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Calculate the total costs for each product if all overheads are absorbed on a machine hour basisOverhead absorption is the means of attributing overheads to a product or service based on direct labour costs direct labour hours or machine hours The treatment of the indirect costs will be examined in this questionIn this question total costs for each product will be calculated using the Overhead Absorption Method Overhead Absorption Tare OAR on a machine hour basisTotal Cost Centre Cost 26000 20 Total No of Machine Hours 13000 Materials4000500030006000 Labour2800210014002100Prime Cost6800710044008100Overheads8000600040006000Total Cost177600013100006720001692000Calculate the total costs for each product using activity based costingCalculate Cost per Unit using driver CostDriverCost per Unit Set-up costs 5250No of Production Runs25000Stores receiving3600Requisitions raised4500Inspectionquality control2100No of production runs10000Materials handing and dispatch 4620 Orders executed11000Machine related costs 10430Total Machine hours802300Set-up costs150000125000100000150000Stores receiving 90000900009000090000Inspectionquality control60000500004000060000Materials handing and dispatch132000110000128400288800Total Overheads817000615700446400720800Prime cost 6800710044008100Cost Overheads6808615755806007Total Cost per Unit 1360813257998014107You should include in your report a discussion on the appropriateness of other traditional methods of absorbing overheads and the effectiveness of Activity based costingThese methods involve the calculation of overhead rates that are designed to ensure that overheads are absorbed by productsThis method is highly acceptable the use restricted to production cost centres that are labour intensive rather than machinery intensive The Direct Labour Hour method is very suitable in order that the time spent in production is related to the cost of overhead incurredin some cases it may cause an overcharge of overhead costs to products which relatively unskilled labour using2Direct Wages Labour Costs OAR MethodOverhead tend to relate to the amount of time that unit spends in production so this method may be particularly suitable since the direct labour is a combination between hours that worked and rates paid When skilled workers use costly machinery and unskilled workers perform tasks that do not require similar capital investments the use of this method will be suitableThe cases
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