Pringlezz
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Hey guys, I'm a new first-year in my accounting & finance degree and I have my first exam next week in Management Accounting. I understand the basic theory, but when asked to apply this knowledge to a calculation question with context, I struggle immensely and I'm worried about failing the class. So I'd appreciate if there was anyone out there that could help me
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MindMax2000
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It's a little late for advice at this point in time.

What do you have problems with specifically? I've got first class marks for first year management accounting.
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Pringlezz
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(Original post by MindMax2000)
It's a little late for advice at this point in time.

What do you have problems with specifically? I've got first class marks for first year management accounting.
Im struggling with overhead allocation and oberhead absorption rates.

I understand the basic allocation based - so rent will be allocated based on floor space of each dept

However there is a question that tells me about the fixed and variable costs for two production departments and I'm not sure if I would add these values together first and come to one complete absorption rate or if I should have an absorption rate for variable costs and one for fixed.

Question:
Calculate the appropriate predetermined overhead absorption rates for 31st December if the budgeted machine hours are 10,000. The direct labour hours at 45,000 and the budgeted units produced for the period are 250,000


Machining
Fixed Costs - 642,000
Variable - 363,000

Hand Finishing
Fixed - 542,000
Variable - 278,000
Last edited by Pringlezz; 1 month ago
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MindMax2000
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(Original post by Pringlezz)
Im struggling with overhead allocation and oberhead absorption rates.

I understand the basic allocation based - so rent will be allocated based on floor space of each dept

However there is a question that tells me about the fixed and variable costs for two production departments and I'm not sure if I would add these values together first and come to one complete absorption rate or if I should have an absorption rate for variable costs and one for fixed.

Question:
Calculate the appropriate predetermined overhead absorption rates for 31st December if the budgeted machine hours are 10,000. The direct labour hours at 45,000 and the budgeted units produced for the period are 250,000


Machining
Fixed Costs - 642,000
Variable - 363,000

Hand Finishing
Fixed - 542,000
Variable - 278,000
The point of apportioning costs is because you're not sure where the costs are coming from. If you can't identify which department incurred which variable cost, you add the fixed and variable costs together first. If you can, you would try to be as accurate and allocate the cost to the department where possible.

As you're using floor space as the way you're attributing costs, you use the ratio of floor space for both departments for the budgeted machine hours and labour hours

Adding up machining cost: 642+363 = 1005k
hand finishing: 542+278 = 820k

Multiply the respective number of hours per cost for each department using the rates above. e.g. if it's on a ratio of 1:4
Department 1: 1005k*1/5 + 820k*1/5 = 365k
Department 2: 1005k*4/5+820k*4/5 = 1460k

If you need to determine the absorption rates i.e. per hour, you need to divide the total cost per hours used
machining cost/machining hours = 1005k/10k = 100.5
hand finishing/labour hours = 820k/450k = 18.22
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Pringlezz
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Okay, thank you very much for your response. That makes a lot more sense to me now 🙂
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