Confussed - ECR Absorbtion Rates

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:30AM in AAT student discussion
I am really confussed doing these past papers and hoping someone could clarify for me please.<BR><BR>I work out under/over absorbtion as follows<BR><BR>ACTUAL OVERHEADS - ABSORBED OVERHEADS = If a positive then it is overabsored if a negative then underabsorbed.<BR><BR>On the Dec 2003 ECR this works as fine as follows:-<BR>CUTTING DEPARTMENT<BR>ACTUAL OVERHEADS = £23,125 - ABSORBED OVERHEADS = £24,000 = £(875) underabsorbed<BR>FINISHING DEPARTMENT<BR>ACTUAL OVERHEADS = £22,050 - ABSORBED OVERHEADS = £21,150 = £900 overabsorbed<BR><BR>This agrees with the answers, however if you look at the June 2004 paper this doesn't work - I worked it out like above as follows<BR>CUTTING DEPARTMENT<BR>ACTUAL OVERHEADS = £6,200 - ABSORBED OVERHEADS £6,600 = £(400) underabsorbed<BR>STICHING DEPARTMENT<BR>ACTUAL OVERHEADS = £5,150 - ABSORBED OVERHEADS £4,680 = £470 overabsorbed<BR><BR>When you look at the answers it is the opposite way round to my workings above.<BR><BR>Can soneone please clarify if the way I am doing it is correct. I have been looking at this for hours now and am getting really confussed.

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confussed - ECR Absorbtion Rates

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confussed - ECR Absorbtion Rates

    You seem to have reversed te formula. We recover overheads using a predetermined OAR which is then charged out on the hours actually worked. This gives us the overheads recovered (absorbed). If this is more than the actual overheads incurred then we have over recovered. If less we have under=recovered.<BR><BR>I think you will find that the answers for Dec 2003 are wrong. (AAT - please can you correct this).<BR><BR>In the Cutting Department we absorbed £24,000 (that is, we recovered £24,000 to pay our overhead bills from), but the actual bills only came to £23,125 meaning that we had over recovered £875 - more profit.<BR><BR>Hope this clarifies,<BR><BR>Graham Blott
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confussed - ECR Absorbtion Rates

    to work out whether you have under or over absorbed draw your overheads "T", then debit your "T" with your actual overhead cost which is 6200 for cutting department, then credit your "T" with your actual hours worked multiplied by your BOAR... then if your difference is on your debit side it means the double entry is a credit on the P & L which means its overabsorbed which is good, and if it's a credit in your overheads "T" then its a debit on the P & L which is bad as it's an expense and will reduce your profit... hope that helps!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confussed - ECR Absorbtion Rates

    I got a bit confused<BR><BR>The answer is<BR><BR>June 2004<BR><BR>Cutting dept (2200 hours x £3) - £6200 (actual) = 400 over absorbed (positive)<BR><BR>Stitching (1300x£3.60) - £5150 (actual) = 470 under absobed (negative)<BR><BR>Dec 2003<BR><BR>cutting Budgeted 24000-23125(actual)=875 over (pos)<BR><BR>stiching budgeted 21150-22050(actual)=900 under (neg)<BR><BR>June 2004 you are uaing the actula machine hours x OAR rate to reach budgeted the minusing actual whereas Dec 2003 you had already calculated this in task 1.6<BR><BR>Hope that makes sense<BR><BR>Have a coffee and look at it in 20 minutes. It usually works for me!!!!!!!!!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confussed - ECR Absorbtion Rates

    Graham<BR><BR>Think you may have that the wrong way round<BR><BR>24,000 was for budgeted refer to page 7<BR><BR>actual is £2.50 (OAR) x 9250 hours answer to a(i)
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Confussed - ECR Absorbtion Rates

    Um.<BR><BR>Not having the past paper in front of me I based my answer on the data that Mel included in her original posting.....<BR><BR>"On the Dec 2003 ECR this works as fine as follows:-<BR>CUTTING DEPARTMENT<BR>ACTUAL OVERHEADS = £23,125 - ABSORBED OVERHEADS = £24,000 = £(875) underabsorbed"<BR><BR><BR>I think my answer quite clearly relates to that.....<BR><BR>"In the Cutting Department we absorbed £24,000 (that is, we recovered £24,000 to pay our overhead bills from), but the actual bills only came to £23,125 meaning that we had over recovered £875 - more profit."<BR><BR>The point is that Mel has quite obviously confused the formula when she stated at the start of her posting that.....<BR><BR>"ACTUAL OVERHEADS - ABSORBED OVERHEADS = If a positive then it is overabsored if a negative then underabsorbed."<BR><BR>A moments thought will make it clear that if the actual bills come to more than we have absorbed then there is a shortfall - an under-absorption - rather than an overabsorption. This I think is a classic example of the dangers inherent in trying to learn management accounting by memorising a set of formulas rather than thinking about what it is all about.<BR><BR>Graham Blott<BR><BR><BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    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. Looking at the books I now know that I got my formula round the wrong way. 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!!!!<BR><BR>Thanks again Mel

Categories

Privacy Policy