XYZ Ltd., uses a historical cost accounting system and absorbs overheads on the basis of…
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XYZ Ltd., uses a historical cost accounting system and absorbs overheads on the basis of predetermined rates. The following data are available for the year ended 31st March, 2007.
Particulars
Amount in Rupees
Manufacturing overheads
Amount actually spent
1,70,000
Amount absorbed
1,50,000
Cost of goods sold
3,36,000
Stock of finished goods
96,000
Work in progress
48,000
Using two methods of disposal of under/absorbed overheads show the implication on the profits of the company under each method.
a. In a certain factory, three products are made from different materials by similar processes. For a typical period, production costs are as under.
Particulars
Product A
Product B
Product C
Materials used
1,600
2,000
800
Direct labor cost
1,200
1,000
400
Overheads (Actual)
800
650
350
Overheads are charged to the cost of each product @ 25% on Prime Cost. Do you see anything wrong in principle in this method of charging overheads? If so, suggest a preferable method.
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