Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ Advanced Accounting Level Notes: Absorption of Overheads: One Product Worked Example

- We have already looks at the theory of overhead absorption 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 and makes only one product

#### The Example

Fantastic Furniture Pvt Ltd produces desks. Each desk uses 3 kg of wood at a cost of $4 per kg, and takes 4 hours 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 expects to produce 50,000 desks p.a.

Required:

- Calculate the total cost per each desk

#### Solution

Cost Element | Cost Per Unit$ |

Materials (3kgx$4) | 12 |

Labour (4hrsx$2) | 8 |

Overheads($700 000/50 000) | 14 |

Total cost per unit | 34 |

#### NB

- This is a straight forward example there is no need for an overhead analysis sheet here
- Under Absorption Costing each unit of production has to “absorb” its portion of fixed costs
- Since there is only one product and one department we can simply divide the total overheads by the number of units we expect to produce
- \dfrac{\text{700 000}}{\text{50 000}}

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