Overhead Absorption Rate based on machine hours

Question

following information relates to the budgeted production details for a company for the following month.

Product A B C

Units produced 600,000 800,000 400,000

Direct labour £28,000 £42,000 £20,000

Direct labour is paid at £15 per hour and the machine produces 50 units per hour.

Total overheads are £720,000 per month.

What is the overhead absorption rate based on machine hours as the absorption base? how do you calculate this?

Answer 1

You need to layout the data as follows:

Products A B C Total

Direct Labour (Hours) 1866.666667 2800 1333.333333 60...

Direct Labout (amounts) 28000 42000 20000 90000

Overheads 720000

Per hour 120

So the answer is £120 per hour.  the last item in line 2 is 6,000 and total overheads are:720,000 so 720,000 / 6,000 = 120

HTH