When all production overheads have been allocated and apportioned to a product cost centre, the total has to be charged to specific units of production. This process is known as absorption. The main methods of absorption are:
• direct labour hour rate
• direct labour cost percentage rate
• machine hour rate
Saluts are manufactured in department J of S M Neal & Co. Ltd. The budgeted overhead costs of department J are estimated to be £200 000 for the next accounting period.
Budgeted direct labour hours for department J for the next accounting period are expected to be 10 000 hours.
Budgeted costs of direct labour in department J for the next accounting period are expected to be £80 000.
Budgeted machine hours to be worked in department J for the next accounting period are expected to be 2450 hours.
Calculate the overhead absorption rate for department J using the following bases of absorption:
1. direct labour hour rate
2. direct labour cost rate, and
3. machine hour rate