Modigliani Limited manufactures large speaker cabinets. Each speaker cabinet has material costs of £50, direct labour cost of £25 and direct expenses of £15. Each speaker requires 5 hours of machining department time and 6 hours of finishing department time. Total overheads in the machining department are £300,000 per annum while the finishing department incurs total overheads of £150,000. The finishing department's employees work 25,000 labour hours each year while the machining department machines run for 30,000 hours during the year. What is the absorption cost of each large speaker cabinet?

Question

Quizplus · Accepted Answer

The absorption cost includes direct costs and allocated overheads. Direct costs are £50 (materials) + £25 (labour) + £15 (expenses) = £90. Overhead rates are £300,000/30,000 = £10/hour for machining and £150,000/25,000 = £6/hour for finishing. Each speaker uses 5 hours of machining (£10*5 = £50) and 6 hours of finishing (£6*6 = £36). Total absorption cost = £90 + £50 + £36 = £176.

Modigliani Limited Manufactures Large Speaker Cabinets