Budgeting Mock Exam Kaplan Question

sscors

Hello

there is a question in the mock exam part of the Kaplan Textbook that I am not sure how to answer. Any help would be much appreciated.

Calculate the appropiate budgeted overhead recovery rate for the following production department. The department's annual budget for indirect costs is:

Indirect labour £6250
Supervisor wages £29000
Depreciation of equipment £35000
Machine maintenance £4000
Canteen subsidy £9750

Total £84000

Notes: the budgeted production of 1000 units will require 25,000 machine hours and 35,000 direct labour hours.


Question: What should overhead recovery be based on? And what is the recovery rate?

Mollypod88

I need help on this aswell! I not sure how you know which rate to choose?

SandyHood

I am surprised to see an overhead absorption rate task on a level 4 budgeting mock. This is a level 3 cost and revenues topic. (examined in task 1.5)
The total budgeted overhead is £84,000
The department has more labour hours than machine hours, so labour hours may well be used to absorb the overhead

Giving an overhead recovery rate of £84,000/35,000 direct labour hours or £2.40 per direct labour hour.


I could add comments about company policies and how absorbing overhead can be on a unit basis, a machine hour basis or based on direct labour hours, but this isn't a discussion question.

(a) Direct labour hours because the department has budgeted for more labour hours indicating that it is labour intensive
(b) £2.40 per direct labour hour

sscors

Many thanks