Shanu Ltd has calculated a predetermined overhead rate of 22 per machine hour for its Quality Check (QC) department. This rate has been calculated…

(i) Variable overhead absorption rate: Variable overhead absorption rate = (Difference in Total Overheads) / (Difference in levels in terms of machine hours) = (₹ 3,47,625 -3,38,875) / (15,500 hours - 14,500 hours) = 8,750 / 1,000 hours = 8.75 per machine hour. (ii) Calculation of Total fixed overheads: (₹) Total overheads at 14,500 hours 3,38,875 Variable overheads = 8.75 × 14,500 1,26,875 Total fixed overheads 2,12,000 (iii) Calculation of Budgeted level of activity in machine hours: Let budgeted level of activity = X Then, (8.75 X + 2,12,000) / X = 22 8.75X + 2,12,000 = 22 X 13.25X = 2,12,000 X = 16,000 Thus, budgeted level of activity = 16,000 machine hours. (iv) Calculation of Under / Over absorption of overheads: (₹) Actual overheads 3,22,000 Absorbed overheads = 14,970 hours × 22per hour 3,29,340 Over-absorption (3,29,340 – 3,22,000) 7,340 (v) Departmental absorption rates provide costs which are more precise than those provided by the use of blanket absorption rates. Departmental absorption rates facilitate variance analysis and cost control. The application of these rates makes the task of stock and work-in-process (WIP) valuation easier and more precise. However, the setting up and monitoring of these rates can be time-consuming and expensive.