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absorption

QUESTIONS-ANSWERS

Methods Of Overhead Absorption

Hourly Rates Machine Hour Rate

OHAR=

POHEs for the period No.Of Machine Hours

Most Popular Method Can be fixed for a Machine or Group Of Machines

**Computing Machine Hour Rate
**

Machine Running Expenses Or Variable Expenses Standing Expenses Or Fixed Expenses

Cost Of

Cost of Power Steam Oil Repairs Maintenance Depreciation Rent & Rates Lighting & Heating Supervision Insurance Cotton Waste Indirect Labour Consumable Stores Lubricants

**Methods Of Overhead Absorption
**

Common Costs to be apportioned Both Fixed/variable costs be divided by Machine Hrs Hourly Rates Machine Hour Rate Machine Hr represents Cost of Operating Machine for One Hour Time spent on cleaning, warming may be excluded from Machine hours Time spent on Normal Setting Up may be included Cost of reserve machine ( Motor ) may be considered

**Methods Of Overhead Absorption
**

Common Costs to be apportioned

Hourly Rates Machine Hour Rate

Uniform Period Basis For Apportionment Variable Cost Calculation Depreciation Maintenance

1. Calculate the machine hour rate from the following data:

Cost of machine Scrap value Repairs and maintenance per month Standing charges per month Effective working life Running time per month

Rs 19,200 Rs 1,200 Rs 150 Rs 50 10,000 hours 200 hours

Power used 5 units at 18 paise per unit per hour.

1. Computation of Machine Hour Rate Particulars

50 Standing charges -------200 Variable charges : 19,200 - 1,200 Depreciation --------------------10,000 150 Repairs and maintenance ------200 Power : 5 units per hour @ 18 paise 1.80 Per Hour (Rs)

0.25

0.75 0.90

Machine Hour Rate

3.70

2) From the following particulars, calculate the machine

hour rate for machine X:

Cost of the machine Estimate scrap value Estimated working life: 1O years of 2000 hours per year Running rime for a four week period: Estimated repairs for life Standing charges allocated to this machine per week Power consumed per hour: 5 units @ 10 paise per unit

Rs 42,000 2,000 150 hours Rs 10,000 Rs 300

2. Computation of Machine Hour Rate

Particulars

300 x 4 ------------150

Per Hour (Rs.)

8.00

Standing charges Variable charges : Depreciation

42,000 – 2,0000 -------------------10 x 2,000 10,000 -------------------10 x 2,000

2.00

Repairs

0.50 0.50

Power consumed : 5 units per hour @ 10 paise

Machine Hour Rate

11.00

3. Work out the machine hour rate for the following machine: Cost of machine Freight and installation charges Working life Working hours Repair charges Power 10 units per hour @ 10 paise per unit Lubricating oil @ Rs 2 per day of 8 hours Consumable stores @ Rs 10 per day of 8 hours Wages of operator @ Rs 4 per day Rs 90,000 Rs 10,000 10 years 2,000 per year 50%of depreciation

3. Computation of Machine Hour Rate Particulars

Standing charges : Lubrication oil Consumable stores Wages of operator Total Rs.2 per day Rs.10 per day Rs. 4 per day ____________________ Rs.16 per day of 8 hrs. ___________________ Per hour (Rs.)

Standing charges per hour (16 ÷ 8) Depreciation 90,000 + 10,000 ----------------------10 x 2,000 2.00

Repairs charges : 50% of depreciation Power : 10 units @ 10 paise per unit

5.00 2.50 1.00

Machine Hour Rate

10.50

4. A machine costing Rs 10,000 is expected to run for 10 years at the end of which period its scrap value is likely to be Rs 900. Repairs, during the whole life of the machine are expected to be Rs 1,800 and the machine is expected to run 4,380 hours per year on the average. Its electricity consumption is 15 units per hour, the rate per unit being 5 paise. The machine occupies one fourth of the area of the department and has two points out of a total of ten for lighting. The foreman has to devote about one-third of his time to the machine. The monthly rent of the department is Rs 300 and the lighting charges amount to Rs 80 per month. The foreman is paid a monthly salary of Rs 480. Ascertain the machine hour rate

4. Computation of Machine Hour Rate Particulars

Standing charges : Rent (300 x 1 x 12) 4 Lighting (80 x 2 x 12) 10 Foreman’s salary (480 x 1 x 12) 3 Total Standing charges Standing charges per hour (3,012 ÷ 4,380) Variable charges : Depreciation 10,000 – 900 ------------------10 x 4,380 900 192 1920 __________ 3012 -------------0.69 0.21 Per annum (Rs.) Per hour (Rs.)

Repairs

1,800 ----------------10 x 4,380

0.04 0.75

Power : 15 units per hour @ 5 paise per unit

Machine hour rate

1.69

5. Compute the machine hour rate from the following data: Cost of the machine Installation charges Scrap value after its life (15 years) Rent and rates for the shop per month General lighting for the shop per month Insurance premium for the shop per annum Repairs and maintenance expenses per annum Power consumption 10 units per hour, rate of power for 100 units Estimated working hours per annum (this includes setting up time of 200 hours) Shop supervisor's salary per month Rs 600 The machine occupies 1/4th of the total area of the shop. The supervisor is expected to devote 1/5th of his time for supervising this machine. Rs. 20 2,200 hrs Rs 1,00,000 Rs 10,000 Rs 5,000 Rs 200 Rs 300 Rs 960 Rs 1,000

5. Computation of Machine Hour Rate Particulars

Standing charges : Rent and rates for the shop General Lighting Insurance Supervisor’s salary 200 x 1 x 12 4 300 x 1 x 12 4 600 x 1 x 12 5

Per annum (Rs.)

600 900 960 1,440 _________ 3,900 --------------

Per hour (Rs.)

Total Standing charges Standing charges per hour (3,900 ÷ 2,000)

1.95

Variable charges :

Depreciation

1,00,000 + 10,000 – 5,000 -------------------------------15 x 2,000 1,000 ---------2,000

3.50

Repairs and maintenance

0.50 2.00

Power consumption : 10 units per hour @ Rs.20 per 100 units

Rate

Machine Hour

7.95

6. Calculate the machine hour rate from the following particulars: Rs Cost of the machine Installation charges Estimated value of scrap at the end of the life (10 years) Estimated working hours per annum Rent and Rates for the shop per month Supervisor's salary per month General lighting for the shop per month Rate of power per 100 units 95,000 10,000 5,000 2,200 Hrs. 250 700 300 50

Power consumption 10 units per hour. The machine occupies 1/4th of the total area of the shop. The supervisor is spending 1/5th of his time for this particular machine.

6. Computation of Machine Hour Rate

Particulars

Standing charges Rent 250 x 12 x 1 4 700 x 12 x 1 5 Per annum (Rs.) Per Hour (Rs.)

**750 1,680 900 --------3,300
**

--------1.51 4.77 5.00

Supervisor’s Salary General lighting

300 x 12 x 1 4 Total standing charges Standing charges per hour (3,330 ÷ 2,200) Variable charges : Depreciation Power : 10 x 1,00,000 + 10,000 – 5,000 10 x 2,200 50 100

Machine Hour Rate

11.28

7. A machine costs Rs 90,000 and deemed to have a scrap value of 5% of

purchase price at the end of its life of 19 years. The machine works for 1,500 hours per annum. The other details of the machine are: Rs a) Wages of operator (the operator is in-charge

of two machines) • • • • • • Rent and rates of the shop (shop houses 4 machines Lighting of the shop Insurance on the machine Cost of repairs and maintenance Shop supervisor's salary Power consumption of machine: 20 units per hour at the rate of Rs 10 per 100 units h) Factory overhead for the shop Rs 4,000 per year Compute the machine hour rate.

6,000 per year 3,000 per year 200 per quarter 250 per month 500 per month 250 per month

7. Computation of Machine Hour Rate Particulars

Standing charges Rent and Rates ( 3000 ÷ 4 ) Wages of operator ( Rs. 6,000 ÷ 2) Lighting ( 250 x 12 ) 4 Insurance : ( 200 x 12 ) 3 x 4 Supervisor’s salary : ( Rs. 6,000 ÷ 4 ) Factory overhead : (Rs. 4,000 ÷ 4 ) Total Standing charges Standing charges per hour (7,200 ÷ 1,500 ) Variable charges 90,000 - 4,500 Depreciation -------------------------19 x 1,500 Repairs & maintenance Power consumption : 20 Rs.250 x 12 1,500 x 10 100

**Per annum Per Hour (Rs.) (Rs.)
**

750 3,000 750 200 1,500 1,000 ----------7,200 -----------

4.80 3.00

2.00 2.00

Machine Hour Rate

11.80

**8. Calculate the machine hour rate for the month of January to cover the
**

overhead expenses, given below, relating to a machine. 1. Rent of the Department (1/5th area is occupied by the machine) 2. Lighting (out of 12 points, 2 are for this machine) 3. Insurance 4. Cotton, wastes etc. 5. Foreman's salary (1/4th for the machine) 6. Cost of machine 7. Scrap 288 p.a. 36 p.a. 60 p.a. 6,000 p.a. 9,200 200 Rs 780 p.a.

It is assumed that machine will work for 1,800 hours p.a. and that will incur Rs 1,125 for repairs and maintenance for life. It is further assumed that 5 units of power would be used per hour available at 6 paise per unit, and that the life of machine will be of 10 years.

8. Computation of Machine Hour Rate

Particulars

Standing charges : Rent ( 780 x 1/5) Lighting ( 288 x 2/12) Foreman’s salary (6,000 x ¼) Insurance Cotton waste etc. Total standing charges Standing charges per hour (1,800 ÷ 1,800 ) Variable charges : 90,000 - 200 Depreciation ---------------------10 x 1,900 Repairs ( 1,125 ÷ 1,800 x 10 ) Power 5 units @ 6 paise per unit

Per annum (Rs)

156.00 48.00 1,500.00 36.00 60.00 -----------1,800.00

Per Hour (Rs.)

1.00 0.50

0.06 0.30

Machine Hour Rate

1.86

** 9. The following information is given:
**

1. The original cost. of the machine used (purchased in June 1998) was Rs 10,000. Its estimated life is 10 years, the estimated scrap value at the end of its life is Rs 1,000 and the estimated working time per year (50 weeks of 44 hours) is 2,200 hours of which machine maintenance, etc. is estimated to take up 200 hours. 2. Setting up time of 100 hours is estimated 3. Electricity used by the machine during production is 16 units per hour at a cost of 20 paise per unit. No current is taken during maintenance or setting up. 4. The machine requires a chemical solution which is replaced at the end of each week at a cost of Rs 20 each time. 5. The estimated cost of maintenance per year is Rs 1,200 6. Two attendants control the operation of the machine together with five other identical machines. Their combined weekly wages, insurance, and the employer's contributions to holidays pay amount to Rs 120.

**7. Departmental and general works overheads allocated to this machine for the
**

year 1998 amount to Rs 2,000.

Calculate machine hour rate when (a) Setting up time is unproductive (b) Setting up-time is productive

9. Computation of Machine Hour

a) When setting up time is unproductive Effective working hours are computed as shown below : Annual working hours (50 x 44) 2200 hrs Less - Maintenance time 200 hrs -------------- 2000 hrs Less - set up time 100 hrs. ---------------

Effective working hours 1900 hrs ---------------

9.a Computation of Machine Hour

Particulars

Standing charges (a) (f) Wages of attendants 120 x 50 ---------------------6 x 1,900

Per Hour (Rs.)

0.53

Departmental and general works overheads (2,000 ÷ 1,900) Total

Standing charges per hour Variable charges (l) Depreciation 10,000 - 1,000 ----------------------10 x 1,900 20 x 50 ---------------1,900

1.05 --------1.58 -------0.47

(b) (s) (t)

Chemical Solution

0.53 3.20 0.63

Electricity ( 16 x 20 paise) Maintenance ( 1,200 + 1,900)

Machine Hour Rate 6.41

9. (b) When setting up time is productive Annual working hours 2,200 Less : Maintenance time 200 ---------------------

Effective working hours 2,000 --------------------

9.b Computation of Machine Hour Rate

Particulars

Standing charges : (c) Wages of attendants 120 x 50 ------------------6

Per Hour (Rs.)

1,000.00

0.50 1.00 ----------1.50

(f)

Departmental and general work overheads

2,000.00

Standing charges per hour 3000 divided by 2000 Variable charges : (l) Depreciation 10,000 – 1,000 ----------------------10 x 2,000 20 x 50 -------------2,000

0.45

(p)

Chemical Solution

0.50

(t) (d)

Electricity

1,900 x 16 x 0.20 -------------------------2,000

3.04

Maintenance (1,200 ÷ 2,000) 0.60

Machine Hour Rate

6.09

10.

The following particulars relate to a new machine Rs. Purchase price Installation expenses Rent per quarter General lighting for the total area Foreman’s salary Insurance premium for the machine Estimated repairs for the machine Consumable Stores 4,00,000 1,00,000 3,750 1,000 per month 30,000 per annum 3,000 per annum 5,000 per annum 4,000 per annum

Power consumed 2 units per hour at Rs.50 per 100 units. The estimated life of the machine is 10 years and scrap value at the end of 10th year is Rs.1,00,000. The machine is expected to run 20,000 hours in its lifetime. The machine occupies 25% of total area. The foreman devotes 1/6th of his time for the machine. Calculate machine hour rate for the machine.

10. Calculation of Machine Hour Rate

Particulars

Standing Charges 3,750 x 4 Rent ----------------4 1,000 x 12 Lighting --------------------4 30,000 Foreman’s Salary ------------6 Insurance Stores Total Standing Charges Standing charges per hour (18,000 ÷ 2,000) Variable charges : Depreciation Repairs Power 4,00,000 + 1,00,000 - 1,00,000 -------------------------------------------10 x 2,000 5,000 ---------2,000 2 x 50 -----------------------100 3,750 3,000

Per annum (Rs.)

Per Hour (Rs.)

5,000 3,000 4,000 -------18,750 -------9.375

20.000 2.500 1.000

Rate

Machine Hour

32.875

11. From the following particulars, compute Machine Hour Rate : Rs. Cost of Machine Installation charges Anticipated life of machine Residual value at the end of 10 years Rent and rates per annum Insurance of the machine p.a. Repairs and maintenance p.a. Consumable stores p.a. Total production services p.a. 1,14,800 5,400 10 years 5,000 12,000 3,000 8,640 1,200 1,080

Power cost is 5 units per working hour @ 40 paise per unit Setting up time (non-productive) 400 hrs. p.a. There are 300 working days of eight hours in a year.

11. Computation of Machine Hour Rate

Particulars

Standing charges

Rent and Rates Insurance Consumable Stores Production Services Total standing charges Standing charges per hour (1`7,280 ÷ 2,000) Variable charges : Depreciation Power 1,14,800 + 5,400 - 5,000 ----------------------------------10 12,000 3,000 1,200 1,080 -------------17,280 ------------8.64

Per annum (Rs.)

Per Hour (Rs.)

11,520

( 300 x 8 x 5 x 0.40)

4,800 8,640

Repairs and maintenance Total

24,960

12,48

Machine Hour Rate

21.12

12. From the following information, compute machine hour rate Cost of the machine Expenses on installation and freight charges Estimated scrap value at the end Insurance premium Standing charges allocated to the machine Effective working life of the machine Hours worked during the month Repairs during the effective life of the machine Rs. 3,00,000 Rs. Rs. Rs. Rs. 25,000 25,000 480 p.a. 480 p.m.

24,000 hours 240 hours Rs. 24,000

Power consumed by the machine is 20 units per hour at a cost of 25 paise per unit. Additional charges at 5 paise per unit are payable on the total units consumed if the same exceeds the basic consumption of 2000 units per month.

12. Computation of Machine Hour Rate

Particulars

Standing charges Standing charges Insurance 480 x12

Per annum (Rs.)

Per hour (Rs.)

5760 480

Total standing charges 6260 Standing charges per hour (6260 ÷ 2880) Variable charges : Depreciation 12.50 2.17

3,00000 + 25,000 - 25,000 -----------------------------------2,4000 hours

Repairs ( 24,000 ÷ 24.000 ) Power ( 0.30 x 20 )

1.00 6.00

Machine Hour Rate

21.67

13. Compute machine hour rate from the following data : Cost of the machine Installation charges Estimated scrap value at the end Effective working life of the machine Estimated repairs over the effective working life of the machine Standing charges allocated to the machine per year Power bill per year Rs. Rs. 5,760 7,200 Rs. 12,000 Rs. 1,44,000 Rs. Rs. 6,000 6,000 12,000 hours

Power consumed by the machine is 20 units per hour at a cost of 25 paise per unit.

13. Computation of Machine Hour Rate

No. of machine hours : 1440*

Particulars

Standing charges (ii) Standing charges allocated to the machine Total standing charges Standing charges per hour Variable charges • 1,44,000 + 6,000 - 6,000 Depreciation ----------------------------------12,000 12,000 Repairs ----------12,000 Power (20 units x 25 P)

Per annum (Rs.)

5,760 -----------5,760 -----------

Per Hour (Rs.)

4.00

12.00

(xiii)

1.00

(iii)

5.00

Machine Hour Rate Computation of Machine Hours :

22.00

•Power bill per year = Rs.7,200 Power bill per hour = 20 units x 25 p. = Rs.5 Therefore No.of machine hours per annum = 7,200/5 = 1,440 hours

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