Slimm Parsons Limited manufactures components for boat engines.The company's fabrications cost centre uses two grades of direct labour: grade X and grade Y.Grade X is to be paid at £8.20 per hour, and grade Y at £7.30 per hour.The budget for the 20X1 financial year requires 15 000 hours of grade X labour and 20 000 hours of grade Y labour. The apportionment of production overheads to the fabrications cost centre is budgeted at £883 000.
What is the overhead absorption rate for the fabrications department for 20X1 financial year, based on direct labour hours (to 1 decimal place)?

Question

Quizplus · Accepted Answer

The overhead absorption rate based on direct labour hours is calculated by dividing the total overheads by the total direct labour hours and then multiplying by 100 to get a percentage. The total direct labour hours are 15,000 hours for grade X plus 20,000 hours for grade Y, which equals 35,000 hours. The total overheads are £883,000. Therefore, the overhead absorption rate is (£883,000 / 35,000 hours) * 100 = 2522.857...%, which is not a provided option, indicating a misunderstanding in the calculation or interpretation of the question. The correct approach for calculating the overhead absorption rate (OAR) in this context is to divide the total overheads by the total direct labour hours without multiplying by 100, as we are looking for a rate per hour, not a percentage. Thus, the correct calculation is £883,000 / 35,000 hours = £25.23 per hour, which does not match any of the provided options directly, suggesting a potential error in the question's interpretation or in the provided options.

Slimm Parsons Limited Manufactures Components for Boat Engines