XYZ Ltd., uses a historical cost accounting system and absorbs overheads on the basis of predetermined rates. The following data are available for the year ended 31st March, 2007.
Amount in Rupees
Amount actually spent
Cost of goods sold
Stock of finished goods
Work in progress
Using two methods of disposal of under/absorbed overheads show the implication on the profits of the company under each method.
a. In a certain factory, three products are made from different materials by similar processes. For a typical period, production costs are as under.
Direct labor cost
Overheads are charged to the cost of each product @ 25% on Prime Cost. Do you see anything wrong in principle in this method of charging overheads? If so, suggest a preferable method.