Explain what a pre-determined overhead absorption rate is and calculate six different overhead absorption rates using the given data.

Hey Sabina, good to see you again. a) A pre-determined overhead absorption rate is a rate calculated at the beginning of an accounting period to apply overhead costs to products or services. It is determined by dividing the budgeted total overheads for a period by the budgeted activity level (e.g., direct labour hours, machine hours) for the same period. This rate allows for the timely costing of products and helps in setting selling prices. b) i) To calculate the six different overhead absorption rates, we use the formula: Overhead Absorption Rate = Budgeted Total OverheadBudgeted Activity Level The total budgeted overhead for the period is GH¢72,000. 1. Per Labour Hour: Rate = GH¢72,00036,000 labour hours = GH¢2.00 per labour hour The overhead absorption rate per labour hour is GH¢2.00. 2. As a percentage of Direct Wages: Rate = GH¢72,000GH¢108,000 × 100\% = 66.67\% The overhead absorption rate as a percentage of direct wages is 66.67\%. 3. As a percentage of Direct Material Cost: Rate = GH¢72,000GH¢48,000 × 100\% = 150\% The overhead absorption rate as a percentage of direct material cost is 150\%. 4. Per Machine Hour: Rate = GH¢72,00024,000 machine hours = GH¢3.00 per machine hour The overhead absorption rate per machine hour is GH¢3.00. 5. Per Unit of Production: Rate = GH¢72,00016,000 units = GH¢4.50 per unit The overhead absorption rate per unit of production is GH¢4.50. 6. As a percentage of Prime Cost: First, calculate the budgeted prime cost: Budgeted Prime Cost = Direct Material Cost + Direct Wages Budgeted Prime Cost = GH¢48,000 + GH¢108,000 = GH¢156,000 Now, calculate the rate: Rate = GH¢72,000GH¢156,000 × 100\% = 46.15\% The overhead absorption rate as a percentage of prime cost is 46.15\%. ii) To calculate the selling price for the batch order, we will use the Machine Hour Rate (GH¢3.00 per machine hour) for overhead absorption. Step 1: Calculate Direct Material Cost for the batch. Direct Material Cost = 60 kg × GH¢2.00/kg = GH¢120 Step 2: Calculate Direct Labour Cost for the batch. Direct Labour Cost = 90 hours × GH¢3.00/hour = GH¢270 Step 3: Calculate Prime Cost for the batch. Prime Cost = Direct Material Cost + Direct Labour Cost Prime Cost = GH¢120 + GH¢270 = GH¢390 Step 4: Calculate Absorbed Overhead for the batch using the Machine Hour Rate. Absorbed Overhead = Machine hours used × Machine Hour Rate Absorbed Overhead = 60 hours × GH¢3.00/hour = GH¢180 Step 5: Calculate Total Cost for the batch. Total Cost = Prime Cost + Absorbed Overhead Total Cost = GH¢390 + GH¢180 = GH¢570 Step 6: Calculate the Selling Price with a 20% profit on selling price. Let SP be the Selling Price. Profit = 20\% of SP = 0.20 × SP Total Cost = SP - Profit GH¢570 = SP - 0.20 × SP GH¢570 = 0.80 × SP SP = GH¢5700.80 SP = GH¢712.50 The selling price to be charged for the batch order is GH¢712.50. Send me the next one 📸