### Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  Advanced Accounting Level Notes: Absorption of Overheads: More than one product one department worked example

• We have already looks at the theory of overhead absorption here
• We have also looked at allocation and apportionment here
• We have also looked at the theory of how to calculate overhead absorption rates (OARs) and why
• Now we will look at a scenario where a business has only one department(factory) and makes two or more products in this factory (department)
• In such cases we have to first determine a basis for absorption first
• At A level the examiners will most certainly decide for you but in the real world management have to decide for themselves

#### The Question

Zurb Pvt Ltd produces desks and chairs in the same factory.Each desk uses 3 kg of wood at a cost of $4 per kg, and takes 4 hours to produce.Each chair uses 2 kg of wood at a cost of$4 per kg., and takes 1 hour to produce.Labour is paid at the rate of $2 per hour. Fixed costs of production are estimated to be$700,000 p.a.The company expect to produce 30,000 desks and 20,000 chairs p.a.

• NB (Overheads are to be absorbed on a labour hour basis)

Required:

1. Calculate the cost per unit for desks and chairs

#### Solution

• A few things to note before we present the solution:
• Since we only have one department an overhead analysis sheet is not really required
• Now the solution
• The first thing is to calculate the Absorption Rate to be used
• To do this we need to Determine the Total Labour Hours:
• Chairs:(20 000 × 1 hr)= 20 000 hours
• Desks: Desks (30 000 × 4hr)= 120 000 hours
• This gives a total of 140 000 hours to be spend making the estimated units to be produced
• The Absorption Rate can be calculated using the formula:
• $\dfrac{\text{70 000}}{text{140 000}}$
• This yields a rate of $5/hour • What this means is that each product made must absorb$5 for each hour it takes to make it in the factory
• The cost per unit for both chairs and desks would thus be
 Cost Element Workings Desk$Workings Chair$ Materials (3kgx$4) 12 (2kgx$4) 8 Labour (4hrsx$2) 8 (1hrx$2) 2 Overheads (4kgx$5) 20 (1hrx$5) 5 Total Cost Per Unit 40 15
• The above table is known as a cost card
• Do not confuse direct labour cost with overhead absorption here direct labour costs are not absorbed

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