Question

A paint manufacturer produces specialist paints to meet customers’ specific requirements. Each customer order is manufactured as a separate job with production overheads allocated to it. Direct labour costs are high as every job requires mixing by hand. The management accountant has provided details of the budget and actual data for the company for the whole year as well as details of a particular customer order

	2022 budget	2022 actuals	Customer order
Production overheads £	550,000	575,000
Direct labour hours	27,000	26,000	85
Machine hours	11,000	9,400	76

  

1. Why should direct labour hours be used to apportion the overhead?
2. What direct labour rate is to be used to apportion the overheads?
3. How much production overhead should be charged to the customer order?
4. How much production overhead has been recovered in the whole year?
5. How much is the over or under recovery for the year?

Answer 1

a.

Direct labor hours be used to apportion the overhead as each job requires most of the work by hand due to which labor cost are high.

b.

Direct labor rate = Budgeted production overhead / Budgeted direct labor hours

Direct labor rate = 550,000 / 27,000 = 20.3704 per labor hour

c.

Production overhead charged to customer order = 85 * 20.3704

Production overhead charged to customer order = 1,731.484

d.

Production overhead recovered in the whole year = 26,000 * 20.3704

Production overhead recovered in the whole year = 529,630

e.

Over or under-recovery = 575,000 - 529,630

Under recovery = 45,370