Questions on Overhead Absorption


Given: Total budgeted overheads = Shs.240,000

Production budget is as follows:

Product A B
i) Units 20,000 10,000
ii) Labour hours 20,000 20,000
iii) Labour cost Shs.17,500 Shs.22,500
iv) Machine hours 45,000 15,000
v) Material cost Shs.15,000 Shs.25,000


The overhead absorption rater per unit of A and B using the following methods:

  1. Unit method
  2. Percentage on material cost.
  3. Percentage on labour cost.
  4. Percentage On prime cost.
  5. Labour hour rate.
  6. Machine hour rate.                 (Total:20 Marks)


A Factory issues a job employee A to produce 35 articles; it takes two standard hours to produce each article. Another job is given to employee B to produce 60 articles; it takes one and half standard hours to produce each article. For every hour saved, a bonus is paid at 50% of the base, which is Sh.200 per hour. The factory works a 40-hour week and overtime is paid at a rate of one and a third. At the end of the week, A’s articles and B’s clock cards show 49 and 46 hours respectively and the work is complete. However, three of A’s articles and three B’s articles failed to pass inspection. This was due to defective material and in view of this all the articles produced were paid for, although as scrap they have no seleable value.


For both A and B:

  1. Bonus due (8 marks)
  2. Total gross wages due (8 marks)
  3. Wages cost per unit of articles passing inspection (4 marks)           (Total: 20 marks)


ABC Company manufactures leather produces with various end uses. The company applies factory overheads to individual jobs on the basis of machine hours for department A, and on the basis of direct labour cost for department B. The following budget estimates were made by the company at the star of year 2:

  Department A Department B
  Shs Shs
Direct material cost 800,000 600,000
Direct labour cost 600,000 500,000
Factory overheads 600,000 400,000
Direct labour hours 40,000 50,000
Machine hours 120,000 7,500

Cost records kept by the company showed that Job No.T506 consumed the following inputs during the year:

  Department A Department B
  Shs Shs
Materials issued 5,000 Shs.15,000
Direct labour cost 4,800 Shs.4,000
Direct labour hours 400 500
Machine hours 1,500 100


  1. Determine the overhead application rate for both department A and B.
  2. Calculate the total cost of Job No.T506.
  3. Suppose the job consists of 50 items, what would be the cost per unit?
  4. At the end of the year 2, total factory overheads incurred amounted to shs.975,000. A total of 110,000 machine hours were worked in department A while the total labour cost for department B was Shs.540,000.


Calculate the over- or under- applied for the company as a whole and indicate whether it is

favourable or unfavourable. (Total20 Marks)


  1. Equator Garments Ltd. Manufactures custom-made suits tailored to the requirements of each customer. They use predetermined overhead absorption rates in allocating overheads to each job. In the cutting department, the rate is based on direct labour hours and in the stitching department the rate is based on machine hours. The management of Equator Garments Ltd., wants to set overhead absorption rates to help in determining prices in the next financial year. The cost accountant has provided the following budgeted data for the next financial year.
  Cutting Stitching
Direct labour cost Shs.1,200,000 Shs.750,000
Factory overhead Shs.1,500,000 Shs.1,620,000
Direct labour hours 60,000 30,000
Machine hours - 40,00


Calculate the overhead absorption rates for each department

  1. The following data relates to Job No.a4
  Cutting Stitching
Direct materials Shs.500 Shs.750
Direct labour hours 30 10
Machine hours - 20

Administration overheads are absorbed at 25% on factory costs.

Profit mark-up is 331/3 % on cost.


  1. Prepare a cost statement for job A4 showing the price that will be charged to the customer.

At the end of the year, the following data was obtained:

  Cutting Stitching
Hours actually worked    
Direct labour hours 68,000 30,000
Machine hours - 17,000
Factory overhead cost incurred 1,600,000 760,00


Calculate the amount of under or over absorption for each department.

(Your attention is drawn to the interrelation between a, b, and c). (Total:20 Marks)


Bogi and Whispers, Certified Public Accountants use a form of job order costing system.

An auditing client may be served by various members of staff who hold professional positions in the hierarchy, managers, and audit seniors to assistants. In addition, there are secretaries and other support employees.

Suppose that Bogi and Whispers have the following budget for 20X4:

Compensation of professional staff 40,000,000
Other costs 24,000,000
Total budgeted costs 64,000,000




Each professional member of staff must submit a weekly time report, which is used to assign costs to jobs. An example is the time report of an audit senior:

Week of November 4, 20X4 S M T W T F S Total
Chargeable hours:                
Client A   8 8 5       21
Client B       3   4   7
Non-chargeable hours:                
Professional development (attending seminars on computer auditing)         8      
Unoccupied time           4   4
TOTAL 0 8 8 8 8 8 0 40

In turn, these reports are used for charging hours to a client job-order, summarized as follows for Client A:

  Week of Nov.4 Nov. 11 Total hours Billing rates Total billed
Employees charged       Shs Shs
Partner 4 4 8 1,000 8,000
Manager 4 4 8 600 4,800
Seniors 21 30 51 400 20,400
Assistants 48 70 118 200 23,600
  77 108 185   56,800

In many cases these job-cost sheets bear only a summary of the hours charged. Each class of labour is billed at an appropriate hourly rate, so that the job-cost sheet is the central basis for billing the client.


  1. Supposing this firm had a policy of charging overhead to jobs at a predetermined percentage of the salaries charged to the job. The experience of the firm has been that chargeable hours average 80 per cent of available hours for all categories of professional staff. The non-chargeable hours are regarded as additional overhead. What is the overhead rate as a percentage of “direct labour” (the chargeable professional compensation cost)?
  1. Compute the total cost of the Client A job for the two weeks that began November 4, 20X4. Assume that the average weekly compensation (based on a 40-hour week) of the personnel working on this job is: Partners, Sh.20,000; Managers, Sh.12,000; Audit Seniors, Sh.80,000; Assistants, Sh.4,000.
  1. As the tabulation for Client A implies, the job order often consists of only the time and no cost. Instead, the revenue is computed via multiplying the time by the billing rates. Suppose the partners’ profit objective is 20% of the total costs budgeted, what predetermined percentage of the salaries charged to the jobs would be necessary to achieve a total billing rate as a percentage of “direct labour”?

Very briefly state what use you might make of the data computed on the job orders in addition to billing.

(Total: 20 Marks)


In a factory with for production departments and two service departments and two service departments, the operating costs for the month of October were as shown below. The costs of running the canteen in apportioned to department on the basis of the estimated use of the canteen by the employees in each department. Similarly, the cost of the boiler house is apportioned on the basis of the estimated consumption of power used by each department.

Cost for October were:   Shs
Production department 1 200,000
  2 500,000
  3 300,000
  4 400,000
Service department    
Canteen   50,000
Boiler house   100,000
Total   1,550,00

The service departments are apportioned as follows:

    Canteen Boiler house
Production department   % %
  1 10 20
  2 30 10
  3 20 30
Service department 4 30 20
Canteen   - 20
Boiler house   10 -__
Total   100 100


  1. Prepare a cost statement showing the costs of operating the four production departmentsafter the cost of the service departments have been re-apportioned. (15 marks)
  2. Comment briefly on the problems associated with apportioning department coststo productive departments. (5 marks)                                    (Total: 20 mark)