Component TDQ sells for £325. This selling price is calculated by adding 30% to the total absorption cost of each component. Direct costs of production of each component are £160. Total overheads for the year are £500,000 and these are absorbed into products on a labour hour basis. During the year to 31 December 2021, 20,000 labour hours were worked but this is 20% lower than the expected level of labour hours that will be worked each year. How many labour hours does each Component TDQ take to produce?

Question

Quizplus · Accepted Answer

First, calculate the total absorption cost of each component. The selling price is £325, which includes a 30% markup on the total absorption cost. Let $x$ be the total absorption cost. Then, $x + 0.30x = £325$, solving for $x$ gives $x = £250$.The direct costs are £160, so the overhead absorbed per component is $£250 - £160 = £90$.The total overheads are £500,000. The actual labour hours worked were 20% lower than expected, meaning the expected labour hours are $20,000 / 0.80 = 25,000$.The overhead absorption rate per hour is $£500,000 / 25,000 = £20$ per hour.Finally, to find the labour hours per component, divide the overhead absorbed per component by the overhead rate per hour: $£90 / £20 = 4.5$ hours.

Component TDQ Sells for £325