Question 2 Liken PLC has asked for your help in installing their new absorption costing system. You have ascertained the following: There are three direct production departments: cutting, machining and painting, and two support departments: stores and maintenance. Allocated costs for each department in the period are: Cutting: £350,000 Stores: £120,000 Machining: £260,000 Maintenance: £90,000 Painting: £140,000 Costs to be apportioned: Cost Pool Cost Driver Rent £140,000 Departmental floor area Insurance £70,000 Machine value Heat and light £65,000 Departmental cubic capacity Secondary apportionment: Stores To be calculated Stores requisites Maintenance To be calculated Maintenance call outs Cutting Machining Painting Stores Maintenance Floor area sq ft 2,000 4,000 3,000 700 300 Machine costs 200,000 400,000 70,000 20,000 10,000 Cubic capacity cu ft 20,000 60,000 30,000 17,000 3,000 Stores requisites 4,000 1,000 2,000 ——– 795 Maintenance call outs 50 100 72 ——– —– Direct labour hours —— 18,160 27,600 ——– —– Machine hours 25,250 ——— ——- ——– —– Required: a) Calculate the overhead absorption rate for each of the three direct production departments. b) Critically discuss the limitations and possible solutions to absorption costing.
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