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4 Overheads

BASIC CONCEPTS AND FORMULAE Basic Concepts 1. Overheads: Overheads represent expenses that have been incurred in providing

certain ancillary facilities or services which facilitate or make possible the carrying out of the production process; by themselves these services are not of any use.

2. Types of the Overheads on the basis of function:

• Factory or Manufacturing Overheads • Office and Administration Overheads • Selling and Distribution Overheads • Research and Development Overheads

3. Types of the Overheads on the basis of nature:

• Fixed Overhead- Expenses that are not affected by any variation in the volume of activity.

• Variable- Expenses that change in proportion to the change in the volume of activity.

• Semi variable- The expenses that do not change when there is a small change in the level of activity but change whenever there is a slightly big change or change in the same direction as change in the level of activity but not in the same proportion.

4. Cost allocation- The term ‘allocation’ refers to assignment or allotment of an entire item of cost to a particular cost center or cost unit.

5. Cost apportionment- Apportionment implies the allotment of proportions of items of cost to cost centres or departments.

6. Re-apportionment- The process of assigning service department overheads to production departments is called reassignment or re-apportionment.

7. Absorption- The process of recovering overheads of a department or any other cost center from its output is called recovery or absorption.

© The Institute of Chartered Accountants of India

4.2 Cost Accounting

8. Methods used for re-apportionment of service department expenses over the production departments:

• Direct re-distribution method- Under this method service department costs are apportioned over the production departments only, ignoring the services rendered by one service department to the other.

• Step Method or Non-reciprocal method- This method gives cognizance to the service rendered by service department to another service department. The sequence here begins with the department that renders service to the maximum number of other service departments.

• Reciprocal Service Method- These methods are used when different service departments render services to each other, in addition to rendering services to production departments. In such cases various service departments have to share overheads of each other. The methods available for dealing with reciprocal services are (a) Simultaneous equation method; (b) Repeated distribution method; (c) Trial and error method.

9. Methods for the Computation of the Overheads Rate : a) Percentage of direct materials method: Under this method, the cost of direct

material consumed is the base for calculating the amount of overhead absorbed.

b) Percentage of prime cost method This method is based on the fact that both materials as well as labour contribute in raising factory overheads. Hence, the total of the two i.e. Prime cost should be taken as base for absorbing the factory overhead.

c) Percentage of direct labour cost : This method also fails to give full recognition to the element of the time which is of prime importance in the accounting for and treatment of manufacturing overhead expenses except in so far as the amount of wages is a product of the rate factor multiplied by the time factor.

d) Labour hour rate Method: This method is an improvement on the percentage of direct wage basis, as it fully recognises the significance of the element of time in the incurring and absorption of manufacturing overhead expenses.

e) Machine hour rate method: By the machine hour rate method, manufacturing overhead expenses are charged to production on the basis of number of hours machines are used on jobs or work orders.

10. Types of Overhead Rates a) Normal rate: This rate is calculated by dividing the actual overheads by actual


Overheads 4.3

base. It is also known as actual rate. b) Pre-determined overhead rate: This rate is determined in advance by

estimating the amount of the overhead for the period in which it is to be used. c) Blanket overhead rates- Blanket overhead rate refers to the computation of

one single overhead rate for the whole factory. It is to be distinguished from the departmental overhead rate which refers to a separator

d) Departmental overhead rate: Where the product lines are varied or machinery is used to a varying degree in the different departments, that is, where conditions throughout the factory are not uniform, the use of departmental rates is to be preferred. ate for each individual cost centre or department.

11. Methods of accounting of administrative overheads

• Apportioning Administrative Overheads between Production and Sales Departments.

• Charging to Costing Profit and Loss Account. • Treating Administrative Overheads as a separate addition to Cost of

Production/Sales • The basis which are generally used for apportionment are :

(i) Works cost (ii) Sales value or quantity (iii) Gross profit on sales (iv) Quantity produced (v) Conversion cost, etc.

Basic Formulas

1. Overhead Absorption Rate or Overhead Recovery Rate =

absorptionforBasisincurredoverheadofAmount

2. Predetermined Overhead Rate = periodtheforbasisBudgeted

periodtheforoverheadBudgeted

3. Blanket Overhead Rate =

.etc,hoursmachinetotal,hourslabourTotal(periodtheforBase

periodtheforfactoryentirethefortcosOverhead

4. Multiple Overhead Rate = baseingCorrespond

.Deptteachtodapportione/allocatedOverhead


4.4 Cost Accounting

5. Variable portion in Semi-variable Overhead = quantityoractivityinChange

enseexpofamountinChange

6. Direct cost of service departments should be apportioned to production departments, as it is also indirect cost for production departments.

Question 1 What is blanket overhead rate? In which situations, blanket rate is to be used and why?

Answer Blanket overhead rate is one single overhead absorption rate for the whole factory. It may be computed by using the following formulae:

Blanket overhead rate = baseselectedtheofunitsTotal*factorywholethefortscosOverhead

* The selected base can be the total output; total labour hours; machine hours etc. Situation for using blanket rate: The use of blanket rate may be considered appropriate for factories which produce only one major product on a continuous basis. It may also be used in those units in which all products utilise same amount of time in each department. If such conditions do not exist, the use of blanket rate will give misleading results in the determination of the production cost, specially when such a cost ascertainment is carried out for giving quotations and tenders.

Question 2 Discuss the step method and reciprocal service method of secondary distribution of overheads.

Answer Step method and Reciprocal Service method of secondary distribution of overheads Step method: This method gives cognisance to the service rendered by service department to another service department, thus sequence of apportionments has to be selected. The sequence here begins with the department that renders service to the max number of other service department. After this, the cost of service dep't serving the next largest number of department is apportioned. Reciprocal service method: This method recognises the fact that where there are two or more service department, they may render service to each other and, therefore, these inter department services are to be given due weight while re-distributing the expense of service department. The methods available for dealing with reciprocal servicing are:


Overheads 4.5

Simultaneous equation method Repeated distribution method Trial and error method

Question 3 Discuss the problems of controlling the selling and distribution overheads

Answer Problems of controlling the selling & distribution overheads are (i) The incidence of selling & distribution overheads depends on external factors such as

distance of market, nature of competition etc. which are beyond the control of management.

(ii) They are dependent upon customers' behaviour, liking etc. (iii) These expenses are of the nature of policy costs and hence not amenable to control. The above problems of controlling selling & distribution overheads can be tackled by

adopting the following steps: (a) Comparing the figures of selling & distribution overhead with the figures of previous

period. (b) Selling & distribution overhead budgets may be used to control such overhead

expenses by making a comparison of budgetary figures with actual figures of overhead expenses, ascertaining variances and finally taking suitable actions,

(c) Standards of selling & distribution expenses may be set up for salesmen, territories, products etc. The laid down standards on comparison with actual overhead expenses will reveal variances, which can be controlled by suitable action.

Question 4

Distinguish between cost allocation and cost absorption

Answer Cost allocation and Cost absorption: Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. In other words, it is the process of identifying, assigning or allowing cost to a cost centre or a cost, unit. Cost absorption is the process of absorbing all indirect costs or overhead costs allocated to apportioned over particular cost center or production department by the units produced.


4.6 Cost Accounting

Question 5 Discuss in brief three main methods of allocating support departments costs to operating departments. Out of these three, which method is conceptually preferable.

Answer The three main methods of allocating support departments costs to operating departments are: (i) Direct re-distribution method: Under this method, support department costs are directly

apportioned to various production departments only. This method does not consider the service provided by one support department to another support department.

(ii) Step method: Under this method the cost of the support departments that serves the maximum numbers of departments is first apportioned to other support departments and production departments. After this the cost of support department serving the next largest number of departments is apportioned. In this manner we finally arrive on the cost of production departments only.

(iii) Reciprocal service method: This method recognises the fact that where there are two or more support departments they may render services to each other and, therefore, these inter-departmental services are to be given due weight while re-distributing the expenses of the support departments. The methods available for dealing with reciprocal services are: (a) Simultaneous equation method (b) Repeated distribution method (c) Trial and error method.

The reciprocal service method is conceptually preferable. This method is widely used even if the number of service departments is more than two because due to the availability of computer software it is not difficult to solve sets of simultaneous equations.

Question 6 Explain Single and Multiple Overhead Rates.

Answer Single and Multiple Overhead Rates: Single overhead rate: It is one single overhead absorption rate for the whole factory. It may be computed as follows:

Single overhead rate = selectedbasetheofquantityTotal

factoryentiretheforcostsOverhead


Overheads 4.7

The base can be total output, total labour hours, total machine hours, etc. The single overhead rate may be applied in factories which produces only one major product on a continuous basis. It may also be used in factories where the work performed in each department is fairly uniform and standardized. Multiple overhead rate: It involves computation of separate rates for each production department, service department, cost center and each product for both fixed and variable overheads. It may be computed as follows:

Multiple overhead rate

= baseingCorrespond

productorcentre/costdepartmenteachto edappportionallocated/Overhead

Under multiple overhead rates, jobs or products are charged with varying amount of factory overheads depending on the type and number of departments through which they pass. However, the number of overhead rates which a firm may compute would depend upon two opposing factors viz. the degree of accuracy desired and the clerical cost involved.

Question 7 How do you deal with the following in cost accounts? (i) Fringe benefits (ii) Bad debts.

Answer Treatment of Cost Accounts (i) Fringe benefits: the benefits paid to workers in every organisation in addition to their

normal wage or salary are known as fringe benefits. They include – Housing facility, children education allowance, holiday pay, leave pay, leave travel concession to home town or any place in India, etc.

Expenditure incurred on fringe benefits in respect of factory workers should be apportioned among all the production and service departments on the basis of the number of workers in each department.

(ii) Bad debts: There is no unanimity among various authors about the treatment of bad debts. Some authors believe that bad debts are financial losses and therefore should not be included in the cost of a particular product or job. Another view is that, bad debts are a part of selling and distribution overhead, especially where they arise in the normal course of trading. Therefore they should be treated in cost accounts in the same way as any other selling and distribution expense.


4.8 Cost Accounting

Question 8 Distinguish between fixed and variable overheads.

Answer Fixed and Variable Overheads: Fixed overhead expenses do not vary with the volume of production within certain limits. In other words, the amount of fixed overhead tends to remain constant for volumes of production within the installed capacity of plant. For example, rent of office, salary of works manger, etc. Variable overhead cost varies in direct proportion to the volume of production. It increases or decreases in direct relation to any increase or decrease in output.

Question 9 How would you treat the idle capacity costs in Cost Accounts?

Answer Treatment of idle capacity cost in Cost Accounts: It is that part of the capacity of a plant, machine or equipment which cannot be effectively utilised in production. The idle capacity may arise due to lack of product demand, no availability of raw-material, shortage of skilled labour, shortage of power, etc. Costs associated with idle capacity are mostly fixed in nature. These costs remain unabsorbed or unrecovered due to under-utilisation of plant and service capacity. Idle capacity costs are treated in the following ways in Cost Accounts. (i) If the idle capacity cost is due to unavoidable reasons - a supplementary overhead rate

may be used to recover the idle capacity cost. In this case, the costs are charged to the production capacity utilised.

(ii) If the idle capacity cost is due to avoidable reasons - such as faulty planning, etc. the cost should be charged to Costing Profit and Loss Account.

(iii) If the idle capacity cost is due to trade depression, etc., - being abnormal in nature the cost should also be charged to the Costing Profit and Loss Account.

Question 10 Discuss the treatment in cost accounts of the cost of small tools of short effective life.

Answer Small tools are mechanical appliances used for various operations on a work place, specially in engineering industries. Such tools include drill bits, chisels, screw cutter, files etc. Treatment of cost of small tools of short effective life:


Overheads 4.9

(i) Small tools purchased may be capitalized and depreciated over life if their life is ascertainable. Revaluation method of depreciation may be used in respect of very small tools of short effective life. Depreciation of small tools may be charged to:

Factory overheads

Overheads of the department using the small tool.

(ii) Cost of small tools should be charged fully to the departments to which they have been issued, if their life is not ascertainable.

Question 11 E-books is an online book retailer. The Company has four departments. The two sales departments are Corporate Sales and Consumer Sales. The two support – departments are Administrative (Human Resources Accounting) and Information Systems each of the sales departments conducts merchandising and marketing operations independently. The following data are available for October, 2003:

Departments Revenues Number of Employees

Processing Time used

(in minutes) Corporate Sales R` 16,67,750 42 2,400 Consumer Sales ` 8,33,875 28 2,000 Administrative -- 14 400 Information system -- 21 1,400

Cost incurred in each of four departments for October, 2003 are as follow:

Corporate Sales ` 12,97,751 Consumer Sales ` 6,36,818 Administrative ` 94,510 Information systems ` 3,04,720

The company uses number of employees as a basis to allocate Administrative costs and processing time as a basis to allocate Information systems costs. Required:

(i) Allocate the support department costs to the sales departments using the direct method.

(ii) Rank the support departments based on percentage of their services rendered to other support departments. Use this ranking to allocate support costs based on the step-down allocation method.


4.10 Cost Accounting

(iii) How could you have ranked the support departments differently?

(iv) Allocate the support department costs to two sales departments using the reciprocal allocation method.

Answer (i) Statement showing the allocation of support

department costs to the sales departments (using the direct method)

Sales department Support department Particulars Basis of

allocation Corporate

sales Consumer

sales Administrative Information

systems (`) (`) (`) (`)

Cost incurred 12,97,751 6,36,818 94,510 3,04,720 Re-allocation of cost of administrative department

Number of employees (6:4:–:–)

56,706 37,804 (94,510)

Re-allocation of costs of information systems department

Processing time (6:5:–:–)

1,66,211

________

1,38,509

________

(3,04,720)

Total 15,20,668 8,13,131

(ii) Ranking of support departments based on percentage of their services rendered to other

support departments

Administration support department provides 23.077% ⎟⎟⎠

⎞⎜⎜⎝

⎛++

×212842

10021 of its services

to information systems support department. Thus 23.077% of `94,510 = `21,810.

Information system support department provides 8.33% ⎟⎟⎠

⎞⎜⎜⎝

⎛×

++100

400000,2400,2400

of its services to Administration support department. Thus 8.33% of `3,04,720 = `25,383.


Overheads 4.11

Statement showing allocation of support costs

(By using step-down allocation method) Sales department Support department Particulars Basis of

allocation Corporate

sales Consumer

sales Administrative Information

systems. (`) (`) (`) (`) Cost incurred 12,97,751 6,36,818 94,510 3,04,720 Re-allocation of cost of administrative department

Number of employees (6:4:–:–3)

43,620 29,080 (94,510) 21,810 3,26,530

Re-allocation of costs of information systems department

Processing time (6:5:–:–:–)

1,78,107

________

1,48,423

________

(3,26,530)

Total 15,19,478 8,14,321 (iii) An alternative ranking is based on the rupee amount of services rendered to other

service departments, using the rupee figures obtained under requirement (ii) This approach would use the following sequence of ranking.

Allocation of information systems overheads as first (`25,383 provided to administrative).

Allocated administrative overheads as second (`21,810 provided to information systems).

(iv) Working notes:

(1) Percentage of services provided by each service department to other service department and sales departments. Service departments Sale departments Particulars Administrative Information

system Corporate

Sales Consumer

Sales Administrative – 23.07% 46.16% 30.77% Information systems 8.33% – 50% 41.67%

(2) Total cost of the support department: (By using simultaneous equation method). Let AD and IS be the total costs of support departments Administrative and

Information systems respectively. These costs can be determined by using the following simultaneous equations:

AD = 94,510 + 0.0833 IS

IS = 3,04,720 + 0.2307 AD

or AD = 94,510 + 0.0833 {3,04,720 + 0.2307 AD}



or AD = 94,510 + 25,383 + 0.01922 AD

or 0.98078AD = 1,19,893

or AD = `1,22,243

and IS = `3,32,922 Statement showing the allocation of support department costs to the sales departments

(Using reciprocal allocation method) Sales department Particulars Corporate sales

(`) Consumer sales

(`)

Costs incurred 12,97,571 6,36,818Re-allocation of cost administrative department (46.16% and 30.77% of `1,22,243)

56,427 37,614

Re-allocation of costs of information systems department (50% and 41.67% of `3,32,922)

1,66,461

________

1,38,729

_______Total 15,20,639 8,13,161

Question 12 Explain what do you mean by Chargeable Expenses and state its treatment in Cost Accounts.

Answer Chargeable expenses: All expenses, other than direct materials and direct labour cost which are specifically and solely incurred on production, process or job are treated as chargeable or direct expenses. These expenses in cost accounting are treated as part of prime cost, Examples of chargeable expenses include - Rental of a machine or plant hired for specific job, royalty, cost of making a specific pattern, design, drawing or making tools for a job.

Question 13 A company manufacturing two products furnishes the following data for a year.

Product Annual output (Units)

Total Machine

hours

Total number of purchase

orders

Total number of set-ups

A 5,000 20,000 160 20 B 60,000 1,20,000 384 44

The annual overheads are as under:


Overheads 4.13

(`) Volume related activity costs 5,50,000 Set up related costs 8,20,000 Purchase related costs 6,18,000

You are required to calculate the cost per unit of each Product A and B based on : (i) Traditional method of charging overheads (ii) Activity based costing method.

Answer Working notes:

1. Machine hour rate = hoursmachineTotal

overheadsannualTotal

= ` 19,88,0001,40,000 hours

= `14.20 per hour

2. Machine hour rate = Total annual overhead cost

= hoursmachineTotalactivitiesrelatedvolumefor

= `5,50,0001,40,000 hours

= `3.93 (approx.)

3. Cost of one set-up = upssetofnumberTotal

upssettorelatedtscosTotal−−

= ` 8,20,00064 set ups−

= `12,812.50

4. Cost of a purchase order = orderpurchaseofnumberTotal

purchasestorelatedtscosTotal

= `6,18,000544 orders

= `1,136.03



(i) Statement showing overhead cost per unit (based on traditional method of charging overheads)

Products Annual output (units)

Total machine

hours

Overhead cost component (Refer

to W, Note 1)(`)

Overhead cost per unit

(`)

A 5,000 20,000 2,84,000 (20,000 hrs. ×

`14.20)

56.80 (`2,84,000 / 5,000

units) B 60,000 1,20,000 17,04,000

(1,20,000 hrs.×`14.20)

28.40 (`17,04,000/60,000

units) (ii) Statement showing overhead cost per unit

(based on activity based costing method) Products Annual

output units

Total Machine

Hours

Cost related to

volume activities

Cost related to

purchases

Cost related to

set-ups

Total cost Cost per unit

(`) (`) (`) (`) (`) (a) (b) (c) (d) (e) (f) = [(c) +

(d) + (e)] (g) =

(f)/(a) A 5,000 20,000 78,600

(20,000 hrs ×

`3.93)

1,81,764.80 (160 orders

× `1136.03)

2,56,250 (20 set ups

× `12,812.50)

5,16,614.80 103.32

B 60,000 1,20,000 4,71,600 (1,20,000

hrs × `3.93)

4,36,235.52 (384 orders

× `1136.03)

5,63,750 (44 set ups

× `12,812.50)

14,71,585.52 24.53

Note: Refer to working notes 2, 3 and 4 for computing costs related to volume activities, set-ups and purchases respectively.

Question 14 In the current quarter, a company has undertaken two jobs. The data relating to these jobs are as under:

Job 1102 Job 1108 Selling price ` 1,07,325 ` 1,57,920 Profit as percentage on cost 8% 12% Direct Materials ` 37,500 ` 54,000 Direct Wages ` 30,000 ` 42,000


Overheads 4.15

It is the policy of the company to charge Factory overheads as percentage on direct wages and Selling and Administration overheads as percentage on Factory cost. The company has received a new order for manufacturing of a similar job. The estimate of direct materials and direct wages relating to the new order are `64,000 and `50,000 respectively. A profit of 20% on sales is required. You are required to compute (i) The rates of Factory overheads and Selling and Administration overheads to be charged. (ii) The Selling price of the new order

Answer Working notes 1. Computation of total cost of jobs

Total cost of Job 1102 when 8% is the profit on cost = ` 1,07,325

108× 100

= `99,375 Total cost of job 1108 when 12% is the profit on cost

= ` 1,57,920112

× 100

= `1,41,000 2. Factory overheads = F% of direct wages Selling & Administrative overheads = A% of factory cost

(i) Computation of rates of factory overheads and selling and administration overheads to be charged.

Jobs Cost Sheet

Job 1102 Job 1108 (`) (`) Direct materials 37,500 54,000 Direct wages 30,000 42,000 Prime cost 67,500 96,000 Add: Factory overheads 30,000F 42,000F Factory cost (67,500 + 30,000 F) (96,000 + 42,000 F) (Refer to Working note 2) Add: Selling and Administration (67,500 + 30,000 F) A (96,000 + 42,000 F) A Overheads



(Refer to Working note 2) Total cost (67,500 + 30,000 F)(1

+ A) (96,000 + 42,000

F)(1+A) Since the total cost of jobs 1102 and 1108 are equal to `99,375 and `1,41,000 respectively, therefore we have the following equations (Refer to working note 1)

(67,500 + 30,000 F) (1 + A) = 99,375 (1) (96,000 + 42,000 F) (1 + A) = 1,41,000 (2) or 67,500 + 30,000 F + 67,500 A + 30,000 FA = 99,375 96,000 + 42,000 F + 96,000 A + 42,000 FA = 1,41,000 or 30,000 F + 67,500 A + 30,000 FA = 31,875 (3) 42,000 F + 96,000 A + 42,000 FA = 45,000 (4) On solving (3) and (4) we get : A = 0.25 and F = 0.40 Hence A = 25% and F = 40%

(ii) Selling price of the new order: (`) Direct materials 64,000 Direct wages 50,000 Prime cost 1,14,000 Factory overheads 20,000 (40% × `50,000) Factory cost 1,34,000 Selling & Admn. Overheads 33,500 (25% × `1,34,000) Total cost 1,67,500 If selling price of new order is `100 then Profit is `20 and Cost is `80

Hence selling price of the new order = `1,67,50080

× 100 = ` 2,09,375

Question 15 PQR Ltd has its own power plant, which has two users, Cutting Department and Welding Department. When the plans were prepared for the power plant, top management decided that its practical capacity should be 1,50,000 machine hours. Annual budgeted practical capacity fixed costs are ` 9,00,000 and budgeted variable costs are Rs.4 per machine-hour. The following data are available:


Overheads 4.17

Cutting Department

Welding Department

Total

Actual Usage in 2002-03 Machine hours) 60,000 40,000 1,00,000Practical capacity for each department (machine hours)

90,000 60,000 1,50,000

Required (i) Allocate the power plant's cost to the cutting and the welding department using a single

rate method in which the budgeted rate is calculated using practical capacity and costs are allocated based on actual usage.

(ii) Allocate the power plant's cost to the cutting and welding departments, using the dual -rate method in which fixed costs are allocated based on practical capacity and variable costs are allocated based on actual usage,

(iii) Allocate the power plant's cost to the cutting and welding departments using the dual-rate method in which the fixed-cost rate is calculated using practical capacity, but fixed costs are allocated to the cutting and welding department based on actual usage. Variable costs are allocated based on actual usage.

(iv) Comment on your results in requirements (i), (ii) and (iii).

Answer Working notes:

1. Fixed practical capacity cost per machine hour: Practical capacity (machine hours) 1,50,000 Practical capacity fixed costs (Rs.) 9,00,000 Fixed practical capacity cost per machine hour ` 6 (` 9,00,000 / 1,50,000 hours) 2. Budgeted rate per machine hour (using practical capacity): = Fixed practical capacity cost per machine hour + Budgeted variable cost per

machine hour = ` 6 + ` 4 = `10

(i) Statement showing Power Plant's cost allocation to the Cutting & Welding departments by using single rate method on actual usage of machine hours. Cutting

Department (`)

Welding Department

(`)

Total

(`)Power plants cost allocation by using actual usage (machine hours) (Refer to working note 2)

6,00,000(60,000 hours

× `10)

4,00,000 (40,000 hours

× `10)

10,00,000



(ii) Statement showing Power Plant's cost allocation to the Cutting & Welding departments by using dual rate method. Cutting

Department (`)

Welding Department

(`)

Total

(`)Fixed Cost 5,40,000 3,60,000 9,00,000(Allocated on practical capacity for each department i.e.): (90,000 hours : 60,000 hours)

` 9,00,000 35

×⎛ ⎞⎜ ⎟⎝ ⎠

` 9,00,000 25

×⎛ ⎞⎜ ⎟⎝ ⎠

Variable cost 2,40,000 1,60,000 4,00,000(Based on actual usage of machine hours)

(60,000 hours × `4)

(40,000 hours × `4)

Total cost 7,80,000 5,20,000 13,00,000(iii) Statement showing Power Plant's cost allocation to the Cutting & Welding

Departments using dual rate method Cutting

Department (`)

Welding Department

(`)

Total

(`) Fixed Cost 3,60,000 2,40,000 6,00,000 Allocation of fixed cost on actual usage basis (Refer to working note 1)

(60,000 hours × ` 6)

(40,000 hours × ` 6)

Variable cost 2,40,000 1,60,000 4,00,000 (Based on actual usage) (60,000 hours

× ` 4) (40,000 hours

× ` 4)

Total cost 6,00,000 4,00,000 10,00,000 (iv) Comments: Under dual rate method, under (iii) and single rate method under (i), the allocation

of fixed cost of practical capacity of plant over each department are based on single rate. The major advantage of this approach is that the user departments are allocated fixed capacity costs only for the capacity used. The unused capacity cost ` 3,00,000 (` 9,00,000 – ` 6,00,000) will not be allocated to the user departments. This highlights the cost of unused capacity.

Under (ii) fixed cost of capacity are allocated to operating departments on the basis of practical capacity, so all fixed costs are allocated and there is no unused capacity identified with the power plant.


Overheads 4.19

Question 16 Define Selling and Distribution Expenses. Discuss the accounting for selling and distribution expenses.

Answer Selling expenses: Expenses incurred for the purpose of promoting, marketing and sales of different products. Distribution expenses: Expenses relating to delivery and despatch of goods/products to customers. Accounting treatment for selling and distribution expenses Selling and distribution expenses are usually collected under separate cost account numbers. These expenses may be recovered by using any one of following method of recovery. 1. Percentage on cost of production / cost of goods sold. 2. Percentage on selling price. 3. Rate per unit sold. Question 17 ABC Ltd. manufactures a single product and absorbs the production overheads at a pre-determined rate of `10 per machine hour. At the end of financial year 1998-99, it has been found that actual production overheads incurred were ` 6,00,000. It included ` 45,000 on account of 'written off' obsolete stores and ` 30,000 being the wages paid for the strike period under an award. The production and sales data for the year 1998-99 is as under:

Production: Finished goods 20,000 units Work-in-progress 8,000 units (50% complete in all respects) Sales: Finished goods 18,000 units

The actual machine hours worked during the period were 48,000. It has been found that one-third of the under – absorption of production overheads was due to lack of production planning and the rest was attributable to normal increase in costs. You are required to: (i) Calculate the amount of under – absorption of production overheads during the year

1998-99; and



(ii) Show the accounting treatment of under – absorption of production overheads.

Answer (i) Amount of under-absorption of production overheads during the year 1998-99

(`)

Total production overheads actually incurred during the year 1998-99 6,00,000 Less: 'Written off' obsolete stores ` 45,000 Wages paid for strike period ` 30,000 75,000 Net production overheads actually incurred: (A) 5,25,000 Production overheads absorbed by 48,000 machines hours @ `10 per hour: (B)

4,80,000

Amount of under-absorption of production overheads: [(A)–(B)] 45,000 (ii) Accounting treatment of under absorption of production overheads It is given in the statement of the question that 20,000 units were completely finished and

8,000 units were 50% complete, one third of the under-absorbed overheads were due to lack of production planning and the rest were attributable to normal increase in costs.

(`)

1. (33-1/3% of `45,000) i.e. `15,000 of under – absorbed overheads were due to lack of production planning. This being abnormal, should be debited to the Profit and Loss A/c

15,000

2. Balance (66-2/3% of `45,000) i.e. `30,000 of under – absorbed overheads should be distributed over work-in-progress, finished goods and cost of sales by using supplementary rate

30,000

______ Total under-absorbed overheads 45,000

Apportionment of unabsorbed overheads of `30,000 over, work-in-progress, finished goods and cost of sales.

Equivalent Completed units (`)

Work-in-progress (4,000 units × `1.25) (Refer to working note)

4,000 5,000

Finished goods (2,000 units × `1.25)

2,000 2,500

Cost of sales (18,000 units × `1.25)

18,000 22,500

24,000 30,000


Overheads 4.21

Accounting treatment:

Work-in-progress control A/c Dr. ` 5,000 Finished goods control A/c Dr. ` 2,500 Cost of Sales A/c Dr. `22,500 Profit & Loss A/c Dr. `15,000 To Overhead control A/c 45,000

Working note:

Supplementary overhead absorption rate = `30,00024,000 units

= `1.25 per unit

Question 18 In a factory, a machine is considered to work for 208 hours in a month. It includes maintenance time of 8 hours and set up time of 20 hours. The expense data relating to the machine are as under:

Cost of the machine is ` 5,00,000. Life 10 years. Estimated scrap value at the end of life is `20,000.

(`)

– Repairs and maintenance per annum 60,480 – Consumable stores per annum 47,520 – Rent of building per annum (The machine under reference

occupies 1/6 of the area) 72,000

– Supervisor's salary per month (Common to three machines) 6,000 – Wages of operator per month per machine 2,500 – General lighting charges per month allocated to the machine 1,000 – Power 25 units per hour at `2 per unit

Power is required for productive purposes only. Set up time, though productive, does not require power. The Supervisor and Operator are permanent. Repairs and maintenance and consumable stores vary with the running of the machine.

Required Calculate a two-tier machine hour rate for (a) set up time, and (b) running time



Answer Working notes: 1. (i) Effective hours for standing charges (208 hours – 8 hours)

200

(ii) Effective hours for variable costs (208 hours – 28 hours)

180

2. Standing charges per hour Per month

(`)Per hour

(`)

Supervisor's salary (`6,000 / 3 machines) 2,000 General Lighting 1,000

Rent (`72,000 / 6 × 112

) 1,000

Total standing charges 4,000 Standing charges per hour (`4,000 / 200 hours) 203. Machine expenses per hour Per month

(`)Per hour

(`)

Depreciation

( )5,00,000 20,00010−

×1

12

4,000 20 (`4,000 / 200 hours

Repairs & maintenance `60,480 / 12 months) 5,040 28 (`5,040 / 180 hours) Consumable stores (`47,520 / 12 months) 3,960 22 (`3,960 / 180 hours) Power (25 units × `2 × 180 hours) 9,000 50 (`9,000 / 180 hours) Wages 2,500 12.50 (`2,500 / 200 hours) Total machine expenses 24,500 132.50Computation of Two – tier machine hour rate Set up time rate

per machine hour(`)

Running time rate per machine hour

(`) Standing Charges (Refer to working note 2)

20.00 20.00

Machine expenses: (Refer to working note 3)

Depreciation 20.00 20.00 Repair and maintenance – 28.00


Overheads 4.23

Consumable stores – 22.00 Power – 50.00 Machine hour rate of overheads 40.00 140.00 Wages 12.50 12.50 Comprehensive machine hour rate 92.50 152.50

Question 19 Indicate the base or bases that you would recommend to apportion overhead costs to production department: (i) Supplies (ii) Repairs (iii) Maintenance of building (iv) Executive salaries (v) Rent (vi) Power and light (vii) Fire insurance (vii) Indirect labour.

Answer

Item Bases of apportionment (i) Supplies Actual supplies made to different departments (ii) Repair Direct labour hours; Machine hours; Direct labour wages; Plant value. (iii) Maintenance of building Floor area occupied by each department (iv) Executive salaries Actual basis; Number of workers. (v) Rent Floor area (vi) Power and light K W hours or H P (power) Number of light points; Floor space; Meter readings (light) (vii) Fire insurance Capital cost of plant and building; Value of stock (viii) Indirect labour Direct labour cost.

Question 20 Your company uses a historical cost system and applies overheads on the basis of “pre-determined” rates. The following are the figure from the Trial Balance as at 30-9-83:- Manufacturing overheads ` 4,26,544 Dr. Manufacturing overheads applied ` 3,65,904 Cr. Work-in-progress ` 1,41,480 Dr. Finished goods stocks ` 2,30,732 Dr. Cost of goods sold ` 8,40,588 Dr.



Give two methods for the disposal of the unabsorbed overheads and show the profit implications of each method.

Answer

Actual overheads ` 4,26,544 Overhead recovered ` 3,65,904 Under absorbed Overhead ` 60,640 The two methods for the disposal of the under-absorbed overheads in this problem may be:- (1) Write off the under – absorbed overhead to Costing Profit & Loss Account. (2) Use supplementary rate, to recover the under-absorbed overhead. According to first method, the total unabsorbed overhead amount of `60,640 will be written off to Costing Profit & Loss Account. The use of this method will reduce the profits of the concern by `60,640 for the period. According to second method, a supplementary rate may be used to adjust the overhead cost of each cost unit. The under-absorbed amount in total may, at the end of the accounting period, be apportioned on ratio basis to the three control accounts, viz, work-in-progress, finished goods stock and cost of goods sold account. Apportioning of under-absorbed overhead can be carried out by using direct labour hours/machine hours/the value of the balances in each of these accounts, as the basis. Prorated figures of under-absorbed overhead over work-in-progress, finished goods stock and cost of goods sold in this question on the basis of values, of the balances in each of these accounts are as follows:- Additional Overhead

(Under-absorbed) Total (`) (`) (`)Work-in-progress 1,41,480 7,074* 1,48,554Finished Goods Stock 2,30,732 11,537** 2,42,269Cost of Goods Sold 8,40,588 42,029*** 8,82,617 12,12,800 60,640 12,73,440

By using this method, the profit for the period will be reduced by `42,029 and the value of stock will increase by `18,611. The latter will affect the profit of the subsequent period. Working Notes The apportionment of under-absorbed overhead over work-in-progress, finished goods stock and cost of goods sold on the basis of their value in the respective account is as follows:-

*Overhead to be absorbed by work-in-progress = `60,640

12,12,800× 1,41,480 = `7,074


Overheads 4.25

**Overhead to be absorbed by finished goods = `60,640

12,12,800× 2,30,732 = `11,537

***Overhead to be absorbed by cost of goods sold = `60,640

12,12,800× 8,40,588 = `42,029

Question 21 A manufacturing unit has purchased and installed a new machine of ` 12,70,000 to its fleet of 7 existing machines. The new machine has an estimated life of 12 years and is expected to realise ` 70,000 as scrap at the end of its working life. Other relevant data are as follows: (i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes

300 hours for plant maintenance and 92 hours for setting up of plant. (ii) Estimated cost of maintenance of the machine is `25,000 (p.a.). (iii) `The machine requires a special chemical solution, which is replaced at the end of each

week (6 days in a week) at a cost of `400 each time. (iv) Four operators control operation of 8 machines and the average wages per person

amounts to `420 per week plus 15% fringe benefits. (v) Electricity used by the machine during the production is 16 units per hour at a cost of `3

per unit. No current is taken during maintenance and setting up. (vi) Departmental and general works overhead allocated to the operation during last year

was `50,000. During the current year it is estimated to increase 10% of this amount. Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive. Answer

Computation of Machine hour Rate Per year Per hour

(unproductive) Per hour

(productive) Standing charges Operators wages 4× 420 × 54 90,720 Add: Fringe Benefits 15% 13,608 1,04,328 Departmental and general overhead (50,000 + 5,000) 55,000 Total Std. Charging for 8 machines 1,59,328 Cost per Machine 1,59,328/8 19,916 Cost per Machine hour 19,916/2,200 9.05 19,916/2,292 8.69



Machine hours: Setting time unproductive (2,592-300-92) = 2200

Setting time productive (2,592-300) = 2,292 Machine expenses Depreciation (12,70,000 -70,000)/(12 × 2,200) 45.45 (12,70,000-70,000)/(12 × 2,292) 43.63 Electricity (16 × 3) 48.00 (16×3×2,200)/2,292) 46.07 Special chemical solution (400 × 54)/2,200,/ 2,292

9.82 9.42

Maintenance (25,000/2,200) 11.36 (25,000/2,292) 10.91 Machine Hour Rate 123.68 118.72

Question 22 From the details furnished below you are required to compute a comprehensive machine-hour rate:

Original purchase price of the machine (subject to depreciation at 10% per annum on original cost)

`3,24,000

Normal working hours for the month (The machine works to only 75% of capacity)

200 hours

Wages of Machineman `125 per day (of 8 hours)

Wages for Helper (machine attendant) `75 per day(of 8 hours)

Power cost for the month for the time worked `15,000 Supervision charges apportioned for the machine centre for the month

`3,000

Electricity & Lighting for the month `7,500 Repairs & maintenance (machine) including Consumable stores per month `17,500 Insurance of Plant & Building (apportioned)for the year

`16,250

Other general expense per annum `27,500 The workers are paid a fixed Dearness allowance of `1,575 per month. Production bonus payable to workers in terms of an award is equal to 33.33% of basic wages and dearness


Overheads 4.27

allowance. Add 10% of the basic wage and dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour-wage for debit to production.

Answer Computation of Comprehensive Machine Hour Rate

Per month(` ) Per hour(` ) Fixed cost Supervision charges 3,000 Electricity and lighting 7,500 Insurance of Plant and building (16,250×1/12) 1,354.17 Other General Expenses (27,500×1/12) 2,291.67 Depreciation (32,400×1/12) 2,700 16,845.84 112.31 Variable Cost Repairs and maintenance 17,500 116.67 Power 15,000 100.00 Wages of machine man 44.91 Wages of Helper 32.97 Machine Hour rate (Comprehensive) 406.86

Effective machine working hour’s p.m.

200 hrs. × 75% = 150 hrs.

Wages per machine hour

Machine man Helper Wages for 200 hours (`125× 25) `3,125 (`75× 25) `1,875 D.A. `1,575 `1,575 `4,700 `3,450 Production bonus (1/3 of above) 1,567 1,150 6,267 4,600 Leave wages (10%) 470 345 6,737 4,945 Effective wage rate per machine hour (150 hrs in all) `44.91 `32.97



Question 23 ABC Ltd. has three production departments P1, P2 and P3 and two service departments S1 and S2. The following data are extracted from the records of the Company for the month of October, 2007:

` Rent and rates 62,500 General lighting 7,500 Indirect Wages 18,750 Power 25,000 Depreciation on machinery 50,000 Insurance of machinery 20,000 Other Information:

P1 P2 P3 S1 S2 Direct wages (Rs.) 37,500 25,000 37,500 18,750 6,250 Horse Power of Machines used

60

30

50

10

−

Cost of machinery (Rs.)

3,00,000 4,00,000 5,00,000 25,000 25,000

Floor space (Sq. ft) 2,000 2,500 3,000 2,000 500 Number of light points

10 15 20 10 5

Production hours worked

6,225

4,050

4,100

−

−

Expenses of the service departments S1 and S2 are reapportioned as below:

P1 P2 P3 S1 S2 S1 20% 30% 40% − 10% S2 40% 20% 30% 10% − Required:

(i) Compute overhead absorption rate per production hour of each production department.

(ii) Determine the total cost of product X which is processed for manufacture in department P1, P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct material cost is `625 and direct labour cost is `375.


Overheads 4.29

Answer Primary Distribution Summary

Item of cost Basis of apportionment

Total(`

P1

(`)P2

(`)

P3

(`)S1

(`)

S2

(`)

Rent and Rates

Floor area 4 : 5 : 6 : 4 : 1

62,500 12,500 15,625 18,750 12,500 3,125

General lighting

Light points 2 : 3 : 4 : 2 : 1

7,500 1,250 1,875 2,500 1,250 625

Indirect wages Direct wages 6 : 4 : 6 : 3 : 1

18,750 5,625 3,750 5,625 2812.5 937.5

Power Horse Power of machines used 6 : 3 : 5 : 1

25,000 10,000 5,000 8,333 1,667 −

Depreciation of machinery

Value of machinery 12 : 16 : 20 : 1 : 1

50,000 12,000 16,000 20,000 1,000 1,000

Insurance of machinery

Value of machinery 12 : 16 : 20 : 1 : 1

20,000

_______

4,800

______

6,400

______

8,000

______

400

______

400

_____

1,83,750 46,175 48,650 63,208 19,630 6,088Overheads of service cost centres Let S1 be the overhead of service cost centre S1 and S2 be the overhead of service cost centre S2. S1 = 19,630 + 0.10 S2 S2 = 6,088 + 0.10 S1 Substituting the value of S2 in S1 we get S1 = 19,630 + 0.10 (6,088 + 0.10 S1) S1 = 19,630 + 608.8 + 0.01 S1 0.99 S1 = 20,238.8 ∴S1 = `20,443. ∴S2 = 6,088 + 0.10 × 20,443. = `8,132.



Secondary Distribution Summary

Particulars Total P1 P2 P3

(`) (`) (`) (`) Allocated and Apportioned over-heads as per primary distribution

1,58,033 46,175 48,650 63,208

S1 20,443 4,089 6,133 8,177 S2 8,132 3,253 1,626 2,440

53,517 56,409 73,825 Overhead rate per hour

P1 P2 P3

Total overheads cost `53,517 `56,409 `73,825 Production hours worked 6,225 4,050 4,100 Rate per hour (`) `8.60 `13.93 `18.01

Cost of Product X

Direct material ` 625 Direct labour ` 375 Prime cost `1,000 Production on overheads P1 5 hours × `8.60 = 43 P2 3 hours × `13.93 = 41.79 P3 4 hours × `18.01 = 72.04 `156.83 Factory cost ` 1,157

Question 24 PQR manufacturers – a small scale enterprise produces a single product and has adopted a policy to recover the production overheads of the factory by adopting a single blanket rate based on machine hours. The budgeted production overheads of the factory are ` 10,08,000 and budgeted machine hours are 96,000. For a period of first six months of the financial year 2007−2008, following information were extracted from the books:

Actual production overheads ` 6,79,000 Amount included in the production overheads: Paid as per court’s order ` 45,000


Overheads 4.31

Expenses of previous year booked in current year ` 10,000 Paid to workers for strike period under an award ` 42,000 Obsolete stores written off ` 18,000 Production and sales data of the concern for the first six months are as under:

Production: Finished goods 22,000 units Works-in-progress (50% complete in every respect) 16,000 units Sale: Finished goods 18,000 units The actual machine hours worked during the period were 48,000 hours. It is revealed from the analysis of information that ¼ of the under-absorption was due to defective production policies and the balance was attributable to increase in costs. You are required: (i) to determine the amount of under absorption of production overheads for the period, (ii) to show the accounting treatment of under-absorption of production overheads, and (iii) to apportion the unabsorbed overheads over the items.

Answer (i) Amount of under absorption of production overheads during the period of first six months

of the year 2007-2008:

Amount (`)

Total production overheads actually incurred during the period 6,79,000 Less: Amount paid to worker as per 45,000 Expenses of previous year booked 10,000 Wages paid for the strike period 42,000 Obsolete material written off 18,000 1,15,000 5,64,000 Less: Production overheads absorbed (48,000

hours * `10.50)

5,04,000

Amount of under absorbed production overheads 60,000



Budgeted Machine hour rate = ` `

10,08,000 10.50 per hour96,000 hours

=

(ii) Accounting treatment of under absorbed production overheads: As, one fourth of the under absorbed overheads were due to defective production policies, this being abnormal, hence should be debited to Profit and Loss Account. Amount to be debited to Profit and Loss Account = (60,000 * ¼) ` 15,000. Balance of under absorbed production overheads should be distributed over Works in progress, finished goods and cost of sales by applying supplementary rate*. Amount to be distributed = (60,000 * ¾) `45,000.

Supplementary rate = ` `

45,000 1.50 per unit30,000 units

=

(iii) Apportionment of under absorbed production overheads over WIP, finished goods and cost of sales:

Equivalent completed units

Amount (in `)

Work-in-Progress (16,000 units *50%*1.50) 8,000 12,000 Finished goods (4,000 units *1.50) 4,000 6,000 Cost of sales (18,000 units *1.50) 18,000 27,000 Total 30,000 45,000

Question 25 In a manufacturing company factory overheads are charged as fixed percentage basis on direct labour and office overheads are charged on the basis of percentage of factory cost. The following informations are available related to the year ending 31st March, 2008 :

Product A Product B Direct Materials ` 19,000 ` 15,000 Direct Labour ` 15,000 ` 25,000 Sales ` 60,000 ` 80,000 Profit 25% on cost 25% on sales price You are required to find out: (i) The percentage of factory overheads on direct labour. (ii) The percentage of office overheads on factory cost

Answer Let, the percentage of factory overheads on direct labour is ‘x’ and the percentage of office


Overheads 4.33

overheads on factory cost is ‘y’, then the total cost of product A and product B will be as follows:

Product A Product B (`) (`) Direct Materials 19,000 15,000 Direct labour 15,000 25,000 Prime Cost 34,000 40,000 Factory overheads (Direct labour × x) 150 x 250 x Factory cost (i) 34,000 + 150 x 40,000 + 250 x Office overheads (Factory cost × y) (ii) 340 y + 1.5 x y 400 y + 2.5 x y Total Cost [(i) + (ii)] 34,000 + 150 x

+ 340 y + 1.5 x y40,000 + 250 x

+400 y + 2.5 x y

Total cost on the basis of sales is:

Product A Product B (`) (`) Sales 60,000 80,000 Less: Profit Product A – 25% on cost or 20% on Sales 12,000 Product B – 25% on sales ______ 20,000 Total Cost 48,000 60,000 Thus, Total Cost of A is 34,000 + 150x + 340y + 1.5 xy = 48,000 or 150x + 340y + 1.5 xy = 14,000…………………….(i) Total Cost of B is 40,000 + 250x + 400y + 2.5 xy = 60,000 or 250x + 400y + 2.5 xy = 20,000…………………….(ii) Equation (ii) multiplied by 0.6 and after deducting from equation (i), we get 150x + 340y + 1.5xy = 14,000………………………….(i) _150x ± 240y ± 1.5xy = _12,000…………..….....………(ii) 100y = 2,000 or y = 20 Putting value of y in equation (i), we get 150x + 340 × 20 + 1.5x × 20 = 14,000



or 150x + 30x = 14,000 – 6,800 or 180x = 7,200 or x = 40. Hence, (i) the percentage of factory overheads on direct labour = 40 and (ii) the percentage of office overheads on factory cost = 20.

Question 26 Maximum production capacity of JK Ltd. is 5,20,000 units per annum. Details of estimated cost of production are as follows:

Direct material `15 per unit. Direct wages `9 per unit (subject to a minimum of `2,50,000 per month). Fixed overheads `9,60,000 per annum. Variable overheads `8 per unit. Semi-variable overheads are `5,60,000 per annum up to 50 per cent capacity and

additional `1,50,000 per annum for every 25 per cent increase in capacity or a part of it. JK Ltd. worked at 60 per cent capacity for the first three months during the year 2008, but it is expected to work at 90 per cent capacity for the remaining nine months. The selling price per unit was `44 during the first three months. You are required, what selling price per unit should be fixed for the remaining nine months to yield a total profit of `15,62,500 for the whole year.

Answer Statement of Cost and Sales for the year 2008

Maximum production capacity = 5,20,000 units per annum

Particulars First 3 months Next 9 months Total Capacity utilized 60% 90% Production

12 60% 3 5,20,000 ××

= 78,000 units

12

90% 9 5,20,000 ××

= 3,51,000 units

4,29,000 units

(`) (`) (`) Direct materials @ `15 per unit 11,70,000 52,65,000 64,35,000 Direct wages @ 9 per unit or `2,50,000 per month which ever is higher

7,50,000 31,59,000 39,09,000

Prime cost (A) 19,20,000 84,24,000 1,03,44,000 Overheads Fixed 2,40,000 7,20,000 9,60,000


Overheads 4.35

Variable @ `8 per unit 6,24,000 28,08,000 34,32,000 Semi Variable 1,77,500 6,45,000 8,22,500 Total overheads (B) 10,41,500 41,73,000 52,14,500 Total Cost (C) [(A + B)] 29,61,500 1,25,97,000 1,55,58,500 Profit during first 3 months (Bal. figure) 4,70,500 Sales @ `44 per unit (78,000 x ` 44) 34,32,000 Desired profit during next 9 months (`15,62,500 – `4,70,500) (D)

10,92,000

Sales required for next 9 months (E) [(C + D)] 1,36,89,000 Total profit 15,62,500 Total Sales 1,71,21,000

months 9last during produced Units months 9last for required sales Total months 9last forunit per price selling Required =

` ` 1,36,89,000 39 per unit.

3,51,000= =

Workings: (1) Semi-variable overheads:

(a) For first 3 months at 60% capacity = `(5,60,000 + `1,50,000) × 3/12 = `7,10,000 × 3/12 = `1,77,500. (b) For remaining 9 months at 90% capacity = `(5,60,000 + `3,00,000) × 9/12 = `8,60,000 × 9/12

= ` 6,45,000

Question 27 Calculate machine hour rate for recovery of overheads for a machine from the following information: Cost of machine is `25, 00,000 and estimated salvage value is `1,00,000. Estimated working life of the machine is 10 years. Annual working hours are 3,000 in the factory. The machine is required 400 hours per annum for repairs and maintenance. Setting-up time of the machine is 156 hours per annum to be treated as productive time. Cost of repairs and maintenance for whole working life of the machine is `3,50,000. Power used 15 units per hour at a cost of `5 per unit. No power is consumed during maintenance and setting-up time. A chemical required for operating the machine is `9,880 per annum. Wages of an operator is `4,000 per



month. The operator, devoted one-third of his time to the machine. Annual insurance charges 2 per cent of cost of machine. Light charges for the department is `2,500 per month, having 48 points in all, out of which only 8 points are used at this machine. Other indirect expenses are chargeable to the machine are `6,500 per month.

Answers Computation of Machine Hour Rate

Running Hours (3,000 – 400) = 2,600 per annum

Particulars Total Amount Rate per hour (`) (`) Fixed Charges (Standing Charges):

Operator’s wages: Rs` 4,000 123

× 16,000

Insurance: 2% of `25,00,000 50,000

Light charges : ` 2,500 12 848× ×

5,000

Other indirect expenses: `6,500 × 12 78,000 Total Standing charges 1,49,000

Hourly rate for fixed charges : Rs` 1,49,0002,600

57.31

Variable Expenses (Machine Expenses) per hour

Depreciation : ` `

25,00,000 1,00,00010 2,600

−×

92.31

Repairs and Maintenance : `

3,50,00010 2,600×

13.46

Power: Rs` 5 15 2,4442,600× ×

70.50

Chemical : Rs` 9,8802,600

3.80

Machine Hour Rate 237.38

Question 28 Explain briefly the conditions when supplementary rates are used.


Overheads 4.37

Answer When the amount of under absorbed and over absorbed overhead is significant or large, because of differences due to wrong estimation, then the cost of product needs to be adjusted by using supplementary rates (under and over absorption/actual overhead) to avoid misleading impression.

Question 29 A company has three production departments (M1, M2 and A1) and three service department, one of which Engineering service department, servicing the M1 and M2 only. The relevant information are as follows:

Product X Product Y M1 10 Machine hours 6 Machine hours M2 4 Machine hours 14 Machine hours A1 14 Direct Labour hours 18 Direct Labour hours

The annual budgeted overhead cost for the year are

Indirect Wages Consumable Supplies (`) (`) M1 46,520 12,600 M2 41,340 18,200 A1 16,220 4,200 Stores 8,200 2,800 Engineering Service 5,340 4,200 General Service 7,520 3,200 (`) − Depreciation on Machinery 39,600 − Insurance of Machinery 7,200 − Insurance of Building 3,240 (Total building insurance cost for M1

is one third of annual premium − Power 6,480 − Light 5,400 − Rent 12,675 (The general service deptt. is located

in a building owned by the company. It is valued at `6,000 and is charged into cost at notional value of 8% per annum. This cost is additional to the rent shown above)

− The value of issues of materials to the production departments are in the same proportion as shown above for the Consumable supplies.



The following data are also available:

Department Book value Machinery

(`)

Area (Sq. ft.)

Effective H.P. hours %

Production Direct Labour

hour

Capacity Machine

hour

M1 1,20,000 5,000 50 2,00,000 40,000 M2 90,000 6,000 35 1,50,000 50,000 A1 30,000 8,000 05 3,00,000 Stores 12,000 2,000 − Engg. Service 36,000 2,500 10 General Service 12,000 1,500 −

Required: (i) Prepare a overhead analysis sheet, showing the bases of apportionment of overhead to

departments. (ii) Allocate service department overheads to production department ignoring the

apportionment of service department costs among service departments. (iii) Calculate suitable overhead absorption rate for the production departments. (iv) Calculate the overheads to be absorbed by two products, X and Y. Answer (i) Summary of Apportionment of Overheads

(`) Items

Basis of Apportionment

Total Amount

Production Deptt. Service Deptt. M1 M2 A1 Store

Service Engineering

Service General Service

Indirect wages

Allocation given

1,25,140 46,520 41,340 16,220 8,200 5,340 7,520

Consumable stores

Allocation given

45,200 12,600 18,200 4,200 2,800 4,200 3,200

Depreciation Capital value of machine

39,600 15,840 11,880 3,960 1,584 4,752 1,584

Insurance of Machine

Capital value of machine

7,200 2,880 2,160 720 288 864 288

Insurance on Building 3

1 to MI

Balance area basis

3,240 1,080 648 864 216 270 162

Power HP Hr% 6,480 3,240 2,268 324 − 648 −


Overheads 4.39

Light Area 5,400 1,080 1,296 1,728 432 540 324 Rent Area 12,675 2,535 3,042 4,056 1,014 1,268 760 Rent of general service

Direct 8% of 6,000

480

_______

−

______

−

______

−

______

−

______

−

______

480

______ Total 2,45,415 85,775 80,834 32,072 14,534 17,882 14,318

(ii) Allocation of service departments overheads Basis of

Apportionment Production Deptt. Service Deptt.

Service Deptt.

M1 M2 A1 Store Service

Engineering Service

General Service

Store Ratio of consumable value (126 :182 : 42)

5,232

7,558

1,744

(14,534)

−

−

Engineering service

In Machine hours Ratio of M1 and M2 (4 : 5)

7,948

9,934

−

−

(17,882)

−

General service

LHR Basis (20 : 15 : 30)

4,406

3,304

6,608

−

−

(14,318)

Production Department allocated in (i)

_______

85,775

80,834

32,072

Total 2,45,415 1,03,361 1,01,630 40,424 (iii) Overhead Absorption rate

M1 M2 A1

Total overhead allocated 1,03,361 1,01,630 40,424 Machine hours 40,000 50,000 − Labour hours − − 3,00,000 Rate per MHR 2.584 2.033 Rate per Direct labour − − 0.135

(iv) Statement showing overhead absorption for Product X and Y

Machine Deptt. Absorption Rate Product X Hours

Product Y Hours

M1 2.584 10 25.84 6 15.50 M2 2.033 4 8.13 14 28.46 A1 0.135 14 1.89 18 2.43

35.86 46.39



Question 30 A machine shop cost centre contains three machines of equal capacities. Three operators are employed on each machine, payable `20 per hour each. The factory works for fortyeight hours in a week which includes 4 hours set up time. The work is jointly done by operators. The operators are paid fully for the forty eight hours. In additions they are paid a bonus of 10 per cent of productive time. Costs are reported for this company on the basis of thirteen four-weekly period. The company for the purpose of computing machine hour rate includes the direct wages of the operator and also recoups the factory overheads allocated to the machines. The following details of factory overheads applicable to the cost centre are available:

Depreciation 10% per annum on original cost of the machine. Original cost of the each machine is `52,000.

Maintenance and repairs per week per machine is `60. Consumable stores per week per machine are `75. Power : 20 units per hour per machine at the rate of 80 paise per unit. Apportionment to the cost centre : Rent per annum `5,400, Heat and Light per annum

`9,720, and foreman’s salary per annum `12,960. Required: (i) Calculate the cost of running one machine for a four week period. (ii) Calculate machine hour rate.

Answer

Computation of cost of running one machine for a four week period

(`)

Standing charges Per annum

Rent 5,400 Heat and light 9,720 Forman’s salary 12,960 28,080 (`)

Total expenses for one machine for four week period = 13 3

4 28,080×

× 2,880

Wages: Hours per week = 48 and hours for 4 weeks = 48 × 4 = 192 Wages 192 × 20 3,840 Bonus (192 − 16) = 176 × 20 × .10 352 (i) Total standing charges 7,072


Overheads 4.41

Machine Expenses:

(`)

Depreciation = ⎟⎠⎞

⎜⎝⎛ ××

13 4 10% 52,000

1,600

Repairs and maintenance = (60 × 4) 240 Consumable stores (75 × 4) 300 Power (192 − 16) = 176 × 20 × .80 2,816 (ii) Total machine expenses 4,956

Total expenses (i) + (ii) 12,028

Machine hour rate = 68.34. 176

12,028=

Question 31 Explain the cost accounting treatment of unsuccessful Research and Development cost. Answer Cost of unsuccessful research is treated as factory overhead, provided the expenditure is normal and is provided in the budget. If it is not budgeted, it is written off to the profit and loss account. If the research is extended for long time, some failure cost is spread over to successful research. Question 32 Discuss the difference between allocation and apportionment of overhead. Answer The following are the differences between allocation and apportionment. 1. Allocation costs are directly allocated to cost centre. Overhead which cannot be directly

allocated are apportioned on some suitable basis. 2. Allocation allots whole amount of cost to cost centre or cost unit where as apportionment

allots part of cost to cost centre or cost unit. 3. No basis required for allocation. Apportionment is made on the basis of area, assets

value, number of workers etc. Question 33 A machinery was purchased from a manufacturer who claimed that his machine could produce 36.5 tonnes in a year consisting of 365 days. Holidays, break-down, etc., were normally allowed in the factory for 65 days. Sales were expected to be 25 tonnes during the year and the plant actually produced 25.2 tonnes during the year. You are required to state the following figures: (a) rated capacity



(b) practical capacity (c) normal capacity (d) actual capacity

Answer (a) Rated capacity 36.5 tonnes (Refers to the capacity of a machine

or a plant as indicated by its manufacturer) (b) Practical capacity 30 tonnes [Defined as actually utilised capacity of a plant

i.e. tonnes 65) (365 36536.5 −× ]

(c) Normal capacity 25 tonnes (It is the capacity of a plant utilized based on sales expectancy)

(d) Actual capacity 25.2 tonnes (Refers to the capacity actually achieved)

Question 34 Following information is available for the first and second quarter of the year 2008-09 of ABC Limited:

Production (in units) Semi-variable cost (`) Quarter I 36,000 2,80,000 Quarter II 42,000 3,10,000

You are required to segregate the semi-variable cost and calculate : (a) Variable cost per unit; and (b) Total fixed cost.

Answer Production (Units) Semi Variable Cost (`.)

Quarter I 36,000 2,80,000 Quarter II 42,000 3,10,000 Difference 6,000 30,000


Overheads 4.43

Variable Cost per Unit = oductionPrinChange

CostVariableSemiinChange = `

30,0006,000 units

= ` 5 per units

Total Fixed Cost = Semi Veriable Cost – (Production x Variable Cost per Unit) Total fixed cost in Quarter I : = 2,80,000 – (36,000 × 5) = 2,80,000 – 1,80,000 = 1,00,000 Total fixed cost in Quarter II : = 3,10,000 – (42,000 × 5) = 3,10,000 – 2,10,000 = 1,00,000 Question 35 Explain the treatment of over and under absorption of Overheads in Cost accounting.

Answer Treatment of over and under absorption of overheads are:- (i) Writing off to costing P&L A/c:– Small difference between the actual and absorbed amount

should simply be transferred to costing P&L A/c, if difference is large then investigate the causes and after that abnormal loss shall be transferred to costing P&L A/c.

(ii) Use of supplementary Rate: Under this method the balance of under and over absorbed overheads may be charged to cost of W.I.P. , finished stock and cost of sales proportionately with the help of supplementary rate of overhead.

(iii) Carry Forward to Subsequent Year: Difference should be carried forward in the expectation that next year the position will be automatically corrected. This would really mean that costing data of two years would be wrong.

Question 36 What are the methods of re-apportionment of service department expenses over the production departments? Discuss.

Answer Methods of re-apportionment of service department expenses over the production departments (i) Direct re-distribution method. (ii) Step method or non-reciprocal method. (iii) Reciprocal Service method



Direct re-distribution Method: Service department costs under this method are apportioned over the production departments only, ignoring services rendered by one service department to another. The basis of apportionment could be no. of workers. H.P of machines. Step Method or Non-Reciprocal Method This method gives cognizance to the service rendered by service department to another service department. Therefore, as compared to previous method, this method is more complicated because a sequence of apportionments has to be selected here. The sequence here begins with the department that renders service to the maximum number of other service departments.

Production Department Service Department P1 P P3 S1 S2 S3

Reciprocal Service Method This method recognises the fact that where there are two or more service departments they may render service to each other and, there these inter-departmental services are to be given due weight while re-distributing the expenses of service department. The methods available for dealing with reciprocal services are:

• Simultaneous equation method • Repeated distribution method • Trial & Error method.

Question 37 You are given the following information of the three machines of a manufacturing department of X Ltd.:

Preliminary estimates of expenses

Total (per annum)

Machines A B C (`) (`) (`) (`) Depreciation 20,000 7,500 7,500 5,000 Spare parts 10,000 4,000 4,000 2,000 Power 40,000 Consumable stores 8,000 3,000 2,500 2,500


Overheads 4.45

Insurance of machinery 8,000 Indirect labour 20,000 Building maintenance expenses 20,000 Annual interest on capital outlay 50,000 20,000 20,000 10,000 Monthly charge for rent and rates 10,000 Salary of foreman (per month) 20,000 Salary of Attendant (per month) 5,000

(The foreman and the attendant control all the three machines and spend equal time on them.) The following additional information is also available:

Machines A B C Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000 Ratio of K.W. Rating 3 2 3 Floor space (sq. ft.) 40,000 40,000 20,000

There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing department works 8 hours in a day but Saturdays are half days. All machines work at 90% capacity throughout the year and 2% is reasonable for breakdown. You are required to : Calculate predetermined machine hour rates for the above machines after taking into consideration the following factors: • An increase of 15% in the price of spare parts. • An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only. 20% general increase in wages rates.

Answer (a) Computation of Machine Hour Rate

Basis of apportionment

Total Machines A B C

(`) (`) (`) (`) (A) Standing

Charges

Insurance Depreciation Basis

8,000 3,000 3,000 2,000

Indirect Labour Direct Labour 24,000 6,000 9,000 9,000 Building

Maintenance Floor Space 20,000 8,000 8,000 4,000



expenses Rent and Rates Floor Space 1,20,000 48,000 48,000 24,000 Salary of

foreman Equal 2,40,000 80,000 80,000 80,000

Salary of attendant

Equal 60,000 20,000 20,000 20,000

Total standing charges

4,72,000 1,65,000 1,68,000 1,39,000

Hourly rate for standing charges

84.75 86.29 71.40

(B) Machine Expenses:

Depreciation Direct 20,000 7,500 7,500 5,000 Spare parts Final estimates 13,225 4,600 5,750 2,875 Power K.W. rating 40,000 15,000 10,000 15,000 Consumable

Stores Direct 8,000 3,000 2,500 2,500

Total Machine expenses 81,225 30,100 25,750 25,375 Hourly Rate for Machine expenses 15.46 13.23 13.03 Total (A + B) 553,225 1,95,100 1,93,750 1,64,375 Machine Hour rate 100.21 99.52 84.43

Working Notes: (i) Calculation of effective working hours: No. of holidays 52 (Sundays) + 12 (other holidays) = 64 Saturday (52 – 2) = 50 No. of days (Work full time) = 365 – 64 – 50 = 251 Hours Full days work 251 × 8 = 2,008 Half days work 50 × 4 = 200 2,208

Hours Effective capacity 90% of 2,208 1,987 (Rounded off) Less: Normal loss of time (Breakdown) 2% 40 (Rounded off) Effective running hour 1,947


Overheads 4.47

(ii) Amount of spare parts is calculated as under: A B C (`) (`) (`) Preliminary estimates 4,000 4,000 2,000 Add: Increase in price @ 15% 600 600 300 4,600 4,600 2,300 Add: Increase in consumption @ 25% − 1,150 575 Estimated cost 4,600 5,750 2,875

(iii) Amount of Indirect Labour is calculated as under:

(`) Preliminary estimates 20,000 Add: Increase in wages @ 20% 4,000 24,000

(iv) Interest on capital outlay is a financial matter and, therefore it has been excluded from the cost accounts.

Question 38 X Ltd. recovers overheads at a. pre-determined rate of ` 50 per man-day. The total factory overheads incurred and the man-days actually worked were ` 79 lakhs and 1.5 lakhs days respectively. During the period 30,000 units were sold. At the end of the period 5,000 completed units were held in stock but there was no opening stock of finished goods. Similarly, there was no stock of uncompleted units at the beginning of the period but at the end of the period there were 10,000 uncompleted units which may be treated as 50% complete. On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective planning and the balance were attributable to increase in overhead cost. How would unabsorbed overheads be treated in cost accounts? Answer (a) Absorbed overheads = Actual Man days x Rate = 1,50,000 x 50 = ` 75,00,000 Under absorption of overheads = Actual overheads – Absorbed overheads = 79,00,000 – 75,00,000 = ` 4,00,000



Reasons for under – absorption: 1. Defective Planning 4,00,000 x 60% = `2,40,000 2. Increase in overhead cost 4,00,000 x 40% = `1,60,000 Treatment in Cost Accounts: (i). The unabsorbed overheads of ` 2,40,000 on account of defective planning to be

treated as abnormal and thus be charged to costing profit & loss account. (ii) The balance of unabsorbed overheads i.e. ` 1,60,000 be charged as below on the

basis of supplementary overhead absorption rate

Supplementary Rate = ` 1,60,000/(30,000+5,000+50% of 10,000)= ` 4 per unit (a) To cost of sales Account = 30,000 x4 = ` 1,20,000 (b) To finished stock account = 5,000 x 4 = ` 20,000 (c) To WIP account = 50% of 10,000 x 4 = ` 20,000 ` 1,60,000

Question 39 A Machine costing `10 lacs was purchased on 1-4-2011. the expected life of the machine is 10 years. At the end of this period its scrap value is likely to be `10,000. the total cost of all the machines including new one was `90 lacs. The other information is given as follows: (i) Working hours of the machine for the year was 4,200 including 200 non-productive

hours. (ii) Repairs and maintenance for the new machine during the year was ` 5,000. (iii) Insurance Premium was paid for all the machine ` 9,000. (iv) New machine consumes 8 units of electricity per hour, the rate per unit being ` 3.75 (v) The new machine occupies area of the department. Rent of the department is

` 2,400 per month. (vi) Depreciation is charged on straight line basis Compute machine hour rate for the new machine. Answer Computation of machine hour rate of new Machine

Total (`)

Per hour(`)

A. Standing Charges 1,000


Overheads 4.49

I. Insurance Premium 9000 x 19

II. Rent 110

x2400x12 2,880

3,880 0.97*

B. Machine expenses I. Repairs and Maintenance [5,000/4,000] 1.25

II. Depreciation 10,00,000 10,00010 4,000

−⎡ ⎤⎢ ⎥×⎣ ⎦

24.75

III. Electricity 8 units x ` 3.75 30.00 Machine hour rate 56.97

Working Note 1 Calculation of productive Machine hour rate Total hours 4,200 Less: Non-Productive hours 200 4,000 * 3,880/ 4000 = 0.97

Question 40 The following account balances and distribution of indirect charges are taken from the accounts of a manufacturing concern for the year ending on 31st March, 2012:

Item Total Amount

Production Departments Service Departments

(`) X (`) Y (`) Z (`) A (`) B (`)Indirect Material 1,25,000 20,000 30,000 45,000 25,000 5,000Indirect Labour 2,60,000 45,000 50,000 70,000 60,000 35,000Superintendent's Salary 96,000 - - 96,000 - -Fuel & Heat 15,000 Power 1,80,000 Rent & Rates 1,50,000 Insurance 18,000 Meal Charges 60,000 Depreciation 2,70,000



The following departmental data are also available:

Production Departments Service Departments X Y Z A B Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200 Capital Value of Assets (`) 4,00,000 6,00,000 5,00,000 1,00,000 2,00,000 Kilowatt Hours 3,500 4,000 3,000 1,500 - Radiator Sections 20 40 60 50 30 No. of Employees 60 70 120 30 20

Expenses charged to the service departments are to be distributed to other departments by the following percentages:

X Y Z A B Department A 30 30 20 - 20 Department B 25 40 25 10 -

Prepare an overhead distribution statement to show the total overheads of production departments after re-apportioning service departments' overhead by using simultaneous equation method. Show all the calculations to the nearest rupee.

Answer Primary Distribution of Overheads

Item Basis Total Amount

(`)

Production Departments Service Departments

X (`) Y (`) Z (`) A (`) B (`) Indirect Material Actual 1,25,000 20,000 30,000 45,000 25,000 5,000Indirect Labour Actual 2,60,000 45,000 50,000 70,000 60,000 35,000Superintendent’s Salary

Actual 96,000 - - 96,000 - -

Fuel & Heat Radiator Sections {2:4:6:5:3}

15,000 1,500 3,000 4,500 3,750 2,250

Power Kilowatt Hours {7:8:6:3:0}

1,80,000 52,500 60,000 45,000 22,500 -

Rent & Rates Area (Sq. ft.) {22:20:15:12:6}

1,50,000 44,000 40,000 30,000 24,000 12,000


Overheads 4.51

Insurance Capital Value of Assets {4:6:5:1:2}

18,000 4,000 6,000 5,000 1,000 2,000

Meal Charges No. of Employees {6:7:12:3:2}

60,000 12,000 14,000 24,000 6,000 4,000

Depreciation Capital Value of Assets {4:6:5:1:2}

2,70,000 60,000 90,000 75,000 15,000 30,000

Total overheads 11,74,000 2,39,000 2,93,000 3,94,500 1,57,250 90,250

Re-distribution of Overheads of Service Department A and B Total overheads of Service Departments may be distributed using simultaneous equation method Let, the total overheads of A = a and the total overheads of B= b a = 1,57,250 + 0.10 b (i) or, 10a - b = 15,72,500 [(i) x10] b = 90,250 + 0.20 a (ii) or, -0.20a + b = 90,250 10a - b = 15,72,500 -0.20a + b = 90,250 9.8a = 16,62,750 a = 1,69,668 Putting the value of a in equation (ii), we get b = 90,250 + 0.20 x 1,69,668 b = 1,24,184

Secondary Distribution of Overheads Production Departments

X (`) Y (`) Z (`) Total overhead as per primary distribution Service Department A (80% of 1,69,668) Service Department B (90% of 1,24,184)

2,39,000 50,900 31,046

2,93,000 50,900 49,674

3,94,500 33,934 31,046

Total 3,20,946 3,93,574 4,59,480



EXERCISE 1 (a) Explain with illustrative examples the concept of fixed cost and variable cost.

Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.

(b) The following are the Maintenance costs incurred in a machine shop per six months with corresponding machine hours:

Month Machine Hours Maintenance Costs `

January 2,000 300 February 2,200 320

March 1,700 270 April 2,400 340 May 1,800 280 June 1,900 290 Total 12,000 1,800

Analyse the Maintenance cost which is semi-variable into fixed and variable element.

Answer Fixed cost (`) 100

2 (a) Explain how departmental overhead rates are arrived at.


(b) Selfhelp Ltd. has gensets and produces its own power. Data for power costs are as follows:-

Horse power Hours Production deptts. Service deptts. A B X Y Needed capacity production 10,000 20,000 12,000 8,000 Used during the month of May 8,000 13,000 7,000 6,000

During the month of May costs for generating power amounted to `9,300: of this `2,500 was considered to be fixed cost. Service Deptt. X renders service to A, B and Y in the ratio 13:6:1, while Y renders service to A and B in the ratio 31:3. Given that the direct labour hours in Deptts. A and B are 1650 hours and 2175 hours respectively, find the Power Cost per labour hour in each of these two Deptts.

Answer A B

Power Cost per labour labour (Rs.) 3.00 2.00

3 The level of production activity fluctuates widely in your company from month to month. Because of this, the incidence of depreciation on unit cost varies considerably. The management decides that you should find out a suitable method to correct this.


4 What is an idle capacity? What are the costs associated with it? How are these treated in product costs?



Overheads 4.53

5 Explain what is meant by Cost Apportionment and Cost Absorption. Illustrate each with two examples. Discuss the methods of cost absorption and state which method do you consider to be the best and why


6 State the objectives of codification of overheads. Enumerate with examples the different methods of coding and suggest a suitable method for a large organization.


7 Explain what do you understand by the terms stores overheads. Cite three example of stores overheads. Discuss the methods of treatment of stores overhead in cost accounts and state the method which you consider to be good.


8 In a manufacturing company where costing is done with a view to fix prices, state whether and, if so, to what extent the following items are includible in cost .

(i) Interest on borrowing

(ii) Bonus and gratuity

(iii) Depreciation on plant and machinery.


9 (a) What do you understand by codification of overheads?

(b) What are the objectives of codification?

(c) List down the various methods of codification (you need not elaborate).


10 How would you deal the following items in the cost accounts of a manufacturing concern?

(a) Research and Development cost

(b) Packing Expenses

(c) Fringe Benefits

Expenses on Removal and Re-erection of Machinery.


11 What do you understand by the term ‘pre-determined rate of recovery of overheads’? What are the bases that are usually advocated for such pre-determination? How do over –absorption and under-absorption of overheads arise and how are they disposed off in Cost Accounts?


12 (a) What do you mean by the term under/over absorption of production overhead? How does it arise? How is it treated in cost account?




(b) In a factory, overhead of a particular department are recovered on the basis of `5 per machine hour. The total expenses incurred and the actual machine hours for the department for the month of August were `80,000 and 10,000 hours respectively. Of the amount of `80,000, `15,000 became payable due to an award of the Labour Court and `5,000 was in respect of expenses of the previous year booked in the current month (August). Actual production was 40,000 units of which 30,000 units were sold. On analysing the reasons, it was found that 60% of the under absorbed overhead was due to defective planning and the rest was attributed to normal cost increase. How would you treat the under absorbed overhead in the cost accounts?

Answer

1. 60 percent of under absorbed overhead is due to defective planning. This being abnormal, should be debited to Profit and Loss A/c (60% of `10,000) (`) 6,000

2. Balance 40 percent of under-absorbed overhead should be distributed over, Finished Goods and Cost of Sales by supplementary rate (40% of `10,000) (`) 4,000

13 (a) Distinguish between allocation, apportionment and absorption of overheads.


(b) A departmental store has several departments. What bases would you recommend for apportioning the following items of expense to its departments

(1) Fire insurance of Building.

(2) Rent

(3) Delivery Expenses.

(4) Purchase Department Expenses.

(5) Credit Department Expenses.

(6) General Administration Expenses.

(7) Advertisement.

(8) Sales Assistants Salaries.

(9) Personal Department expenses.

(10) Sales Commission


14 Define administration overheads and state briefly the treatment of such overheads in Cost Accounts.


15 Enumerate the arguments for the inclusion of interest on capital in cost accounts.


Overheads 4.55


16 What is ‘Idle Capacity ‘? How should this be treated in cost accounts?


17 Write short notes on Chargeable Expenses


18 What is notional rent of a factory building? Give one reason why it may be included in cost accounts.


19 How would you treat the following in Cost Accounts?

(i) Employee welfare costs

(ii) Research and development costs

(iii) Depreciation


20 Write a note on 'classification', 'allocation' and 'absorption' of overheads. How does it help in controlling overheads?


21 Explain, how under absorption and over-absorption of overheads are treated in Cost Accounts.


22 X Ltd. having fifteen different types of automatic machines furnishes information as under for 1996-97

(i) Overhead expenses: Factory rent `96,000 (Floor area 80,000 sq.ft.), Heat and gas `45,000 and supervision `1,20,000.

(ii) Wages of the operator are `48 per day of 8 hours . He attends to one machine when it is under set up and two machines while they are under operation.

In respect of machine B (one of the above machines) the following particulars are furnished:

(i) Cost of machine Rs 45,000, Life of machine- 10 years and scrap value at the end of its life `5,000

(ii) Annual expenses on special equipment attached to the machine are estimated as `3,000

(iii) Estimated operation time of the machine is 3,600 hours while set up time is 400 hours per annum

(iv) The machine occupies 5,000 sq.ft. of floor area.

(v) Power costs `2 per hour while machine is in operation.

Find out the comprehensive machine hour rate of machine B . Also find out machine costs to be absorbed in respect of use of machine B on the following two work- orders

Work – order 31 Work order – 32 Machine set up time (Hours) 10 20 Machine operation time (Hours) 90 180



Answer Set up rate Per hour Operational rate Per hour

Comprehensive machine hour rate per hr. (Rs.) 12 11

Work – order 31 Work order – 32 Total cost (Rs.) 1,110 2,220

243 "The more kilometers you travel with your own vehicle, the cheaper it becomes." Comment briefly on this statement.


24 A factory has three production departments: The policy of the factory is to recover the production overheads of the entire factory by adopting a single blanket rate based on the percentage of total factory overheads to total factory wages. The relevant data for a month are given below:

Department Direct

Materials `

Direct Wages`

Factory Overheads `

Director Labour Hour

Machine Hours

Budget Machining 6,50,000 80,000 3,60,000 20,000 80,000 Assembly 1,70,000 3,50,000 1,40,000 1,00,000 10,000 Packing 1,00,000 70,000 1,25,000 50,000 – Actual Machining 7,80,000 96, 000 3,90,000 24,000 96,000 Assembly 1,36,000 2,70,000 84,000 90,000 11,000 Packing 1,20,000 90,000 1,35,000 60,000

The details of one of the representative jobs produced during the month are as under:

Job No. CW 7083

Department Direct Materials `

Direct Wages`

Director Labour Hour

Machine Hours

Machining 1,200 240 60 180 Assembly 600 360 120 30 Packing 300 60 40 –

The factory adds 30% on the factory cost to cover administration and selling overheads and profit.

Required:

(i) Calculate the overhead absorption rate as per the current policy of the company and determine the selling price of the Job No. CW 7083.

(ii) Suggest any suitable alternative method(s) of absorption of the factory overheads and calculate the overhead recovery rates based on the method(s) so recommended by you.

(iii) Determine the selling price of Job CW 7083 based on the overhead application rates calculated in (ii) above.


Overheads 4.57

(iv) Calculate the departmentwise and total under or over recovery of overheads based on the company's current policy and the method(s) recommended by you.

Answer (i) Overhead absorption rate = 125% of Direct wages

(ii) Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.

(iii) Selling Price(Rs.) 4,989.40

25 (a) Why is the use of an overhead absorption rate based on direct labour hours generally preferable to a direct wages percentage rate for a labour intensive operation?


(b) B & Co. has recorded the following data in the two most recent periods:

Total cost of production `

Volume of production (Units)

14,600 800 19,400 1,200

What is the best estimate of the firm's fixed costs per period?

Answer Fixed cost = `5,000

(c) In a manufacturing unit overhead was recovered at a pre-determined rate of Rs.20 per labour-hour. The total factory overhead incurred and the labour-hours actually worked were Rs.45,00,000 and 2,00,000 labour-hours respectively. During this period 30,000 units were sold. At the end of the period 5,000 units were held in stock while there was no opening stock of finished goods. Similarly, though there was no stock of uncompleted units at the beginning of the period, at the end of the period there were 10,000 uncompleted units which may be reckoned at 50% complete.

On analysing the reasons, it was found that 60% of the unabsorbed over-heads were due to defective planning and rest were attributable to increase in overhead costs.

How would unabsorbed overheads be treated in cost accounts?

Answer Balance of unabsorbed overheads due to increase in overhead costs. (Rs.) 2,00,000

Supplementary overhead absorption rate `5/- per unit

26 A company is making a study of the relative profitability of the two products – A and B. In addition to direct costs, indirect selling and distribution costs to be allocated between the two products are as under:

` Insurance charges for inventory (finished) 78,000 Storage costs 1,40,000 Packing and forwarding charges 7,20,000 Salesmen salaries 8,50,000 Invoicing costs 4,50,000



Other details are

Product A Product B Selling price per unit (`) 500 1,000 Cost per unit (exclusive of indirect selling and distribution costs) (`) 300 600 Annual sales in units 10,000 8,000 Average inventory (units) 1,000 800 Number of invoices 2,500 2,000

One unit of product A requires a storage space twice as much as product B. The cost to packing and forwarding one unit is the same for both the products. Salesmen are paid salary plus commission @ 5% on sales and equal amount of efforts are put forth on the sales of each of the product.

Required

(i) Set-up a schedule showing the apportionment of the indirect selling and distribution costs between the two products.

(ii) Prepare a statement showing the relative profitability of the two products

Answer

Products A. B ` ` Profit 5,45,000 17,67,000

27 SWEAT DREAMS Ltd. uses a historical cost system and absorbs overheads on the basis of predetermined rate. The following data are available for the year ended 31st March, 1997.

` Manufacturing overheads Amount actually spent 1,70,000 Amount absorbed 1,50,000 Cost of goods sold 3,36,000 Stock of finished goods 96,000 Works-in-progress 48,000 Using two methods of disposal of under-absorbed overheads show the implication on the profits of the company under each method.

Answer According to first method, the total unabsorbed overhead amount of `20,000 will be written off to Costing Profit & Loss Account. The use of this method will reduce the profits of the concern by `20,000 for the period.

According to second method, a supplementary rate may be used to adjust the overhead cost of each cost unit. The use of this method would reduce the profit of the concern by `14,000.

28 A company has three production departments and two service departments. Distribution summary of overheads is as follows:


Overheads 4.59

Production Departments A `13,600 B `14,700 C `12,800 Service Departments X ` 9,000 Y ` 3,000

The expenses of service departments are charged on a percentage basis which is as follows:

A B C X Y X Deptt. 40% 30% 20% – 10% Y Deptt. 30% 30% 20% 20% –

Apportion the cost of Service Departments by using the Repeated Distribution method.

Answer Production Departments

A B C ` ` ` Total of the apportionment Statement 18,712 18,833 15,555

29 A factory manufactures only one product in one quality and size. The owner of the factory states that he has a sound system of financial accounting which can provide him with unit cost information and as such he does not need a cost accounting system. State your arguments to convince him the need to introduce a cost accounting system.

Answer Refer to ‘Chapter No. 4.i.e. Overheads’ of Study Material.

30 Ventilators Ltd. wants to stabilize its production throughout the year. The approaches recommended are:

(a) Maintain production at an even pace throughout the year, and get the off-season production stored on the premises.

(b) Maintain production at an even pace but offer dealers a special discount for off-season purchases.

(c) Extend special terms to dealers, but maintain prices at levels that will enable regular movement of goods throughout the year.

Discuss the relative merits and disadvantages of above proposals.


31 Treatment of Interest paid in Cost Account.


32 Soloproducts Ltd. Manufactures and sells a single product and has estimated a sales revenue of `126 lakhs this year based on a 20% profit on selling price. Each unit of the product requires 3 lbs of material P and 1½ lbs of material Q for manufacture as well as a processing time of 7 hours in the Machine Shop and 2½ hours in the Assembly Section. Overheads are absorbed at a blanket rate of 33-1/3% on Direct Labour. The



factory works 5 days of 8 hours a week in a normal 52 weeks a year. On an average statutory holidays, leave and absenteeism and idle time amount to 96 hours, 80 hours and 64 hours respectively, in a year.

The other details are as under

Purchase price Material P `6 per lb Material Q `4 per lb Comprehensive Labour rate Machine shop `4 per hour Assembly `3.20 per hour No. of Employees Machine shop 600 Assembly 180 Finished Goods Material P Material Q Opening stock 20,000 units 54,000 lbs 33,000 lbs Closing stock (Estimated) 25,000 units 30,000 lbs 66,000 lbs

You are required to calculate:

(a) The number of units of the product proposed to be sold.

(b) Purchased to be made of materials P and Q during the year in Rupees.

(c) Capacity utilization of machine shop and Assembly section, along with your comments.

Answer (a) Number of units of the product proposed to be sold 1,40,000 Units

(b) P (Rs.) 24,66,000

Q (Rs.) 10,02,000

(c) Machine shop Assembly Section

Capacity utilization 91.94% 109.45%

33 In a factory following the job costing Method, an abstract from the work in process as at 30th September was prepared as under:

Job No. Material

Director Labour

Factory overheads Applied

` ` `

115 1,325 400 hours 800 640 118 810 250 hours 500 400 120 765 300 hours 475 380

2,900 1,775 1,420

Material used in October were as follows :

Material requisition Job Cost No. No. `

54 118 300 55 118 425


Overheads 4.61

56 118 515 57 120 665 58 121 910 59 124 720 3,535

A summary of Labour Hours deployed during October is as under:

Job no Number of Hours Shop A Shop B 115 25 25 118 90 30 120 75 10 121 65 — 124 20 10 275 75

Indirect Labour:

Waiting for material 20 10 Machine Breakdown 10 5 Indle time 5 6 Overtime Premium 6 5 316 101

A shop credit slip was issued in October that material issued under Requisition No. 54 was returned back to stores as being not suitable. A material Transfer Note issued in October indicated that material issued under requisition No.55 for job 118 was directed to job 124.

The hourly rate in shop A per labour hour is `3 per hour while at shop B, it is `2 per hour. The Factory Overhead is applied at the same rate as in September. Jobs 115, 118 and 120 were completed in October.

You are asked to compute the factory cost of the completed jobs. It is the practice of the management to put a 10% on the factory cost to cover administration and selling overheads and invoice the job to the customer on a total cost plus 20% basis. What would be the invoice price of these three jobs?

Answer Job No. 115 118 120

Factory cost (`) 2,990 ,819 2,726

Invoice price (`) 3,946.80 3,721.08 3.598.32

34 Modern manufacturers Ltd. Have three production department P1, P2 and P3 and two Service Departments S1 and S2 the details pertaining to which are as under:-

P1 P2 P3 S1 S2 Direct Wages (`) 3,000 2,000 3,000 1,500 195 Working Hours 3,070 4,475 2,419 – – Value of Machines (`) 60,000 80,000 1,00,000 5,000 5,000



HP of Machines 60 30 50 10 – Light Points 10 15 20 10 5 Floor space (Sq.Ft.) 2,000 2,500 3,000 2,000 500

The following figures extracted from the Accounting records are relevant:

`

Rent and Rates 5,.000 General Lighting 600 Indirect Wages 1,939 Power 1,500 Depreciation on Machines 10,000 Sundries 9,695

The expenses of the service departments are allocated as under:-

P1 P2 P3 S1 S2 S1 20% 30% 40% – 10% S2 40% 20% 30% 10% –

Find out the total cost of product X which is processed for manufacture in Departments P1, P2 and P3 for 4,5 and 3 hours respectively, given that its Direct Material cost in `50 Direct Labour cost Rs.30.

Answer P1 P2 P3

Total (`) 8,787.16 8,504.87 11,441.79

Cost of the product 'X' ` 115.13

35 PH Ltd. is a manufacturing company having three production departments, ‘A’ ‘B’ and ‘C’ and two service departments ‘X’ and ‘y’. The following is the budget for December 1981:

Total A B C X Y ` ` ` ` ` `

Direct Material 1,000 2,000 4,000 2,000 1,000 Direct Wages 5,000 2,000 8,000 1,000 2,000 Factory rent 4,000 Power 2,500 Depreciation 1,000 Other overheads 9,000 Additional information Area( Sq.ft.) 500 250 500 250 500 Capital Value (`Lacs) of assets 20 40 20 10 10 Machine hours 1,000 2,000 4,000 1,000 1,000 Horse power of machines 50 40 20 15 25

A technical assessment or the apportionment of expenses of service departments is as under:


Overheads 4.63

A B C X Y

% % % %. %

Service Dept. ‘X’ 45 15 30 - 10

Service Dept. ‘Y’ 60 35 - 5 -

Required:

(i) A statement showing distribution of overheads to various departments.

(ii) A statement showing re-distribution of service departments expenses to production departments.

Machine hours rates of the production departments ‘A’, ‘B’ and ‘C’.

Answer A B C

Machine hour rate (Rs.) 8.48 3.25 1.88

36 Explain how under and over absorption of overheads are treated in cost accounts.

Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material

37 A machine shop has 8 identical Drilling Machines manned by 6 operators. The machines cannot be worked without an operator wholly engaged on it. The original cost of all these 8 machines works out to `8 lakhs. These particulars are furnished for a 6 month period:-

Normal available hours per month 208 Absenteeism (without pay)- hours 18 Leave (with pay)-hours 20 Normal idle time unavoidable-hours 10 Average rate of wages per day of 8 hours Rs.20 Production Bonus estimated 15% on wages Value of Power consumed Rs.8,050 Supervision and Indirect Labour `3,300 Lighting and Electricity `1,200

These particulars are for a year:

Repairs and maintenance including consumables 3% on the value of machines.

Insurance `40,000.

Depreciation 10% on original cost.

Other Sundry works expenses `12,000

General Management expenses allocated `54,530

You are required to work out a comprehensive machine hour rate for the Machine Shop.

Answer Machine Hour Rate = `23.87



38 Gemini Enterprises undertakes three different jobs A,B and C.All of them require, the use of a special machine and also the use of a computer. The computer is hired and the hire charges work out to `4,20,000/- per annum. The expenses regarding the machine are estimated as follows.

`

Rent for the quarter 17,500 Depreciation per annum 2,00,000 Indirect charges per annum 1,50,000

During the first month of operation the following details were taken from the job register :

Job A B C Number of hours the machine was used : (a) Without the use of computer 600 900 – (b) With the use of the computer 400 600 1,000

You are required to compute the machine hour rate:-

(a) For the firm as a whole for the month when the computer was used and when the computer was not used.

(b) For the individual jobs A, B and C.

Answer (a) Machine Hour Rate of Gemini Enterprises for the firm as a whole, for a month

(1) When the computer was used `27.50 per hour.

(2) When the computer was not used Rs.10 per hour.

(b) Machine hour rate for the individual jobs.

Job A B C

Machine hour rate `17 `17 `27.50

39 Deccan Manufacturing Ltd. have three departments which are regarded as production departments. Service departments’ costs are distributed to these production departments using the “Step Ladder Method” of distribution. Estimates of factory overhead costs to be incurred by each department in the forthcoming year are as follows. Data required for distribution is also shown against each department:

Department Factory overhead Direct Labour No.of Employees Area in sq. m. ` Hours Productions X 1,93,000 4,000 100 3,000 Y 64,000 3,000 125 1,500 Z 83,000 4,000 85 1,500 Services P 45,000 1,000 10 500 Q 75,000 5,000 50 1,500 R 1,05,000 6,000 40 1,000 S 30,000 3,000 50 1,000


Overheads 4.65

The overhead costs of the four service departments are distributed in the same order, viz., P,Q,R and S respectively on the following basis:

Department Basis P _ Number of Employees Q _ Direct Labour Hours R _ Area in square meters S _ Direct Labour Hours

You are required to:

(a) prepare a schedule showing the distribution of overhead costs of the four service departments to the three production departments; and

(b) calculate the overhead recovery rate per direct labour hour for each of the three production departments.

Answer X Y Z Overhead recovery rate per hour: `75/- Rs.45/- Rs.40/-

40 A Ltd. manufactures two products A and B. The manufacturing division consists of two production departments P1and P2 and two services S1 and S2.

Budgeted overhead rates are used in the production departments to absorb factory overheads to the products. The rate of Department P1 is based on direct machine hours, while the rate of Department P2 is based on direct labour hours. In applying overheads, the pre-determined rates are multiplied by actual hours.

For allocating the service department costs to production departments, the basis adopted is as follow:

(i) Cost of Department S1 to Department P1 and P2 equally, and

(ii) Cost of Department S2 to Department P1 and P2 in the ratio 2:1 respectively.

The following budgeted and actual data are available:

Annual profit plan data:

Factory overhead budgeted for the year:

` ` Departments P1 25,50,000 S1 6,00,000 P2 21,75,000 S2 4,50,000

Budgeted output in units:

Product A– 50,000; B – 30,000.

Budgeted raw material cost per unit:

Product A – `120 ; Product B –`150.

Budgeted time required for production per unit:



Department P1: Product A: 1.5 machine hours

Product B: 1.0 machine hour

Department P2: Product A: 2 Direct labour hours

Product B: 2.5 Direct labour hours

Average wage rates budgeted in Department P2 are: Product A –Rs72 per hour

and Product B – `75 per hour.

All materials are used in Department P1 only.

Actual data (for the month of July,1993)

Units actually produced: Product A: 4,000 units

Product B: 3,000 units

– Actual direct machine hours worked in Department P1

On product A – 6,100 hours, Product B-4,150 hours.

– Actual direct labour hours worked in Department P2

On product A – 8,200 hours, Product B-7,400 hours.

Cost actually incurred:

Product A Product B Raw materials: `4,89,000 `4,56,000 Wages: `5,91,900 `5,52,000 ` ` Overheads: Department P1 `231,000 S1 `60,000 P2 `2,04,000 S2 `48,000


(i) Compute the predetermined overhead rate for each production department.

(ii) Prepare a performance report for July. 1993 that will reflect the budgeted costs and actual costs.

Answer P1 P2

Budgeted machine hour rate `30 `15

41 In a manufacturing unit, factory overhead was recovered at a pre- determined rate of `25 per man – day. The total factory overhead expenses incurred and the man-days actually worked were `41.50 lakhs and 1.5 lakhs man-days respectively. Out of the 40,000 units produced during a period, 30,000 were sold .

On analysing the reasons, it was found that 60% of the unabsorbed overheads were due to defective planning and the rest were attributable to increase in overhead costs.

How would unabsorbed overheads be treated in Cost Accounts?


Overheads 4.67

Answer Treatment of Unabsorbed Overheads in Cost Accounts

(i) The unabsorbed overheads of `2,40,000 due to defective planning to be treated as abnormal and therefore be charged to Costing Profit and Loss Accounts.

(ii) The balance unabsorbed overheads of `1,60,000 be charged to production i.e. 40,000 units at the supplementary overhead absorption rate i.e. `4/- per unit .

42 A company has two production departments and two service departments. The data relating to a period are as under:

Production Department Service Department

PD1 PD2 SD1 SD2 Direct materials (`) 80,000 40,000 10,000 20,000 Direct wages (`) 95,000 50,000 20,000 10,000 Overheads (`) 80,000 50,000 30,000 20,000 Power requirement at normal capacity operations (Kwh) 20,000 35,000 12,500 17,500 During Power Consumption during the period (Kwh) 13,000 23,000 10,250 10,000

The power requirement of these departments are met by a power generation plant. The said plant incurred an expenditure, which is not included above of `1,21,875 out of which a sum of `84,375 was variable and the rest fixed.

After apportionment of power generation plant costs to the four departments, the service department overheads are to be redistributed on the following bases:

PD1 PD2 SD1 SD2 SD1 (`) 50% 40% --- 10% SD2 (`) 60% 20% 20% ---


(i) Apportion the power generation plant costs to the four departments.

(ii) Re-apportion service department cost to production departments.

(iii) Calculate the overhead rates per direct labour hour of production departments, given that the direct wage rates of PD1 and PD2 are `5 and `4 per hour respectively.

Answer PD1 PD2

Overhead rate per 10.87 12.43

Direct labour hour (`)

43 A machine was purchased January 1,1990, for 5 lakhs. The total cost of all machinery inclusive of the new machine was `75 lakhs. The following further particulars are available:

Expected life of the machine 10 years.

Scrap value at the end of ten years ` 5,000.



Repairs and maintenance for the machine during the year `2,000 Expected number of working hours of the machine per year, 4,000 hours Insurance premium annually for all the machines `4,500

Electricity consumption for the machine per hour (@ 75 paise per unit) 25 units.

Area occupied by the machine 100 sq.ft.

Area occupied by other machine 1,500 sq.ft.

Rent per month of the department `800.

Lighting charges for 20 points for the whole department, out of which three points are for the machine `120 per month.

Compute the machine hour rate for the new machine on the basis of the data given above.

Machine hour rate (`) 31.904

44 An engine manufacturing company has two production departments: (i) Snow mobile engine and (ii) Boat engine and two service departments: (i) Maintenance and (ii) Factory office. Budgeted cost data and relevant cost drivers are as follows:

Departmental costs: ` Snow mobile engine 6,00,000 Boat engine 17,00,000 Factory office 3,00,000 Maintenance 2,40,000 Cost drivers: Factory office department: No. of employees Snow mobile engine department 1,080 employees Boat engine department 270 employees Maintenance department 150 employees 1,500 employees Maintenance department: No. of work orders Snow mobile engine department 570 orders Boat engine department 190 orders Factory office department 40 orders 800 orders

Required:

(i) Compute the cost driver allocation percentage and then use these percentage to allocate the service department costs by using direct method.

(ii) Compute the cost driver allocation percentage and then use these percentage to allocate the service department costs by using non-reciprocal method/step method.

Answer

(i) Cost Driver Allocation percentage Percent used

Factory office dept.:

Snowmobile engine 80%


Overheads 4.69

Boat engine 20%

Maintenance dept:


Boat engine 25%

(ii) Cost Driver Allocation percentage Percent used

Factory office dept.:


Boat engine 18%

Maintenance dept 10%

Maintenance dept:


Boat engine 25%

45 RST Ltd. has two production departments: Machining and Finishing. There are three service departments: Human Resource (HR), Maintenance and Design. The budgeted costs in these service departments are as follows:

HR Maintenance Design ` ` `

Variable 1,00,000 1,60,000 1,00,000 Fixed 4,00,000 3,00,000 6,00,000 5,00,000 4,60,000 7,00,000

The usage of these Service Departments’ output during the year just completed is as follows:

Provision of Service Output (in hours of service) Providers of Service

Users of Service HR Maintenance Design HR − − − Maintenance 500 − − Design 500 500 − Machining 4,000 3,500 4,500 Finishing 5,000 4,000 1,500 Total 10,000 8,000 6,000

Required:

(i) Use the direct method to re-apportion RST Ltd.’s service department cost to its production departments.

(ii) Determine the proper sequence to use in re-apportioning the firm’s service department cost by step-down method.

(iii) Use the step-down method to reapportion the firm’s service department cost.

Answer The proper sequence for apportionment of service department overheads is

First HR



Second Maintenance

Third Design

The sequence has been laid down based on service provided.

46 Two service departments, A and B, show expenses of ` 5,000 and ` 8,000 respectively. 1/10 expenses of department A are chargeable to department B, whereas 1/4 of the expenses of the latter are chargeable to department A. Ascertain the overheads of the departments to be apportioned to production departments of the two departments.

Answer `7,180 and `8,718

47 Three machines A, B and C are in use, involving the undermentioned expenditure for a period:

A ` 639; B ` 697; C ` 951.

The machines sometimes require the use of a crane also for which ` 570 has to be spent. The number of hours for the machines are:

A B C With the use of crane 160 130 480 Without the use of crane 428 577 Calculate the rates for recovery of overheads.

Answer `1.09, ` 0.99, `1.98 plus ` 0.74 when crane is used.

48 The actual figures relating to production for a period in a factory were as follows:

Material used ` 5,00,000 Direct labour (Total 1,20,000) ` 4,00,000 Factory expenses ` 3,00,000 Machine hours totaled 1,00,000

A job requires ` 20,000 in material, and 4,000 hours of labour @ `3 per hour (on the average) of which 2,800 were machine hours. Ascertain the cost of the job using different methods of absorbing overheads.

Answer `44,000, `41,000, `42,667, `42,000 and `40,400 respectively on the basis of materials, labour, prime cost, productive labour hours and machine hours.

49 Suppose in the factory mentioned in Question 3, administrative expenses total `2,50,000 and assume 1/5 of goods produced remained unsold. What is the value that should be put on inventory with alternative treatments of administrative expenses?

Answer ` 2,90,000 and ` 2,40,000.

50 The products of a factory pass through two departments, though the output emerging from the first department is also saleable. The direct labour in the two processes per period is ` 60,000 and ` 40,000 and the indirect expenses are ` 45,000 and ` 40,000. The rate for recovery of the overheads is 85%. Do you think the method followed is proper?

Answer There should be separate rates for the two departments.


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