Oars and Paddles Plc. Analysis - Assignment Example

Download file to see previous pages General overheads include rent, electricity, etc. which are incurred as a single expense for the entire organization.

Overhead Absorption Rate (OAR) = Budgeted overheads/ Budgeted level of activity, where the level of activity could be labor hours, machine hours, or a number of units (Hirsch, 2000, 78; Drury, 2005, 145).

Due to the complexity of the production process, the traditional method of absorbing overheads becomes less effective and it is not highly recommended (Horngren et al, 2002, 247). It is quite cumbersome and less self-explanatory (Thukaram, 2007, 257). In OarsandPaddles, direct materials are used to apportion production overheads to the four products under consideration. Further analysis of the use of the total cost of production of goods sold is applied to apportion other overheads e.g. selling and distribution. Valuation of the stock is also achieved by this method where raw materials and finished goods closing stock are determined. The method, however, is time-consuming and uses past data. Therefore there is a need to explore other methods of absorbing overheads to get effective results. These methods are thus adopted e.g. activity-based overheads, activity-based budgeting, etc.

This is a method of assigning the costs of goods and services on the basis of the resources they have consumed (Bhattacharyya, 2005, 388). Due to the irrelevance of the traditional method, ABC was adopted since the early 1980s (Kaplan & Anderson, 2007, 3, Turney, 2005, 15). All costs incurred are apportioned to the various activities that the firm has in progress. ABC is used to date to apportion the overheads or the indirect costs such as rent, lighting, etc. to the various activities (Hicks, 2002, 26). Two different activities may absorb the same direct costs i.e. raw materials, labor hours, machine hours, etc., but usually consume varying indirect costs (James, 2009, 25). ...Download file to see next pagesRead More