State, and critically assess, the objectives of overhead apportionment and absorption.


Question Description:

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Calculation of under/over recovery of overheads A company produces several products which pass through the two production departments in its factory. These two departments are concerned with filling and sealing operations. There are two service departments, maintenance and canteen, in the factory. Predetermined overhead absorption rates, based on direct labour hours, are established for the two production departments. The budgeted expenditure for these departments for the period just ended, including the apportionment of service department overheads, was £110 040 for filling, and £53 300 for sealing. Budgeted direct labour hours were 13 100 for filling and 10 250 for sealing. Service department overheads are apportioned as follows: Maintenance — Filling 70% – Maintenance — Sealing 27% Maintenance — Canteen 3% Canteen — Filling 60% — Sealing 32% — Maintenance 8% During the period just ended, actual overhead costs and activity were as follows: Direct labour (£) Hours Filling 74260 12820 Sealing 38115 10075 Maintenance 25050 Canteen 24375 Required: (a) Calculate the overheads absorbed in the period and the extent of the under/over absorption in each of the two production departments. (b) State, and critically assess, the objectives of overhead apportionment and absorption.

Answer

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