Overhead absorption rate for labour-intensive department Z

Steps:

• Apportion total company overheads initially across service department X and production departments Y and Z.
• Reapportion all of X's overheads to Y and Z using a suitable basis (e.g., labour or area).
• Aggregate the resulting total budgeted overheads assigned to Y and Z after full reapportionment.
• Divide this total by budgeted labour hours for Y and Z to get the per-hour rate, applied to Z as it is labour intensive.

Why A is correct:

• Predetermined overhead absorption rate formula is budgeted overheads (after apportionment and reapportionment to production departments) divided by budgeted activity level (labour hours for labour-intensive operations).

Why the others are wrong:

• B: Relies on actual labour hours, but rates use budgeted figures for planning and control.
• C: Limits overheads to Z only, ignoring the full reapportionment process across Y and Z.
• D: Uses actual labour hours for Z, violating the budgeted basis for predetermined rates.

Final answer: A