Question 12.3: Johnson Ltd has overheads of $60,000 each month. Each month ...
Johnson Ltd has overheads of $60,000 each month. Each month 2,500 direct labour hours are worked and charged to units of output (the business’s products). A particular job uses direct materials costing $238. Direct labour worked on the the job is 15 hours and the wage rate is $25 an hour. Overheads are charged to jobs on a direct labour hour basis. What is the full cost of the job?
First, let us establish ‘overhead recovery rate’ —that is, the rate at which jobs will be charged with overheads. This is $24 (i.e. $60,000/2,500) per direct labour hour.
Thus, the full cost of the job is:
| $ | |
| Direct materials | 238 |
| Direct labour (15 × $24) | 375 |
| 613 | |
| Overheads (15 × $24) | 360 |
| 973 |
Note that the number of labour hours (15 hours) appears twice in deducing the full cost: one to deduce the direct labour cost, and a second time to deduce the overheads to be charged to the job. These are really two separate issues, although they are both based on the same number of labour hours.
Note also that if all jobs completed during the month are assigned overheads in a similar manner all $60,000 of overheads will be charged to the jobs between them. Jobs that involve a lot of direct labour will be assigned a large share of overheads, and those that involve little direct labour will be assigned a small share of overheads.