IMAC - JULY 2024 - L1 - Q4 - Cost-Volume-Profit (CVP) Analysis

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)

Answer