Absorption Costing

“A” LEVEL ACCOUNTING
ABSORPTION COSTING
REVISION QUESTIONS
BOOKLET
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QUESTION 1
Janty operates a small manufacturing business making a single product, product Aye. The
factory has two production cost centres and no service cost centres.
REQUIRED
(a) Explain what is meant by a cost centre. [2]
Additional information
Janty calculates an overhead absorption rate for each cost centre based on budgeted data. She
then uses this to charge overheads to products
Details of the budgeted information are:
Cost centre 1 Cost centre 2

Overheads $100 000 $180 000
Direct labour hours 10 000 3 600
Machine hours 2 000 45 000
REQUIRED
(b) Calculate a suitable overhead absorption rate for each cost centre. [4]
The actual overheads incurred and hours worked for each cost centre during the year were as
follows:
Cost centre 1 Cost centre 2
Actual overheads $105 000 $172 000
Actual direct labour hours 10 100 4 000
Actual machine hours 2 400 47 000
REQUIRED
(c) Calculate the over absorption or under absorption of overheads for each department for
the year.
[4]
Simon, a new customer, asks Janty to quote for an order of 500 units of product Aye. The
following information is available in respect of their manufacture.
Direct material 50 kilos at $2 per kilo

Direct labour – cost centre 1 5 hours at $12 per hour
cost centre 2 2 hours at $15 per hour
Machine hours cost centre 2 only 6 hours
Janty marks up the cost of an order by 100% to calculate the selling price for a quote.
REQUIRED
(d) Prepare a quote in as much detail as possible to show the total selling price. [8]

Simon offers to pay Janty $350 for the order. At the present time the factory is not operating
at full capacity.
REQUIRED
(e) Recommend with reasons whether Janty should accept Simon’s order. [4]
Janty operates a second factory. This factory manufactures two products, Bee and Cee. She
has provided you with the following actual information for the last financial year.
Bee Cee Total

Sales units 5 000 8 000 13 000
$ $ $
Revenue 75 000 96 000 171 000
Variable costs (50 000) (62 000) (112 000)
Allocated fixed overheads (22 000) (12 000) (34 000)
Profit for the year 3 000 22 000 25 000
REQUIRED
(f) Calculate the break-even point in units for Bee. [4]
Janty is considering stopping the production of Bee because of its low profitability.
REQUIRED
(g) Recommend with reasons whether Janty should stop making product Bee. [4]
[Total: 30]

QUESTION 2
Morgan Ltd has expanded its production capacity by acquiring a new factory. The factory has
three production departments: Moulding, Assembly and Paint Shop. There is also a service
department: Stores. The Accountant must apportion the overheads of the factory to the three
production departments.
Details of the departments and the budgeted overheads expenses for the six months to
31December 2007 together with data for Product Q are given below:
Departmental statistics for six months ending 31 December 2007

Moulding Assembly Paint Shop Stores
Area in square metres 6 000 8 000 5 000 1 000
Machinery at cost $80 000 $40 000 $20 000 -
No. of workers 30 40 20 10
No. of stores requisitions 700 500 300
Budgeted overheads for 6 months to 31 December 2007

$
Rent 90 000
Lighting and heating 23 000
Insurance of premises 7 000
Canteen costs 54 000
Machinery is depreciated at 30% per annum on cost.

All workers will work 35 hours per week and there will be 24 working weekends in the six
months to 31December 2007.
Product Q passes through all three departments in the course of manufacture and the time
taken in each department is:
Moulding 2 hours Assembly 1 hours Paint Shop 1 hours
Required
a. A table to show the apportionment of the factory overheads to the production
departments for six months to 31 January 2007. {14}
b. Calculate for each production department an hourly overhead rate, giving your answer
correct to three decimal places. {3}
c. Calculate the total overhead to be awarded to each unit of Product Q {4}

QUESTION 3
The Headlands company manufactures parts for the car industry. The company has
two production departments and a works canteen that provides meals and
refreshments for the two production departments.
The following information is available
Department A B Canteen
Floor area (square metres) 13 000 10 000 2 000
Staff employed 30 70 10
Power used (kwh) 1 200 300 100
Cost of machinery $80 000 $20 000 $5 000
The following budgeted costs for the month of December have not been apportioned
to a department.
$
Rent and rates 10 000
Insurance of machinery 2 625
Heating and lighting expenses 7 500
Supervisory wages 12 100
Power 4 800
Depreciation of machinery 9 030
Additional budgeted information per month
Department A Department B
Direct labour hours 5 120 12 605
Direct machine hours 17 250 1 000
Required
a. A statement showing the apportionment of overheads for the month of
December. {17}
b. Calculate an overhead absorption rate for department A and department B.{8}
The managers of Headlands company have been asked to cost a new job 36.
The job would require:
6 kilos of material costing $7.40 per kilo;
Other variable costs of $30.50
The job will spend 14 hours in department A and a further 6 hours in
department B.
The job will be marked up by 60% on cost to achieve the selling price.
c. Calculate the price to be quoted to the customer for job 36.

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“A” LEVEL ACCOUNTING

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Details of the budgeted information are:

Cost centre 1 Cost centre 2

Direct material 50 kilos at $2 per kilo

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Bee Cee Total

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Departmental statistics for six months ending 31 December 2007

Budgeted overheads for 6 months to 31 December 2007

Machinery is depreciated at 30% per annum on cost.

Moulding 2 hours Assembly 1 hours Paint Shop 1 hours

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Additional budgeted information per month

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