XYZ Ltd., uses a historical cost accounting system and absorbs overheads on the basis of…

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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