Murphy Limited incurred the following labour costs in respect of its production process in the year ended 31 March 201X:
The production process is split into two cost centres: machining and finishing. 40% of the supervisory labour time is spent in the finishing department with the balance spent in machining. In the finishing process 60% of the cleaners’ hours are spent in this department. £101 000 of direct labour costs are incurred in the machining department and the remainder in the finishing department.

What is the total amount of indirect labour cost allocated to the machining cost centre?

Question

Murphy Limited incurred the following labour costs in respect of its production process in the year ended 31 March 201X: 
The production process is split into two cost centres: machining and finishing. 40% of the supervisory labour time is spent in the finishing department with the balance spent in machining. In the finishing process 60% of the cleaners’ hours are spent in this department. £101 000 of direct labour costs are incurred in the machining department and the remainder in the finishing department.

What is the total amount of indirect labour cost allocated to the machining cost centre?

Quizplus · Accepted Answer

Total indirect labour cost = (£70,000 + £12,000 + £7,500) = £89,500
Supervisory labour time spent in finishing department = 40% of total supervisory labour time = 400 hours
Cleaners’ hours spent in finishing department = 60% of total cleaners’ hours = 1800 hours
Indirect labour cost allocated to finishing department:
Supervisory labour cost = (400/1000) x £42,000 = £16,800
Cleaners’ labour cost = (1800/3000) x £12,000 = £7,200
Total indirect labour cost allocated to finishing department = (£16,800 + £7,200) = £24,000
Indirect labour cost allocated to machining department = Total indirect labour cost – Indirect labour cost allocated to finishing department
Indirect labour cost allocated to machining department = (£89,500 - £24,000) = £65,500
Indirect labour cost rate for machining department = Indirect labour cost allocated to machining department / Direct labour cost for machining department
Indirect labour cost rate for machining department = (£65,500 / £101,000) = £0.6485
Indirect labour cost allocated to machining cost centre = Indirect labour cost rate for machining department x Direct labour cost for machining department
Indirect labour cost allocated to machining cost centre = (£0.6485 x £101,000) = £65,535
Round off to nearest pound, indirect labour cost allocated to machining cost centre = £25,320.

Murphy Limited Incurred the Following Labour Costs in Respect of Its