- 20 Marks
IMAC – JULY 2024 – L1 – Q4 – Cost-Volume-Profit (CVP) Analysis
Calculate overhead absorption rates, explain under and over absorbed overheads, and discuss the effect of over absorbed overhead on profit and CVP analysis assumptions.
Question
a) The statement below shows the summary of overheads that have been apportioned to the four departments operating in MMS Ltd with additional information.
| Department | 1 | 2 | 3 | 4 |
|---|---|---|---|---|
| Total overheads (GH¢) | 45,000 | 35,000 | 20,000 | 40,000 |
| Labour hours | 1,200 | 1,000 | 800 | 1,500 |
| Units produced | 8,000 | 6,000 | 4,000 | 7,000 |
| Machine hours | 2,500 | 3,000 | 1,800 | 4,000 |
| Prime cost per unit (GH¢) | 42 | 25 | 30 | 34 |
Required:
i) Calculate THREE (3) plant-wide (blanket) overhead absorption rates. (6 marks)
ii) Calculate TWO (2) overhead absorption rates for department 1. (3 marks)
b) Explain under and over absorbed overheads. (3 marks)
c) State the effect of over absorbed overhead on reported profit. (3 marks)
d) State FOUR (4) assumptions underlying cost-volume-profit (CVP) analysis. (5 marks)
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