Question

Zacotax Limited Absorption of fixed overhead You have been working as a Cost and Management Accountant in Zacotex Ltd. a maufacture company, manufactures and sells a range of products. Its budgeted production averheads for year 6 were 150,000 and budgeted direct labour hours were 50,000 hours. Actual results in Year 6 were as follows: Sales 630,000 Direct materials costs 130,000 Direct labour costs 160,000 Production overheads 140,000 (40,000 hours) Administration overheads 70,000 Selling and distribution Overhead 90,000 There was no opening or elosing inventory at the beginning or end of year 6. The company uses an absorption costing system, and production overhead is absorbed using a direct labour hour rate Required: ) Determine the over or under absorption of fixed overhead. 2) Calculate the full production cost 3) Show how the profit or loss for the year will be reported

Answer 1

Solution As per below Image:

Requirement 1 Statement showing calculation for Over or Underabsorbtion of Overheads: Production Overhead Absorbtion Rate Budgeted Production Overheads Budgeted direct labour hours £ 150000 50000 hours £ 3 per hour Production Overheads Absorbed = 40000 hours X £ 3 per hour = £ 120000 Underabsorbed Ovehead = Actual Overheads - Absorbed Overhead = 140000 - 120000 = £ 20000 Requirement 2 Statement Showing calculation of Full production cost Particulars Direct Material Cost Direct Labour Cost Production Overhead cost Total Production Cost Amount in £ 130000 160000 120000 410000 Requirement 3 Treatment of Underabsorbed Overheads: Underabsorbed Production overheads of £ 20000 will be debited profit and loss account Statement of Income Particulars Amount in £ 630000 Sales Direct Materials Direct Labour Cost Production Overheads Total Production Cost 130000 160000 120000 410000 Operating Profit Administrative Overheads Selling and distribution Overheads Unabsorbed Overheads 220000 70000 90000 20000 Net Profit 40000 CS Scan Scanned with CamScanner