Question 12.4: A business expects to incur overheads totalling $20,000 next...

Accounting for Business Students

A business expects to incur overheads totalling $20,000 next month. The total direct labour time worked is expected to be 1,600 hours, and machines are expected to operate for a total of 1,000 hours. During the month the business expects to do just two large jobs, outlined as follows:

	Job 1	Job 2
Direct labour hours	800	800
Machine hours	700	300

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Let us now examine how much overhead will be charged to each job if overheads are to be charged on:

• a direct labour hour basis, or
• a machine hour basis.

The overheads are calculated as shown below.

Direct labour hours basis
Overhead recovery rate = $20,000/1,600 = $12.50 per direct labour hour
Job 1	$12.50 × 800 = $10,000
Job 2	$12.50 × 800 = $10,000

Machine hour basis
Overhead recovery rate = $20,000/1,000 = $20.00 per direct labour hour
Job 1	$20.00 × 700 = $14,000
Job 2	$20.00 × 300 = $6,000

It is clear from this that the total of overheads charged to jobs is the same whichever method is used. So, whereas the machine hour basis gives Job 1 a higher share than the direct labour hour method does, the opposite is true for Job 2.

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