Question 2 Liken PLC has asked for your help in installing their new absorption costing system. You have ascertained the following: There…

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:

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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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