Course 5 MA

Structure:
Recap overhead part 1
Overhead part 2
Exercises - overheads
 Tailoring house

Part 1. 15th of January, 2021

DM 90 lei
DL 5 40 200 lei
Estimated production OH 6,000 lei
Pieces of clothes 320 pieces
Estimated administrative OH 4,000 lei
Profit margin 30%

Absorption rate (OH production) 18.75 lei/one unit

Absorption rate (OH admin.) 12.5 lei/one unit

Estimations
for 2021 Production cost 309 lei
Complete cost 321 lei
Profit margin 96.38 lei
Selling price 417.63 lei

Part 2. 15th of January, 2022

DM 90 lei
DL 5 40 200 lei
Actual/effective production OH 8,000 lei
Pieces of clothes produced and sold 305 pieces
Actual/effective administrative OH 3,500 lei
Profit margin 27.44%
Effective
values for
2021 Absorption rate (OH production) 26.23 lei/piece
Absorption rate (OH admin.) 11.48 lei/piece

Production cost 316.23 lei

Complete cost 327.70 lei
Profit margin 89.92 417.625 check
Selling price 417.63 lei
 Tailoring house

Three things are unchanged: DM, DL and the selling price.

Analysis of the OH

OH production

Absorbed (estimation) in production during the year: 18.75 lei

Absorbed (effective) in production during the year: 26.23 lei
…we allocated less during the year by 7.48 lei
… our profit decreased by 7.48 lei
under-asbsorbed OH

OH administration

Absorbed (estimation) in complete cost during the year: 12.5 lei

Absorbed (effective) in complete cost during the year: 11.48 lei
…we allocated more during the year by -1.02 lei
… our profit increased by 1.02 lei
over-absorbed OH
Profit margin
estimated 30%
effective 27.44% Estimatio
- OH,
- allocatio
allocation
 Tailoring house

Estimated Effective Variance

lei % lei % lei %
seeling price 418 100% 418 100% 0.00 0.0%
DM 90 22% 90 22% 0.00 0.0%
DL 200 48% 200 48% 0.00 0.0%
OH production 18.75 4% 26.23 6% 7.48 1.8% U
production cost 308.75 74% 316.23 76% 7.48 1.8% U
OH admin. 12.5 3.0% 11.48 2.7% -1.02 -0.2% F
complete cost 321.25 77% 327.70 78% 6.45 1.5% U
profit margin 96.38 23% 89.92 22% -6.45 -1.5% U

Begining of the
period End of
the period
Time line

Before starting After completion

the activity of activity

Estimations for: Effective/

- OH, VARIANCES Actual data
- allocation basis, - for:
allocation rates - OH,
- allocation
basis
- alocation
rates
estimated absorption rate effective / actual absorption rate
/ predetermined OH rate / actual OH rate
 Tailoring house

OH absorbed during the period for all the products

no of units estimated to be produced 320
no of units effectively produced 305

OH production
OH incurred during the period / allocated 5,718.75 (POH * no of units produced) inventory = production
OH at the end of the period 8,000
Under-allocated OH from production 2,281.25

OH administration
OH incurred during the period / allocated 3,812.50 (POH * no of units produced)
OH at the end of the period 3,500
Over-allocated OH from administration -312.5

Check: (2.281,25-312,5)/305 = 6.45

orption rate
 Tailoring house

= production
 Exercises:
1. Over-absorbed OH occur when: OH allocated during th eperiod
A. absorbed overheads exceed actual overheads. Actual OH
B. absorbed overheads exceed budgeted overheads. Over absorbed
C. actual overheads exceed budgeted overheads.
D. budgeted overheads exceed absorbed overheads.

Budgeted labour hours 8,500

Budgeted overheads £148,750 Absorption rate = budgeted OH/ budgeted basis
Actual labour hours 7,928 actual rate/hour 18.44097
Actual overheads £146,200
2. Based on the data given above, what is the labour hour overhead absorption rate used during the period?
A. £17.50 per hour.
B. £17.20 per hour.
C. £18.44 per hour.
D. £18.76 per hour.
3. Based on the data given above, what is the amount of overhead under-/over-absorbed?
A. £2,550 under-absorbed. OH allocated during the period
B. £2,529 over-absorbed. Actual OH
C. £2,550 over-absorbed. under absorbed OH
D. £7,460 under-absorbed. * Budgeted OH is not the same as allocated OH

4. Freeman Company uses a predetermined overhead rate based on direct labor-hours to apply manufacturing ove
to jobs. At the beginning of the year, the company estimated manufacturing overhead would be $150,000 and dire
labor-hours would be 10,000. The actual figures for the year were $186,000 for manufacturing overhead and 12,00
direct labor-hours. The cost records for the year will show: 
A. overapplied overhead of $30,000
B. underapplied overhead of $30,000
C. underapplied overhead of $6,000
D. overapplied overhead of $6,000

At the begining of the year:

estimated OH 150000 pounds 1 allocation rate 15 pounds/hour
estimated direct labor 10000 (another term for the allocation rate is predetrmined OH ra
allocation rate = estimated OH / estimated base
Scope of the allocation rate: to give to the items (units prod
At the end of the period 2 actual allocation rate 15.5 pounds/hour
actual OH 186000 pounds actual allocation rate = actual OH / actual base
actual direct labor hou 12000 3 Compare estimated rate with the actual rate = I should hav

4 What the value of the OH allocated during the period to the labor hours?
OH allocated during the period = estimated rate * actual number of labor hours
OH allocated 180,000
Actual OH 186,000
Under allocated OH -6,000
ed during th eperiod 15 lei
12 lei
3

budgeted basis 17.5 pounds/labor hour

d during the period?

138740 allocation rate*no of effective hours worked

146200 actual rate (18,44) * actual no of hours (7928)
-7460
the same as allocated OH

to apply manufacturing overhead

would be $150,000 and direct
cturing overhead and 12,000

pounds/hour
rate is predetrmined OH rate)
estimated base
ive to the items (units produced, hours worked) a part of the OH
pounds/hour
H / actual base
e actual rate = I should have givend you more by 0,5 pounds/hour
Problem 4 Overhead absorption rates
QRS Ltd has three main departments – Casting, Dressing and Assembly – and has prepared
the following production overhead budgets for period 3.
Estimations
Department Casting Dressing Assembly
Production overheads 225,000 175,000 93,000
Expected production hours 7,500 7,000 6,200
During period 3, actual results were as follows:
Department Casting Dressing Assembly
Production overheads 229,317 182,875 92,500
Actual production hours 7,950 7,280 6,696

Requirements
(a) The departmental overhead absorption rates per production hour for period 3 are:
Casting Dressing Assembly
Absorption rates 30 25 15 absorption rate computed at the beginning
(b) (i) The overheads in the Casting department were (tick the correct box and insert the
value of the over-/under-absorption):
under-absorbed no over-absorbed yes by £

(ii) The overheads in the Dressing department were (tick the correct box and insert
the value of the over-/under-absorption):
under-absorbed yes over-absorbed no by £

(c) The overheads in the Assembly department were over-absorbed. Which of the following
factors contributed to the over absorption?
the actual overheads incurred were lower than budgeted.
the actual production hours were higher than budgeted.

Problem 5
Data for the machining cost centre are as follows:
Budgeted cost centre overhead £ 210,000 £
Actual cost centre overhead 230,000 £
Budgeted machine hours 42,000 £
Actual machine hours 43,000 £

Complete the following calculation.

£
Overhead absorbed 215,000
Actual overhead incurred 230,000 Tick correct box:
Overhead under absorbed (15,000) under-absorbed yes
over-absorbed

Problem 6
The Crayfield Hotel has completed its initial allocation and apportionment of overhead
costs and has established that the total budgeted annual overhead cost of its
linen services activity is £836,000.
The cost unit used to plan and control costs in the hotel is an occupied room
night. The hotel expects the occupancy rate of its 400 rooms, which are available for
365 nights each year, to be 85 per cent for the forthcoming year.
To the nearest penny, the overhead absorption rate for the linen services activity is £
 OH allocated during the period = estimated rate * actual number of production hours
OH allocated 238,500
Actual OH 229,317
Over allocated OH 9,183

n rate computed at the beginning of the year

9,183
OH allocated during the period = estimated rate * actual number of production hours
OH allocated 182000
Actual OH 182,875
875 Under allocated OH -875

e following OH allocated during the period = estimated rate * actual number of production hours
OH allocated 100,440
Actual OH 92,500 budgeted O 93,000 No
Over allocated OH 7,940 why?

production hours actual 6,696

budgeted 6,200 yes

absortion rate (budgeted) 5 pounds/machine hours

Absorption rate = Estimated OH / estimated basis

6.74 per occupied room night.
how many room night could we have? 400 room * 365 = maxim capacity