WGB produces two types of metal shelving in their factory – one for domestic use, and one, which is produced to a higher quality standard, for commercial use (in factories and hotel kitchens, for...

WGB produces two types of metal shelving in their factory – one for domestic use, and one, which is produced to a higher quality standard, for commercial use (in factories and hotel kitchens, for example).

Each shelf unit passes through two processes – first, metal machining and second, painting and finishing (P&F). Commercial shelving is made of stronger material, has extra bracing bars and is given an additional coat of paint in the painting shop.

The company plans to produce 6 000 units of each product next year.

Required: calculate overhead absorption rates based upon:

i) percentage of direct materials cost

ii) percentage of direct labour cost.

Discuss which basis of overhead absorption might be preferable for each cost centre.