help with december 2003 paper

hanapospis

Hi,

I have just finished this paper and cannot get my head around the task 1.6. Can anyone help me out here?

The budget number of direct hours in the cutting department was 9600 hours.
The budgeted number of machine hours in the finishing department was 7050 hours.

The actual direct labour hours worked in the cutting department were 9250 hours
The actual machine hours worked in the finishing department were 7350hours.

The Fixed overheads for cutting department are 24.000 (absorbed on basic of budgeted direct labour) and for finishing department 21.500 (absorbedon basic of budgeted machine hour).

24.000 / 9600 = 2,5 per labour hour
21150/7050 = 3 per machine hour

actual hours worked in Cutting department 9250 x 2,5 = 23.125
actual hours workedin Finishing department 7350x 3 = 22.050.

Therefore:
Cuffing department = overabsorbed 875 (actual overheads are less then absorbed)
Finishing department = underabsorbed 900 (actual overheads are more then absorbed).

Why the answers on the answersheet are the other way around? Cannot get it straight!! I have been thinking about it for hours.... please can anyone explain:crying::crying: Where am I making the mistake...

Thank you

visha

hanapospis wrote: »

Therefore:
Cuffing department = overabsorbed 875 (actual overheads are less then absorbed)
Finishing department = underabsorbed 900 (actual overheads are more then absorbed).

I am sorry but you showing a lack of undersating.

Cutting dept. You have budgeted to recover £24,000 as overheads but you have only managed to recover £23,125. Therefore you have under absorbed or under recovered £875.

We don't know the actual overheads but the absorbed/recovered overheads are LESS then planned/budgeted overheads

Finishing dept. You have budgeted to recover £21,150 as overheads but you have managed to recover £22,050. Therefore you have over absorbed or over recovered £900.

We don't know the actual overheads but the absorbed/recovered overheads are MORE then planned/budgeted overheads


The answer sheet is right

hope this helps

talinka

Have a look at this link, it's all explained: http://forums.aat.org.uk/showthread.php?t=6213&highlight=dec+2003

hanapospis

I am sorry but I still don't get it. I have got the right answers on other paper but this one just cannot get right.

According my textbook (Osborn Book)
With under absorption the overheads absorbed into the cost units are less then the overheads actually incurred (debit P&L add to total cost - reduce profit)
With over absorption the overheads absorbed into the cost units are more then the overheads actually incurred. (credit P%L increase profit)

Visha posted:
Cutting dept. You have budgeted to recover £24,000 as overheads but you have only managed to recover £23,125. Therefore you have under absorbed or under recovered £875.

We don't know the actual overheads but the absorbed/recovered overheads are LESS then planned/budgeted overheads

When I would do the bookkeeping:

I would Debit work in progress with 24 000 and credit production overheads
when the actual overheads occurred 23125 debit production overheads credit bank
over absorption - debit production overheads credit P&L

I am sorry I still do not get this task... but I will probably just ignore it.. as I got this type of task on other papers right...

Thanks

visha

hanapospis wrote: »

When I would do the bookkeeping:

I would Debit work in progress with 24 000 and credit production overheads
when the actual overheads occurred 23125 debit production overheads credit bank
over absorption - debit production overheads credit P&L

Thanks

Your double entry should be the other way round.

Remember the Absorption figure used of £12,125 is the book entry. Actual cash has not been paid or recovered

The double entry for this is

Debit W-I-P...................£ 23,125............................This is part of total unit costs
Credit O/H control a/c.....................£23,125


When the actual overheads are paid (in this case the budgeted are also assumed as the actual)

The the Double entry for this is

Debit O/H control a/c.......£24,000....................Actual expense incurred
Credit Bank a/c..............................£24,000

There will be a balance brought down on the O/H control a/c of £875 on the debit side. (This is the under absorbed amount from W-I-P- and eventually it will have to be posted to the debit side of the Profit & loss a/c)

talinka

With all the respect to Visha:blushing:, I am convinced it's a typo in 2003 Dec paper. Your explanations, Visha, don't seem correct to me, plus you make a mistake yourself. £ 875 are b/d on CREDIT side of O/h Control account to be debited to profit&loss account as underabsorbed amount, that is if your way of thinking is right.

I came across one more link to this arguable matter:
http://forums.aat.org.uk/showthread.php?t=6420

An extract from there:
09-06-05, 00:00
mel1
Guest Posts: n/a

Confussed - ECR Absorbtion Rates
Thanks so much for all your help - I stupidly based my formula on the Dec 2003 paper instaed of looking at my books and notes which I now realise was incorrect. My tutor just clarified that the December 2003 paper was WRONG.<BR><BR>Makes you think weather they realised the answer was incorrect when they marked these papers!!!! Mel