Production and service cost

An organization has budgeted for the following production overheads for its production and service cost centres for the coming year:Cost centreMachining (M/c)180 000Assembly (Ass)160 000Paint shop (Paint shop)130 000Engineering shop (Eng Shop)84 000Stores52 000Canteen75 000 The product passes through the machining, assembly and paint shop cost centres and the following data relates to the cost centres:M/cAssPaint shopEng shopStoresNo. of employees8151393024Eng Shop-service18 00012 00010 000Stores (orders)1801359045The following budgeted data relates to the production cost centres:MachiningAssemblyPaint shopMachine hours9 2008 1006 600Labour hours8 30011 2509 000Labour cost40 00088 00045 000Required:(a) Apportion the production overhead costs of the service cost centres to the production cost centres and determine predetermined overhead absorption rates for the 3 production cost centres on the following basis:Machining – Machine hours.Assembly – Labour hours.Paint shop – Labour costs. (11 marks)(b) Actual results for the production cost centres were:MachiningAssemblyPaint shopMachine hours10 0008 2006 600Labour hours4 5007 8006 900Labour cost25 00042 00035 000Actual Overhead290 000167 000155 000Prepare a statement showing the under/over absorption per cost centre for the period under review. (7 marks)(c) Explain why overheads need to be absorbed upon pre-determined bases such as the above. Consider whether these bases for absorption are appropriate in the light of changing technology, suggesting any alternative basis that you consider appropriate.

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