Budgeting Help! - Variable Production Overhead

broom123

On practice assessment 3, question 1.4 (b) I am struggling to work out the variable production overhead.

I have been given the following information;

'Each Unit is made from 1.2kg of material costing 0.80p per kg. Takes 5 mins to make each item. 1800 hours of basic time is available in the month. Basic rate is £10 p/h. Overtime is 50% above basic rate.
Variable o/head relates to labour hours, including overtime.

Units sold for the month are 25,000 and units produced are 25200.

I have worked out that direct labour is £22500 for the month.

The variable production o/head for the year is 36,000 and the direct labour for the year is 252,000.

According to the answers the Variable production o/head for the month is 3150, how have they come to this answer?

Sorry this is so long. Sitting my exam Thursday and I'm dreading it!

Any help would be appreciated.

Nps

Hi,

The variable overheads are based on total labour costs. So the OAR for these will be total budgeted labour hours / total budgeted variable overheads.

From this we get 288,000 x 5/60 = 24,000 budgeted hours to produce the budgeted output
So the budgeted OAR is budgeted overheads / budgeted hours = 36000/24000 = 1.5 per hour

Now we can add in the actual figures. You've already identified that it will take 2100 hours to make the required quantity so multiplying that by your OAR gives you your £3150.

crispy

Hello,

This may not be correct, but this is how I worked it:

If direct labour cost per year is £ 252,000 then labour hours per year would be:

21,600 hours(1,800 * 12) @ £10 = 216,000
2,400 hours @ £ 15 = 36,000

Total Labour Cost for Year = £ 252,000 : Total Hours Worked for Year = 24,000

Therefore V. O/Head per hour would be £ 36,000 / 24,000 = £ 1.50 per hour

Number of hours worked for the month = 2,100 (1,800 + 300)

So...... V/Ohead cost for month 2,100 hours @ £ 1.50 = £ 3,150

Well thats my version anyway

crispy

Beaten to it !! Damn my slow typing fingers :P

Nps

I have an unfair advantage, I can touch type! (One of the most useful transferrable skills I ever learnt).

crispy

That was my bestest answer ever too !! I reckon you could have answered another 5 questions, had a cup of tea - and I would still be trying to type / work out the answer. Good luck to the OP for the exam next Thursday.

coojee

Nps1976 wrote: »

Hi,

The variable overheads are based on total labour costs. So the OAR for these will be total budgeted labour hours / total budgeted variable overheads.

From this we get 288,000 x 5/60 = 24,000 budgeted hours to produce the budgeted output
So the budgeted OAR is budgeted overheads / budgeted hours = 36000/24000 = 1.5 per hour

Now we can add in the actual figures. You've already identified that it will take 2100 hours to make the required quantity so multiplying that by your OAR gives you your £3150.

Am I missing something in the question or do you know this question anyway? I can't see where it says that budgeted output is 24,000 units for you to arrive at total annual output of 288,000 units. I'm not picking holes I just can't see it in the information given so I was wondering if you've looked up the actual question. I get crispy's explanation as all the info is there.

Nps

The actual question tells you that the budgeted annual output is 288,000.

I always look up the question directly if I can so I know I've got all the info (have spent far too much time trying to answer impossible questions because someone has missed out some vital piece of info or have mistyped something!)

I also now understand why Crispy seemed to do it in a much more complicated way, as he wouldn't have had that vital figure of £288,000! Crispy - you can forgive your slow typing fingers, your brain was getting a bit more of a workout!

coojee

Nps1976 wrote: »

The actual question tells you that the budgeted annual output is 288,000.

I always look up the question directly if I can so I know I've got all the info (have spent far too much time trying to answer impossible questions because someone has missed out some vital piece of info or have mistyped something!)

I also now understand why Crispy seemed to do it in a much more complicated way, as he wouldn't have had that vital figure of £288,000! Crispy - you can forgive your slow typing fingers, your brain was getting a bit more of a workout!

Great so I didn't miss something obvious :-)

Nps

No, not at all! I didn't even notice the OP hadn't put it in till you pointed it out.

crispy

Haha - who needs these details when answering questions, I can answer the question even without the question ! On browsing the forum Nps you do seem pretty 'switched on' your answers are very well explained/easy to follow - and it also appears were born in a great year (1976 FA Cup) thefore I trust your feedback.

Nps

Thank you very much! And yes, 1976 was a vintage year. Can't comment on the FA Cup but it was a good year for babies (though getting a little too far in the past for my liking!). If my husband mentions the big 4-0 beckoning once more, I may have to consider divorce..........

Nps

Aah, the power of google. FA Cup - Southampton. I get it now! I hope that comes up in a pub quiz one day!

broom123

This makes so much more sense to me now! Thank you all so much!