Budgeting Mock Question

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sscors
sscors Registered Posts: 72 Epic contributor 🐘
in General discussion
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?

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  • Nileshladva
    Nileshladva Registered Posts: 22 Dedicated contributor 🦉
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    Hey,

    The total of £84,000 represents the overheads that need to be divided.

    Your first step should be 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 direct labour hours.

    The rate is worked out as below:

    Actual (or estimated) overhead
    Actual (or estimated) hours of direct labour work

    The total of £84,000 should be divided by 35,000 (the total direct labour hours) giving the answer of £2.40 per hour.

    I hope this helps!

    Nilesh
  • Spamkebab
    Spamkebab Registered Posts: 233 Beyond epic contributor 🧙‍♂️
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    35000 Direct Labour Hours = £2.40 per hour.
  • Nileshladva
    Nileshladva Registered Posts: 22 Dedicated contributor 🦉
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    Spamkebab wrote: »
    35000 Direct Labour Hours = £2.40 per hour.

    Ahh, good spot.. i divided it by the total machine hours by accident.

    Thanks

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