Packing: 1
Service cost centre:
Canteen: 4
Overhead allocated and apportioned:
Machinery: £28,500
Finishing: £18,300
Packing: £8,960
Canteen: £8,400
After the re-apportionment, the total overhead cost of the packing department, to the nearest £, will be
A - £1,200
B - £9,968
C - £10,080
D - £10,160
D - £10,160
Number of employees in packing department = 2 direct + 1 indirect = 3
Number of employees in all production departments = 15 direct + 6 indirect
= 21
Packing department overhead:
Canteen cost apportioned to packing
department = £8,400/21 × 3 = £1,200
Original overhead allocated and apportioned = £8,960
———–
Total overhead after apportionment of canteen costs = £10,160
Which three of the following statements on the determination of overhead absorption rates are correct?
A - Costs can be allocated where it is possible to identify which department caused them.
B - Supervisors’ salaries are likely to be apportioned rather than allocated.
C - Costs need to be apportioned where they are shared by more than one department.
D - There is no need for a single product company to allocate and apportion overheads in order to
determine overhead cost per unit.
E - Apportionment always produces the correct result.
A - Costs can be allocated where it is possible to identify which department caused them.
C - Costs need to be apportioned where they are shared by more than one department.
D - There is no need for a single product company to allocate and apportion overheads in order to
determine overhead cost per unit.
Which of the following bases of apportionment would be most appropriate for apportioning heating costs to production cost centres?
A - Floor space occupied in square metres
B - Volume of space occupied in cubic metres
C - Number of employees
D - Labour hours worked
B - Volume of space occupied in cubic metres
A company makes three products in a period
Product A:
Quantity (units): 1,000
Labour hours per unit: 4
Product B:
Quantity (units): 2,000
Labour hours per unit: 6
Product C:
Quantity (units): 3,000
Labour hours per unit: 3
Total units: 6,000
Overheads for the period are £30,000 and they are absorbed on the basis of labour hours
What is the fixed overhead cost absorbed by a unit of Product B?
A - £30.00
B - £5.00
C - £7.20
D - £1.20
C - £7.20
Total labour hours = (1,000 × 4) + (2,000 × 6) + (3,000 × 3) = 25,000 hours
Overhead per labour hour = £30,000/25,000 = £1.20 per hour
Overhead content per unit of Product B = £1.20 × 6 = £7.20
Budgeted information relating to two departments in JP Ltd for the next period as follows.
Department: 1
Production overhead: £27,000
Direct material cost: £67,500
Direct labour cost: £13,500
Direct labour hours: 2,700
Machine hours: 45,000
Department: 2
Production overhead: £18,000
Direct material cost: £36,000
Direct labour cost: £100,000
Direct labour hours: 25,000
Machine hours: 300
Individual direct labour employees within each department earn differing rates of pay, according to
their skills, grade and experience.
What is the most appropriate production overhead absorption rate for department 1?
A - 40% of direct material cost
B - 200% of direct labour cost
C - £10 per direct labour hour
D - £0.60 per machine hour
What is the most appropriate production overhead absorption rate for department 2?
E - 50% of direct material cost
F - 18% of direct labour cost
G - £0.72 per direct labour hour
H - £60 per machine hour
D - £0.60 per machine hour
Department 1 appears to undertake primarily machine-based work, therefore a machine-hour rate would be most appropriate.
£27,000/45,000 = £0.60 per machine hour
G - £0.72 per direct labour hour
Department 2 appears to be labour-intensive, therefore a direct labour-hour rate would be most
appropriate.
£18,000/25,000 = £0.72 per direct labour hour
The following information is recorded in the machinery department relating to activity levels and overheads in period 1
Budget
Machine hours: 22,000
Overheads: £460,000
Actual
Machine hours: 27,000
Overheads: £390,000
Overheads are absorbed on the basis of machine hours
What is the overhead absorption rate for the machinery department to two decimal places?
A - £14.44
B - £17.04
C - £17.73
D - £20.91
D - £20.91
Overhead absorption rate = £460,000/22,000 = £20.91 per hour
Remember overhead absorption rates are based on budgeted information.
Which of the following statements about overhead absorption rates are true?
1) They are usually determined in advance for each period.
2) They are used to charge overheads to products.
3) They are normally based on actual data for each period.
4) They are used to control overhead costs.
A - (1) and (2) only
B - (1), (2) and (4) only
C - (2), (3) and (4) only
D - (3) and (4) only
A - 1 and 2 only
Overhead absorption rates are usually determined in advance for each period, usually based on
budgeted data.
Overhead absorption rates are used in the final stage of overhead analysis, to absorb overheads into product costs.
A product requires four hours of direct labour at £5.25 per hour, and requires direct expenses of £53.50. In its production, it requires 24 minutes of complex welding.
Possible overhead absorption rates have been calculated to be £7.10 per direct labour hour or £41.50 per welding machine hour.
Requirement
Using the direct labour hour basis of overhead absorption, calculate to the nearest penny the total product cost.
A - £81.90
B - £91.10
C - £102.90
D - £119.50
C - £102.90
Direct labour £5.25 × 4 hours = 21.00
Direct expenses = 53.50
Total direct cost = 74.50
Overhead absorbed
£7.10 × 4 hours = 28.40
—————
Total production cost
= 102.90
Lerna Ltd produces hydras in three production departments and needs to apportion budgeted monthly overhead costs between those departments. Budgeted costs are as follows:
Rent of factory: £2,000
Rates for factory: £1,000
Machine insurance: £1,000
Machine depreciation: £10,000
Factory manager’s salary: £7,000
——–
21,000
The following additional information is available:
Department A
Area (sqm): 3,800
Value of machinery (£’000): 210
No. employees: 34
Department B
Area (sqm): 3,500
Value of machinery (£’000): 110
No. employees: 16
Department C
Area (sqm): 700
Value of machinery (£’000): 80
No. employees: 20
The total budgeted monthly overhead cost for Department C is
A - £1,837.50
B - £4,462.50
C - £6,000.00
D - £7,000.00
B - £4,462.50
Apportionment of budgeted overhead costs £
Rent and rates (area) £3,000 × (700/8,000) = 262.50
Plant insurance and depreciation (value of machinery)
£11,000 × (80/400) = 2,200.00
Factory manager’s salary (employee numbers) £7,000 × (20/70) = 2,000.00
—————–
4,462.50
A company manufactures two products, J and K, in a factory divided into two production cost centres, Primary and Finishing. In order to determine a budgeted production overhead cost per unit
of product, the following budgeted data are available.
Primary
Allocated and apportioned production overhead costs: £96,000
Direct labour minutes per unit:
Product J = 36
Product K = 48
Finishing
Allocated and apportioned production overhead costs: £82,500
Direct labour minutes per unit:
Product J = 25
Product K = 30
Budgeted production is 6,000 units of product J and 7,500 units of product K. Production overheads
are to be absorbed on a direct labour hour basis.
The budgeted production overhead cost per unit for product K is
A - £10.00
B - £13.20
C - £14.00
D - £14.60
D - £14.60
Primary hours:
Product J (6,000 x 36/60) = 3,600
Product K (7,500 × 48/60) = 6,000
——–
Total budgeted direct labour hours = 9,600
Budgeted production overheads = £96,000
Production absorption rate = £10 per hour
Finishing hours
Product J (6,000 x 25/60) = 2,500
Product K (7,500 x 30/60) = 3,750
——–
Total budgeted direct labour hours = 6,250
Budgeted production overheads = £82,000
Production overhead absorption rate = £13.20
Production overhead cost absorbed by product K
£ per unit
Primary cost centre (£10 × 48/60) 8.00
Finishing cost centre (£13.20 × 30/60) 6.60
Total budgeted production overhead cost 14.60
Which of the following statements about predetermined overhead absorption rates are true?
1) Using a predetermined absorption rate avoids fluctuations in unit costs caused by abnormally high or low overhead expenditure or activity levels
2) Using a predetermined absorption rate offers the administrative convenience of being able to record full production costs sooner.
3) Using a predetermined absorption rate avoids problems of under/over absorption of overheads because a constant overhead rate is available.
A - 1 and 2 only
B - 1 and 3 only
C - 2 and 3 only
D - 1, 2, and 3
A - 1 and 2 only
Statement (1) is correct because a constant unit absorption rate is used throughout the period.
Statement (2) is correct because ‘actual’ overhead costs, based on actual overhead expenditure and
actual activity for the period, cannot be determined until after the end of the period.
Bumblebee Co absorbs production overhead costs on a unit basis. For the year just ended, Bumblebee Co’s production overhead expenditure was budgeted at £150,000 but was actually £148,000 while the budgeted activity level (production units) was 30,000 units and 29,000 units were actually produced
Which of the following is true?
A - Fixed overheads were under absorbed by £5,000, this being the difference between budgeted expenditure and 29,000 units at £5 per unit.
B - Fixed overheads were under absorbed by £5,000, this being the difference between budgeted and actual production at £5 per unit.
C - Fixed overheads were over absorbed by £3,000, this being partly the difference between budgeted and actual expenditure and partly the production shortfall of 1,000 units.
D - Fixed overheads were under absorbed by £3,000, this being partly the difference between budgeted and actual expenditure and partly the production shortfall of 1,000 units
D - Fixed overheads were under absorbed by £3,000, this being partly the difference between budgeted and actual expenditure and partly the production shortfall of 1,000 units.
Overhead absorption rate = £150,000/30,000 = £5 per unit
Absorbed overhead (29,000 units × £5) 145,000
Actual overheads (148,000)
—————
Under-absorbed overhead 3,000
The effect of the production shortfall was partly offset by the difference between budgeted and
actual expenditure.
The budgeted overhead absorption rate for variable production overheads in department X of Lublin’s factory is £3.00 per direct labour hour and for fixed overhead is £4.50 per direct labour hour.
Actual direct labour hours worked exceeded the budget by 500 hours.
If expenditures were as expected for variable and fixed overheads, the total over-absorbed overhead
for the period would be:
A - £507.50
B - £1,500.00
C - £2,250.00
D - £3,750.00
C - £2,250.00
When expenditures are as budgeted, but actual and budgeted production activity levels are
different, only fixed overhead can be under or over absorbed.
Over-absorbed overhead = 500 hrs × £4.50 = £2,250
Variable overhead absorbed = (500 × £3.00) = £1,500 more than budgeted in the original budget.
However, variable overhead incurred would be £1,500 more as well, leaving neither under nor over
absorbed variable overheads
The finishing department has budgeted labour hours of 3,250 and budgeted overhead costs of £14,950.
The actual labour hours were 3,175 and actual overheads were £14,810
The overheads for the period were:
A - under-absorbed by £140
B - Over-absorbed by £140
C - under-absorbed by £205
D - over-absorbed by £205
C - under-absorbed by £205
The overhead absorption rate is the budgeted
overhead cost/budgeted hours = £14,950/3,250 = £4.60 per hour
Absorbed overheads (3,175 hours × £4.60) = £14,605
Actual overheads = £14,810
Under absorbed overheads = £205
Actual overheads incurred = 480,000
Over absorbed overheads = 95,000
Overheads absorbed = 575,000
The overhead is under absorbed because the actual overhead expenditure exceeded the amount
absorbed.
A company absorbs overheads on a machine hour basis. Actual machine hours were 20,000, actual overheads were £480,000 and there was over absorption of overheads of £95,000
What is the overhead absorption rate?
A - £19.25 per unit
B - £19.25 per hour
C - £28.75 per unit
D - £28.75 per hour
D - £28.75 per hour
Actual overheads incurred 480,000
Over absorbed overheads 95,000
————
Overheads absorbed 575,000
Overhead absorption rate = £575,000/20,000
= £28.75 per hour
Budgeted and actual data for the year ended 31 December 20X1 is shown in the following table.
Budget:
Production (units): 5,000
Fixed production overheads: £10,000
Sales (units): 4,000
Actual:
Production (units): 4,600
Fixed production overheads: £9,500
Sales (units): 4,000
Fixed production overheads are absorbed on a per unit basis
Why did under/over absorption occur during the year ended 31 December 20X1?
A - The company sold fewer units than it produced
B - The company sold fewer units than it produced and spent less than expected on fixed overheads
C - The company produced fewer units than expected
D - The company produced fewer units than expected and spent less on fixed overheads
C - The company produced fewer units than expected
Overhead absorbed = 4,600 units × £2 = 9,200
Overhead incurred = (9,500)
———–
Under absorption 300
Budgeted overheads for a period were £340,000. At the end of the period the actual labour hours worked were 21,050 hours and the actual overheads were £343,825
If overheads were over absorbed by £14,025, how many labour hours were budgeted to be worked?
A - 20,000
B - 20,225
C - 21,050
D - 21,700
A - 20,000
Actual overheads = £343,825
Over absorption = £14,025
Absorbed overheads = Actual overheads + over absorbed overheads
= £343,825 + £14,025
= £357,850
If the absorbed overheads = £357,850 then the budgeted overhead absorption rate = Absorbed
overheads/actual labour hours = £357,850/21,050 = £17 per labour hour.
The budgeted absorption rate for variable production overhead in department X of Wiggipen Ltd’s factory is £2.50 per direct labour hour and for fixed overhead is £4 per direct labour hour. Actual
direct labour hours worked fell short of budget by 1,000 hours.
If expenditures for the actual level of activity were as expected for variable and fixed overheads, the
total under or over absorbed overhead for the period would be
A - £4,000 under-absorbed
B - £4,000 over- absorbed
C - £6,500 under-absorbed
D - £6,500 over-absorbed
A - £4,000 under-absorbed
When expenditures are as budgeted, but actual and budgeted production activity levels are
different, only fixed overhead can be under or over absorbed.
Under-absorbed overhead = 1,000 hours × £4 = £4,000.
Variable overhead absorbed would be (1,000 × £2.50) = £2,500 less than in the original budget, but
variable overhead incurred would be £2,500 less as well, leaving neither under nor over absorbed
variable overheads
