The production manager of Walt (Pty) Ltd has recently attended a management course where the advantages of variance

analysis were discussed.

He feels such an analysis would assist in solving problems of budgetary control that arose during the year.

The following information relates to the past year’s activities:

Actual manufacturing overheads R175 000.00

Actual direct labour hours 25 000 hours
Budgeted manufacturing overheads R125 000.00
Actual sales R600 000.00
Budgeted direct labour hours 20 000 hours
Actual profit for the year R185 000.00

Required:

(a) Calculate the predetermined overhead rate. Direct labour hours are used as an allocation base.
(b) Calculate overheads over- or under-absorbed.

(c) Can prime cost be calculated? Substantiate your answer.

SOLUTION

R125
a. Budgeted manufacturing overheads 000
÷ Budgeted direct labour hours 20 000
 Predetermined overhead rate R6.250

R175
b. Actual manufacturing overheads 000
R156
Absorbed manufacturing overheads 250
Under/(Over) absorbed R18 750

c. Yes, the total actual prime cost can be calculated,

but it cannot be broken down further into direct
material and direct labour, as the given
information
is insufficient.

Total actual prime cost can be calculated as

follows:

R600
Actual sales 000
R185
Less actual profit 000
R175
Less actual manufacturing overhead 000
R240
= Prime cost 000