Ecco Ltd is engaged in the manufacture of components for the computer hardware industry. The factory consists of three production departments, A, B and C and a number of service departments. The costing system uses a single production overhead absorption rate expressed as a percentage of direct labour cost. A newly qualified accountant has just joined the company and has expressed a view that departmental overhead absorption rates would result in more accurate job costs. With this in mind, she has produced the following budgeted information for the next year. The budgeted production overheads in each department are after the allocation of service department costs.
(a) State with reasons, whether you agree with the view that ‘departmental overhead absorption rates would result in more accurate job costs’ and outline why a company would calculate predetermined annual overhead absorption rates as opposed to rates calculated from actual weekly or monthly activity and expenditure.
(b) (i) Calculate the current overhead absorption rate in use by Ecco;
(ii) Compute separate departmental overhead absorption rates for the company that you would deem most appropriate.
Extracted text: Direct wages | Direct Labour Machine Hours Production Overhead € Hours € BUDGET Department A 25,000 2,500 10,000 240,000 B 100,000 12,500 2,500 60,000 C 25,000 6,250 150,000 -- ТОTAL 150,000 21,250 12,500 450,000