Help with practice CBA question re overhead recovery

jojo1979

Hi all!

I am currently studying for my budgeting CBA and am in the process of doing one of the practice ones on here and am stuck on one of the questions about overhead recovery. Can anyone please help and explain how to work it out as i cannot see how it is worked out. The question is

Calculate the appropriate budgeted overhead recovery rate for the following production department the departments annual budget for indirect costs is

Indirect labout £17000
Supervisor wages £19000
Depreciation of equipment £4000
Machine maintenance £3500
Canteen subsidy £6500

TOTAL £50000

The budget production of 2500 units will require 5000 machine hours and 25000 direct labour hours

Complete the following

Overhead recovery should be based on labour hours or machine hours or units produced.
The recovery rate will be £ ? per ?

ANy help would be appreciated, am really struggling with overhead recovery :-(

Thanks Jo

guinea pig

Hi Jo,
The total of £50,000 represents the overheads that need to be apportioned. First you need to think about what this should be based on; as the bulk of the hours relate to direct labour, then the overhead recovery should be based on labour hours.
The total of £50,000 should be divided by 25,000 (the total direct labour hours) giving the answer of £2.00 per hour.
GP

jojo1979

Hi GP

Thank you so much for your reply. I totally understand it now thank you. Think i was having a mental block, its so easy to understand but for the life of my i couldnt understand where the answers were coming from. Thank you again

Jox

guinea pig

no problem! I had a similar mental block with a question last week, and got so confused, until someone here helped me, thank goodness for the forum!