Question

Rolex Ltd planned to produce 500,000 units for the coming year using 120,000 labour hours. Planned fixed overhead costs amount to $420,000 and overhead is absorbed on a labour hour basis. Determine the fixed overhead over or under absorbed in the following situation:

The company produced 480,000 units but used 125,000 labour hours; and fixed overhead cost was as planned.

Answer 1

The fixed overhead over or under absorbed can be calculated by finding the difference between the actual labor hours used and the planned labor hours, and multiplying it by the fixed overhead rate.

Step-by-step explanation:

The fixed overhead over or under absorbed can be calculated by finding the difference between the actual labor hours used and the planned labor hours, and multiplying it by the fixed overhead rate. In this case, the fixed overhead rate is calculated by dividing the planned fixed overhead costs by the planned labor hours.

To find the fixed overhead over or under absorbed, we can use the following equation:

Fixed Overhead Over/(Under) Absorbed = (Actual Labor Hours - Planned Labor Hours) x Fixed Overhead Rate

Substituting the values from the question:

Fixed Overhead Over/(Under) Absorbed = (125,000 - 120,000) x ($420,000 / 120,000)

Fixed Overhead Over/(Under) Absorbed = 5,000 x ($420,000 / 120,000)

Fixed Overhead Over/(Under) Absorbed = 5,000 x $3.50

Fixed Overhead Over/(Under) Absorbed = $17,500