4

Overheads

Question 1 (a) Explain with illustrative examples the concept of fixed cost and variable cost. (b) The following are the Maintenance costs incurred in a machine shop per six months with corresponding machine hours: Month January February March April May June Total Machine Hours(output) 2,000 2,200 1,700 2,400 1,800 1,900 12,000 Maintenance Costs Rs. 300 320 270 340 280 290 1,800

Analyse the Maintenance cost which is semi-variable into fixed and variable element. Answer (a) Fixed cost: it is a cost which accrues in relation to the passage of time and which within certain output or turnover limits, tends to be unaffected by fluctuations in volume of output or turnover. Fixed costs, are thus time based and within certain output limits, they are not affected by changes in the level of activity. Fixed costs are also known as period costs. Rent is an example of fixed cost. In the case of factory, its rent is

4.2

Cost Accounting

independent of its volume of production, i.e. whether it produces 1 unit or 1000 units, but its rent remains the same. Other examples of fixed costs are rates, foremen’s salary etc. Variable cost: it is a cost which in the aggregate tends to vary in direct proportion to changes in the volume of output or turnover. For example material cost is a variable cost. If the cost of material for 1 unit of a product is say Rs.5, then the cost of material for 10 units of the product will be Rs. 50. In this way the cost of material is a variable one. (b) Note: This part can be solved by using other methods as well

Overheads

4.3

Workings: High and low points method Machine Hours High point, April Low point, March 2,400 1,700 700 Rate of change of variable cost Rs. 70 ÷ 700 hrs. = Rs. 0.10 per machine hour Total variable cost for 2,400 machine hour will be Rs. 240 2400 x Rs. 0.10 Hence Fixed cost is (Rs. 340 – Rs. 240 ) = Rs.100 Analysis of maintenance cost into fixed and variable element Machine Hours Maintenanc e Cost Rs. 300 320 270 340 280 290 Fixed Cost Variable Cost. Rs. 200 220 170 240 180 190 Maintenance Costs Rs. 340 270 70 =

January February March April May June Question 2

2,000 2,200 1,700 2,400 1,800 1,900

Rs. 100 100 100 100 100 100

(a) Explain how departmental overhead rates are arrived at. (b) Self-help Ltd. has gensets and produces its own power. Data for power costs are as follows:Horse power Hours Needed production capacity Production deptts. A 10,000 B 20,000 Service deptts. X 12,000 Y 8,000

4. Thus by using primary and secondary distribution processes.500 was considered to be fixed cost. This process of distributing overhead expenses between the production and service departments is known as primary distribution. (b) Statement of overhead Distribution of a Selfhelp Ltd. 2. For example the total overheads of each department may be divided by labour hour. As the service departments in an organization are meant for rendering service to other production departments. X renders service to A. production departments. X Y . the total overhead expenses are apportioned to the concerned production departments. B and Y in the ratio 13:6:1.. A and B are 1650 hours and 2175 hours respectively.000 7.000 6. find the Power Cost per labour hour in each of these two Deptts. machine hours etc. their expenses are apportioned to the users viz. Particulars Basis Total Production A B Service Deptts.4 Cost Accounting Used during month of May the 8. Given that the direct labour hours in Deptts. to arrive at departmental overhead recovery rate.000 During the month of May costs for generating power amounted to Rs. Service Deptt. This process of apportioning service department expenses to the production departments by using suitable basis is known as secondary distribution.000 13. while Y renders service to A and B in the ratio 31:3.300: of this Rs. 9. These total overhead expenses of each production department may be absorbed by using a suitable method of overhead absorption. Answer (a) To arrive at the department overhead rates it is necessary to have complete account of overhead expenses. These overhead expenses are either completely assigned to the production and service departments or are apportioned by using suitable basis.

600 Redistribution of Service Expenses to Production Departments Particulars Total Production Deptts. Fixed Cost H.5 Rs. Hours used (8:13:7:6) 2.950 1. Y overhead (Rs.600 600 Service Deptts.P.) Deptt.600 2.800 1.350 2.300 Departments' 2.B And Y in the ratio (13:6:1) Deptt.600 100 1.400 1.500 Rs.30 0 2. X 2.000 – 2.P.) apportioned to A.700 4.000 Y 1.300 B 3. 500 Rs.) Labour hours Power Cost per labour labour Question 3 The level of production activity fluctuates widely in your company from month to month.00 1.600 1.000 Rs.100 1.200 9. the incidence of — 9. 1.00 4. X overhead (Rs.550 150 –1. Because of this.600 2.) apportioned to A and B in the ratio (31:3) Total overheads (Rs.100 3. 400 Variable Cost 6. Hours needed at capacity production (5:10:6:4) H. A Total overheads (Rs.630 3.Overheads 4.175 2.00 – – . 600 Rs.

000 or Rs. which is known as depreciation rate per unit. For example. To be more clear about this method. Under this method.00. Suppose the cost of a machine used for manufacturing products is Rs.4.0000 units during its entire life and has no scrap value.m. Consequently. consider the following example. It satisfies the costing requirement that the cost of an asset should be evenly spread over the work done by it. the cost of acquisition plus the installation charges minus the scrap value. but only the usage factor. suppose the cost of a machine used by a concern for manufacturing its products is Rs.00.1. This method is suitable when the units of production are identical or uniform. by dividing the cost of the assets by the estimated number of unit to be produced during the life of the asset. 1 respectively. Suppose further that the units manufactured by this machine in the months of March and April are 500 and 1.0. The management decides that you should find out a suitable method to correct this. is spread over the estimated life of the asset to arrive at the annual depreciation charge. we arrive at a figure of Re.000. One simple method used for the purpose is known as straight line method. 10 years. no depreciation is provided only for any lapse of time. Under production unit method. due to wide fluctuations in the production activity can be overcome by using the method known as production unit method. On dividing the cost of the machine with estimated output. 2 and Re.50 per unit. The formula for calculating depreciation under this method is :D= Oig a C s – R s u l V lu r in l o t e id a a e E tim t d o tp t d rin its life s ae u u u g This method recognises the fact that depreciation should vary according to the volume of the output. Then the rate of depreciation to be charged to each unit manufactured in the month of March and April will be Rs. the incidence of depreciation only arises when the asset is employed in production and not when it remains idle. The use of this method for charging depreciation on output will overcome the .12.000. depreciation is charged at a rate per unit of production. Then the charge of depreciation per annum would be Rs. Its capacity is to manufacture 2.6 Cost Accounting depreciation on unit cost varies considerably.000 respectively.1. Answer Depreciation is usually charged on the basis of time. This incidence of depreciation on unit cost. It does not recognize the time factor. Its life is. say.000 p.20.1. According to this method.

because of market demand of the product. power failure etc. fuel or supplies. shortage of power. nonavailability of raw-material. management and supervisory costs. etc. maintenance. it is the difference between the practical or normal capacity and capacity of utilisation based on expected sales. (ii) If the idle capacity cost is due to avoidable reasons such as faulty planning. shortage of skilled labour.7 problem created by wide fluctuations. machine or equipment which cannot be effectively utilised in production. the cost should be charged to profit and loss account. etc Idle Capacity Costs: Costs associated with idle capacity are mostly fixed in nature.Overheads 4. These costs remain unabsorbed or unrecovered due to under-utilisation of plant and service capacity.000 units will be treated as the idle capacity of the machine. Idle capacity cost can be calculated as follows:Idle capacity cost = A g g te o e e d re te to p n g re a v rh a la d la t × Idle N rm l p n c p c o a la t a a ity Capacity Treatment of Idle capacity cost: Idle capacity costs can be treated in product costing. Question 4 What is an idle capacity? What are the costs associated with it? How are these treated in product costs? Answer Idle Capacity: Idle capacity is that part of the capacity of a plant. the costs are charged to the production capacity utilised. a supplementary overhead rate may be used to recover the idle capacity cost. .. in production activity and charging depreciation on the time basis. but is used only to produce 8. For example. rates. in the following ways: (i) If the idle capacity cost is due to unavoidable reasons such as repairs. if the practical capacity of production of a machine is to the tune of 10. insurance premium. repairs and maintenance charges. The idle capacity may arise due to lack of product demand. In this case. These include depreciation.000 units in a month. rent.000 units. change over of job. seasonal nature of product. In other words. 2. then in such a case. absenteeism.

4. then. cost . For example. (b) Percentage of direct wages. factory rent can be apportioned over the production and service departments on the basis of the area occupied by each. (c) Percentage of prime cost. is the process of absorbing all overhead costs allocated to or apportioned over particular cost centre or production department by the units produced. Therefore.g. For overhead absorption some suitable basis has to be adopted. This describes the allotment of proportions of overhead to cost centres or departments. (a) Percentage of direct material cost. Methods of Cost Absorption: Various methods of absorption can be grouped under the following three heads: (i) Production unit method.g. Likewise. Question 5 Explain what is meant by Cost Apportionment and Cost Absorption. Manufacturing costs of groundnut crushing centre can be absorbed by using a Kg. Illustrate each with two examples. some logical basis is selected and adopted for the apportionment of such type of expenses over various departments. the cost should be charged to the cost of production by inflating overhead rates. Cost absorption. as he attends in general to all the departments. (iii) Hourly rate method e.the manufacturing cost of lathe centre is absorbed by a rate per lathe hour. The purpose behind the absorption is that expenses should be absorbed in the cost of the output of the given period. of groundnut oil produced as the basis. It is carried out in respect of those items of cost which cannot be allocated to any specific cost centre or department. Discuss the methods of cost absorption and state which method do you consider to be the best and why Answer Cost apportionment is the process of charging expenses in an equitable proportion to the various cost centres or departments.8 Cost Accounting (iii) If the idle capacity cost is due to seasonal factors. (ii) Percentage method e. the salary of general manager cannot be allocated wholly to the production department. for example .

Material prices fluctuate quite often and this phenomenon leads to high or low charges in respect of overhead. . Percentage of direct wage method: This method is similar to the previous one except that here direct wages are taken for ascertaining the recovery rate. Percentage of direct material cost method: Under this method. But its usefulness is limited normally to those situations where only one product is produced. all the workers employed earn more or less the same hourly rate and labour is predominant. Production unit method: To absorb the overhead costs by this method either a pre-determined or actual rate of overhead absorption is calculated. This vitiates comparison of cost of production from period to period 2. It is useful where production is uniform. even though overheads figures remain unchanged. The main advantages of this method are: (1) It is simple to operate and understand. Thus. The application of the direct wage method does not give correct results under the following conditions: (a) Where major work is done by machines and the workers merely act as attendants. But the use of direct material cost bases totally ignores the time considerations. (b) Machine hour rate. (3) Labour rates fluctuate less frequently than the rate of materials. overheads are recovered on the basis of a pre-determined or actual rate. This method is the simplest one. (2) It given consideration to time element.Overheads 4. a job requiring cheap materials but longer period of processing should bear more for overheads as compared to a job which necessitates expensive materials but shorter period of processing. which is computed as follow:E p c d (o A tu l) O e e d x e te r c a v rh a × 100 E p c d (o A tu l) d c m te l c s t x e te r c a ire t a ria o This method is not used commonly because of the following limitations: 1. Most of the overhead expenses vary with time.9 (a) Direct labour hour rate. by dividing the cost to be absorbed by the number of units produced or expected to be produced.

Percentage of prime cost method: This method is infact a combination of direct material and the direct wage cost basis. To operate this method successfully additional records of labour must be maintained to get the number of direct labour hours by departments and product. But in fact highly paid workers take less time and therefore make use of less resources. The rate of absorption here is calculated by using the following formula: T ta o e e d c s t o l v rh a o × 100 T ta p e c s t o l rim o This method is very simple and takes into account both material and labour costs to calculate rate of absorption. It is difficult to name a single method which is suitable for the absorption of overhead costs under different circumstances. (b) Where labour is the main factor of production. where a percentage method would not give accurate results. . In such a case if. The main disadvantage of using this method is that it givens equal weightage to both material and labour. so that share of overhead should be rather less.. It can be calculated by dividing the overheads to be absorbed by the labour hours expended or expected to be expended. Under this method. overhead is recovered on the basis of direct wages it will not only cost more in labour but also involve large share of overhead expenses as compared to those performed by low paid workers.4. Machine hour rate: This is one of the most scientific methods for the absorption of factory overheads. This rate is calculated by dividing the amount of factory overheads concerning a machine the number of machine hours. labour hours are taken as a basis for the overhead absorption. Direct labour hour rate: This is the most equitable method of charging the manufacturing overhead to production where labour hours are the most important element of cost. Machine hour rate means the cost or expenses incurred in running a machine for one hour.10 Cost Accounting (b) Where same work is done on different jobs by workers with different rate of pay and also the highly paid workers cannot increase their output/input ratio. supplies etc. The labour hour circumstances: rate can be adopted under the following (a) Where production is not uniform and.

(2) To facilitate the task of allocation and apportionment of overheads over different departments or cost centres. direct labour hour rate or machine hour rate are considered as best methods specially in those very manufacturing units in which labour or machine is a predominant factor.Overheads 4. (5) To help the task of machine accounting systems in a large organization.g. Enumerate with examples the different methods of coding and suggest a suitable method for a large organization. 100-150 for fringe benefits etc.11 However. (3) To carry out an analysis of overhead expenses for control purposes. Standing order number: 11 for indirect labour. the length description of numerous cost accounting heads for ease of recording and controlling of the cost data generated. Number blocks: According to this method a block number is generally earmarked to indicate the major heads of expenditure e. which are amenable to apportionment of overhead expenses on the same basis. Answer Coding is a technique of intelligently describing in number/letters or a combination of both. Question 6 State the objectives of codification of overheads. Methods of codification: The codification of overheads are as follows: important methods of 1. 51-100 for maintenance. Here alphabet stands for the main head of the . (4) To reduce the task of maintaining a huge number of accounts. Combination of symbols and Numbers: Under this method a combination of symbol/alphabet and a number is used to represent a code. Straight Numbering Systems: Under this system each type of expenditure is allotted a fix number. Objective of codification: The codification of overheads are as follows: important objectives of (1) To group items of similar nature. 1-50 for service labour . This is usually accomplished by formulating a coding system. for example: Standing order number: 10 for indirect material. 2. 3.

The Mnemonic method: Under this method the letters alphabets are used as codes to help the memory. 4.). Question 7 Explain what do you understand by the terms stores overheads. Field method numerical codes: Under this method each code number consist of nine digits. Lastly this method is easy to operate in case mechanical system of accounting is in vogue in the concern. costs which cannot be directly attributed to any particular cost unit (jobs. work. For example in the code R1 and R2 .12 Cost Accounting expenditure and the number represents the concerned department. may be used as a code for Mild Steel Bar.B.Repairs of machines. to example under method 4). 01 for waiting of materials and 05 for lathe shop or. For example in code 10/120/01/05. 120 for idle time. Out of the five different methods discussed above for the purpose of codification of overhead expenses. R stands for repair and ‘1’and ‘2’stands for building and machines respectively. order. the next two digits stand for the analysis for expenses. Answer Overheads refer to indirect costs i.4.e. product.S. For example M. The next three digits indicate head of expenses . and last two digits indicate the cost centre. in other words: R1. process. where expenses have been incurred. Also large number of items of overhead expenses can be accommodated under this type of codification. Cite three example of stores overheads. the field method is considered to be most suitable for a large size business organization. The first two digits indicate the nature of expenses viz.. etc.Repairs of buildings R2. Discuss the methods of treatment of stores overhead in cost accounts and state the method which you consider to be good. Code particulars Variable/Idle Time/Waiting for 10/120/01/05 material/Lathe shop 5. The main plus point of this method is that a code given to an item of expense represents four of its characteristics (Ref. variable or fixed. 10 stands for variable cost. Stores overheads include all those expenditure(excluding material cost) which are incurred by stores .

This method of charging overheads to different departments is not considered satisfactory. The following methods are generally used for recovering the stores overheads. storage and issues. Value of material requisitioned. It does not give due weightage to those factors which affect overheads e. if during a given period. inward transportation expenses.Overheads 4. The materials purchased. the total stores overheads will be charged to the two departments in the ratio of 2:3. In the ascertainment of standard overheads recovery rate due consideration is given for the efforts involved in purchasing. weight of different items. Three examples of stores overheads are: (i) (ii) (iii) rent of store – room. (i) (ii) (iii) Number of stores . Under this method a department is charged a higher proportion of stores overheads if the value of the material issued is proportionately higher though the number of requisitions may be less. They are treated as a part of factory overheads and are charged to various production and non . For example.g. storing and issuing different materials requisitioned . (i) Number of stores requisitions: According to this method the stores overheads are charged to different departments on the basis of number of requisitions. Stores overheads are collected under separate standing order number.. insurance. carriage etc. etc (iii) Standard pre-determined rate: Under this method a standard overheads recovery rate is ascertained for the recovery of stores overheads. number of requisitions. ‘A’ department has issued two requisitions and ‘B’ department has issued 3 requisitions and these are the only two departments using the services of the stores department.requisitions. Standard pre-determined rate.production departments on the basis of the extent of service received by each departments. freight. salaries and wages of stores staff and workers. stored and issued by the stores department may be used by the production department as well as by the service departments.13 department to perform its functions such as purchase. (ii) Value of material requisitioned: Under this method. stores overheads are apportioned over different departments by using the basis of the value of the material issued.

The supporters of interest inclusion give the following argument: . Pricing is the domain of top management and sometimes sales management . state whether and. while others hold that interest.4. to what extent the following items are includible in cost . Question 8 In a manufacturing company where costing is done with a view to fix prices. depreciation on plant and machinery – be included as elements of cost. Some favour its inclusion in the Cost Accounts. If also enable the effective control over stores overheads by comparing stores overheads recovered and stores overheads actually incurred. bonus and gratuity .14 Cost Accounting by different departments. Another reason which accounts for its superiority over the other methods is that it ensures uniformity in stores overheads recovery rate throughout the year. It is also free from seasonal fluctuations. and if so the extent to which – interest on borrowing. if so. the pre-determined stores overheads recovery rate is considered the best because it gives due weightage to all such factors which affect the stores overhead. Out of the three methods discussed above. (i) Interest on borrowings: There is a wide difference of opinion among accountants about the treatment of interest on borrowing in cost accounts. being a financial charge. Here the cost accountant is required to analyse whether . should not be included in Cost Accounts. The cost accountant only helps management in providing cost data and also determines the financial effects of fixing prices or the change in prices on the profitability of the undertaking . Answer The Cost Accountant makes no decision on pricing . (i) Interest on borrowing (ii) Bonus and gratuity (iii) Depreciation on plant and machinery . This method of stores overhead recovery enables the firm to use the same rate throughout a financial year.

bonus linked with productivity is definitely a part of the overhead cost. payable irrespective of profit or loss earned by the concern. is not an element of cost of production whereas cost accounting is concerned with determination of true cost of production. However. 2. to narrow down the risk of wrong pricing decision. profits on different jobs requiring different amounts of capital or requiring different periods for completion are not comparable. The amount of bonus. Interest is the cost of the borrowed capital as wages are rewards for the labour.15 1. therefore. it should be treated as an element of cost: (iii) Depreciation on plant and machinery: Depreciation on fixed assets represents the consumption of the value of the concerned assets in the process of operations. incurred directly or indirectly. as the same is payable even in a loss situation. Accordingly. . based on interest being a financial charge. The other viewpoint. Care should be taken to see that no interest on borrowings for asset acquisition is included in cost account. may be included in a direct labour cost to the extent of the minimum bonus. Both are factors of production and as such no distinction should be made between the remuneration of these two factors. Any amount paid as bonus in excess of the minimum may be considered as an appropriation of profit. for the purpose. (ii) Bonus and gratuity: Bonus under the payment of Bonus Act is to be paid compulsorily to the workers although the amount of bonus may vary with amount of profit earned. Without inclusion of interest. A minimum bonus of 8.33% is. it is advisable that interest on borrowings attributable to production process should be taken in the cost statement meant to help the pricing decision. In price determination effort should be made to accumulate as much costs as can be attributable to the production activity. But the proposition for consideration is whether interest on borrowing should be taken into costing for the purpose of price determination or not. however. Comparison of cost is rendered difficult if no interest is taken in business where raw materials in different states of readiness are used. it is indeed directly linked with the wages and is not by any means related to the profits. Accordingly. So far as gratuity is concerned. 3.Overheads 4. This consumption.

(v) Mnemonic method. (ii) To facilitate the task of allocation and apportionment of overheads over different departments or cost centres. (iv) Field method of numerical code. (iii) Combination of letters and numbers. Without this. depreciation charged in the accounts is considered as includible as an element of cost. Question 10 . Question 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). (ii) Number blocks. (iii) To carry out an analysis of overhead expenses for control purposes. (c) Methods of codification: (i) Straight numbering system. Codes are developed after accepting/developing a coding system.4. (v) To help the task of machine accounting systems in large organization. (b) Objectives of codification: (i) To group items of similar nature which are amenable to apportionment of overhead expenses on the same basis. (iv) To reduce the task of maintaining a huge number of accounts. Hence.16 Cost Accounting is therefore an indirect cost of the production and operations. true cost of production cannot be obtained. Answer (a) Codification of overheads: It is a technique of intelligently describing in number/letters or a combination of both. The lengthy description of numerous Cost Accounting heads for ease of recording and controlling of the cost data generated.

Such costs are directly charged to the product. which is not directed towards any specific practical aim (under basic research) and is directed towards a specific practical aim or objective(under applied research). If applied research is conducted for searching new products or methods of production etc. production method/techniques or plants/ equipments.17 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 (d) Expenses on Removal and Re-erection of Machinery.. then such costs should be charged to the concerned product. begins with the implementation of the decision to produce a new or improved product or to employ a . Research Cost may be incurred for carrying basic or applied research. if it relates to all existing products and methods of production then it should be treated as a manufacturing overhead of the period during which it has been incurred and absorbed. Answer (a) Research and Development Cost: Research and Development Cost is the cost/expense incurred for searching new or improved products. if it is solely incurred for it. It may be spread over a number of years if research is not a continuous activity and amount is large.Overheads 4. Both basic and applied research relates to original investigation to gain from new scientific or technical knowledge and understanding. For example. then the research costs treatment depends upon the outcome of such research. If research proves successful. If research findings are expected to produce future benefits or if it appears that such findings are going to result in failure then the costs incurred may be a mortised by charging to the Costing Profit and Loss Accounts of one or more years depending upon the size of expenditure. Treatment in Cost Accounts Cost of Basic Research (if it is a continuous activity) be charged to the revenues of the concern. Development Costs. Cost of applied research.

In Cost Accounts they are treated as follows: (i) It is treated as a direct material cost in the case of those products which cannot be sold without the use of a packing. (d) Expenses on Removal and Re. (ii) It may be treated as distribution overhead if packing expenses are incurred to facilitate the transportation of finished products. change in the follow of production. boxes. All such expenses are treated as production overheads. When amount of such expenses is large. etc.18 Cost Accounting new or improved method. (iii) It may be treated as advertisement cost and included in selling overheads if it is incurred for advertisement to make the product attractive. Bread. (c) Fringe Benefits: Additional Benefits paid to the employees of a concern and are not related to the direct efforts of the employees. Expenditure incurred on fringe benefits in the case of factory workers should be treated as factory overheads and are apportioned among all the production and service departments on the basis of the number of workers in each department. . paste etc.erection of Machinery: Expenses are sometime incurred on removal and re-erection of machinery in factories. medical benefits. subsidised facility etc. containers or bags etc. are called fringe benefits. it may be spread over a period of time. leave pay. bottles. state insurance. employer’s contribution to provident fund. (b) Packing Expenses: It includes the expenses incurred on wrapping. The treatment of development expenses is same as that of applied research. an addition or alteration in the factory building. Fringe benefits to office and selling and distribution staff should be treated as administration and selling and distribution overheads respectively and are recovered accordingly.4. They include holiday pay. then they may be charged to Costing Profit and Loss Account. Such expenses may be incurred due to factors like change in the method of production. For example ink-pot . If such expenses are incurred due to faulty planning or some other abnormal factor. gratuity and pension schemes. tying.

Direct material cost method 6.Overheads 4. Rate per unit of output 2. that is why it is called a ‘pre-determined rate’. Direct labour cost method 3. Prime cost method. Machine hour rate method 5. (ii) Improper estimation of overhead. Some important ones are. The use of the pre-determined rate of recovery of overheads enables prompt preparation of cost estimates and quotations and fixation of sales prices. policy of management etc. pre-determined overhead rates are particularly useful. Reason for over/under absorption of overheads: Over-absorption of overheads arises due to one or more of the following reasons. . It is calculated by dividing the budgeted overhead expenses for the accounting period by the budgeted base for the period. organisational set-up. Bases Available: The bases available for computing ‘predetermined rate of recovery of overheads’ are given below:1. as for example in the case of cost plus contracts. The choice of a suitable method for calculating ‘pre-determined rate of recovery of overhead. (iv) Unanticipated changes in the methods or techniques of production.type of industry. (iii) Error in estimating the level of production. nature of product and processes of manufacture. For prompt billing on a provisional basis before completion of work. depends upon several factors. Direct labour hours method 4. This rate of overhead absorption is determined prior to the start of the activity.19 Question 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? Answer The term ‘pre-determined’ rate of recovery of overheads’ refers to a rate of overhead absorption. nature of overhead expenses.

(ii) Writing off to costing profit & loss account: When over or underabsorbed amount is quite negligible and it is not felt worthwhile to absorb it by using supplementary rates. this method may be used when the normal business cycle extends over more than one year. Methods for absorbing under/over absorbed overheads: The over-absorption and under-absorption of overheads can be disposed off in cost accounting by using any one of the following methods: (i) Use of supplementary rates (ii) Writing off to costing profit & loss Account (iii) Carrying over to the next year’s account (i) Use of supplementary rates: This method is used to adjust the difference between overheads absorbed and overhead actually incurred by computing supplementary overhead rates. Such rates may be either positive or negative. Further. Therefore.4. (vi) Seasonal fluctuations in the overhead expenses from period to period. In case underabsorption of overheads arises due to factors like idle capacity. Question 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. or in the case of a new project.20 Cost Accounting (v) Under-utilisation of the available capacity. 5 per machine hour. The negative rate. However. defective planning etc. (iii) Carrying over the next year’s account: Under this method the amount of over/under absorbed overhead is carried over to the next period.. this method is not proper and has only a limited application. then the said amount be transferred to costing profit & loss Account. overhead of a particular department are recovered on the basis of Rs. The effect of applying such a rate is to make the actual overhead get completely absorbed. comparison between one period and another is rendered difficult. it may also be transferred to costing profit & loss Account. This method is not considered desirable as it allows costs of one period to affect costs of another period. A positive rate is intended to add the unabsorbed overheads to the cost of production. however corrects the cost of production by deducting the amount of over-absorbed overheads. the output is low in the initial years. The total expenses .

000 units were sold. 80. The under/over absorption of overheads arise due to the following reasons: (1) Error in estimating overhead expenses. If the actual expenses fall short of the amount applied to production. How would you treat the under absorbed overhead in the cost accounts? Answer (a) Production Overheads are usually applied to production on the basis of predetermined rates . (3) Unanticipated changes in methods of production.000 hours respectively. 15.000 was in respect of expenses of the previous year booked in the current month (August). On analysing the reasons. The amount of expenses actually incurred and the amount of overhead applied to production will seldom be the same. . it was found that 60% of the under absorbed overhead was due to defective planning and the rest was attributed to normal cost increase. the amount of under or over absorbed over-heads is large the cost of the jobs may be adjusted by means of a supplementary rates The supplementary rate here is determined by dividing the amount of under or over absorbed overhead by the actual base.21 incurred and the actual machine hours for the department for the month of August were Rs. (2) Error in estimating the level of production. 80. Of the amount of Rs. the rate of overhead absorption is reduced to the extent of supplementary rate. Whereas in the case of over. there is a case of under absorption.000. Under – absorption of overheads is set right by increasing the rate of overhead absorption to the extent of supplementary rate.000 units of which 30.The pre-determined rates may be based on estimated costs. Treatment of under/over absorption in Cost Accounts Under/overabsorbed overheads may be treated in Cost Accounts by adopting the following methods: (i) Use of supplementary rates : In case. 5. Actual production was 40. Rs. If the actual expenses exceeds the amount applied to production.000 became payable due to an award of the Labour Court and Rs. there is said to be an over absorption of production overheads.absorption of overheads.Overheads 4. Some difference is inevitable. (4) Seasonal fluctuations in the overhead expenses from period to period.000 and 10.

Finished Goods and Cost of Sales by supplementary rate (40% of Rs. 15. 60 percent of under absorbed overhead is due to defective planning. This being abnormal.000 units were sold. 10.000 hours @ Rs.000) 2.per hour Under absorbed overheads Rs.000 ______ 10. (b) Under-absorbed Overhead Expenses during the month of August: Total Expenses incurred in the month of August Less: The amount paid according to labour court award (Assumed To be non. 6. It is also given that 60% of the under-absorbed overhead was due to defective planning and the rest was attributed to normal cost increase.4. should be debited to Profit and Loss A/c (60% of Rs. 10. 1.22 Cost Accounting (ii) Write off to Costing Profit and Loss Account: When the amount of under-or-over absorbed overheads is small the simple method is to write it off to the Costing Profit and Loss Account.000 10.000 units were produced out of which 30.000 .000 20. 80.000 Treatment of under – absorbed overhead in the Cost Accounts It is given in the question that 40.000) Rs.recurring) Expenses of previous year Net overhead expenses incurred for the month Overhead recovered for 10. This may be done by transferring the amount either to a Suspense or Overhead Reserve Account. 5/.000 50.000 40. Balance 40 percent of under-absorbed overhead should be distributed over. 5.000 Rs.000 Rs.000 60. (iii) Absorption in the accounts of subsequent years: The amount of under or over absorbed overheads may be carried over as a deferred charge of deferred credit to the next accounting year.

000 may be distributed over Finished Goods and Cost of Sales as follows.23 Rs. 1.000 .000 Cost of Sales *Rs.Overheads 4. Finished Goods *Rs. 3.4.

(9) Personal Department expenses. (5) Credit Department Expenses.absorbed overhead recovery – Amount of under–absorbed overheads charged to finished goods (10.000 (a) Distinguish between allocation.4. (4) Purchase Department Expenses. Apportionment and Absorption of Overheads: Allocation: According to ICMA terminology: “ the allotment of whole items of cost to cost centres or cost units”. (b) A departmental store has several departments.000 ×0.10P) Question 13 Re. (10) Answer (a) Distinguish between Allocation.000 – Units produced : 40. 1. Sales Commission .000 Rs. (2) Rent (3) Delivery Expenses. apportionment and absorption of overheads. What bases would you recommend for apportioning the following items of expense to its departments (1) Fire insurance of Building.10P) – Amount of under–absorbed overheads charged to Cost of sales (30.000 – Rate of Under.10 per unit Rs. (6) General Administration Expenses. is known as allocation. (7) Advertisement. 3. (8) Sales Assistants Salaries.24 Cost Accounting *Working notes – Under absorbed overhead :Rs 4. 0.000 ×0.

(b ) (1) (2) (3) (4) (5) (6) (7) (8) (9) (1 0) Items of expenses Fire Insurance of Building.25 Apportionment: “The allotment to two or more cost centres of a proportions of common items of cost on the estimated basis of benefit received” is known as apportionment. Allocation of cost involves the process of charging total expenditure to cost centres or cost units while the apportionment of overheads involves the process of charging expenditures to cost centres or cost units in the specified proportions.Overheads 4. Rent Delivery Expenses. Sales Commission Basis For apportioning Floor Area Floor Area Volume or Distance or Weight department No. Purchase Expenses General Expenses. Advertisement. the overhead costs are either allocated or apportioned over different cost centres r cost units and afterwards they are absorbed basis by the output of the same cost centres. of Purchase order/Value of Purchases Credit Sales Value Administration Works cost Actual sales Actual/Time devoted Department No. of Employees Actual Credit Department Expenses. Absorption of overheads takes place only after the allocation and apportionment of overhead expenses. In other words . 1996. Personal expenses. Question 14 Define administration overheads and state briefly the treatment of such overheads in Cost Accounts. Sales Assistants Salaries. Absorption of Overheads : It is defined as the process of absorbing all overhead costs allocated or apportioned over particular cost centre or production department by the units produced. (Nov. 4 marks) Answer .

Hence these overheads should be transferred to the Costing Profit and Loss Account. (ii) Apportionment between Production and Selling and Distribution: According to this method. office administration and business management are included in administration overheads. interest like wages should also be included in the cost of production. Answer Arguments for the inclusion of interest on capital in cost accounts: 1. Question 15 Enumerate the arguments for the inclusion of interest on capital in cost accounts. all expenses. The exclusion of interest from cost accounts. (iii) Treat as a separate element of total cost: Here administration overheads are considered as a cost of a distinct and identifiable operation of the organisation necessary to carry on its activity. directing the organisation and controlling the operation of an undertaking. While determining the total cost.4. control. Both are factors of production and. In other words. incurred on policy formulation. particularly in businesses where raw material is used in different states of . Treatment Accounting of Administrative Overheads in Cost (i) Charge to Costing Profit and Loss Account: According to this method administrative overheads should be treated as fixed cost as they are concerned with the formulation of policy. These are not related directly to production activity or function. therefore should not be treated differently in cost accounts. Interest is the cost of capital as wages are the reward for labour.26 Cost Accounting Definition of Administration Overhead: These are costs of formulating the policy. Therefore these overheads are recovered separately on some equitable basis which may be on cost or sales basis. Therefore these overheads should be divided on some equitable basis between production and selling and distribution activity. direction. 2. it is assumed that administrative overheads are incurred both for production and for selling and distribution.

the use of blanket rate will give misleading results in the determination of the production cost . 3. total labour hours. Question 16 What is blanket overhead rate? In which situations. 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. If such conditions do not exist. machine hours etc. blanket rate is to be used and why? (May 1999. Profit on different jobs/ operations requiring different periods for completion may not be comparable if interest on capital is not included in their total cost. specially when such a cost ascertainment is carried out for giving quotations and tenders.Overheads 4. Question 17 What is ‘Idle Capacity ‘? How should this be treated in cost accounts? (May 1997. The significance of time value of money is recognized only when interest is treated as an element of cost. It may be computed by using the following formulae: Blanket overhead rate = O e e d c s ts fo th w o fa to v rh a o r e h le c ry *T ta u its o th s le te b s o l n f e e c d ae * The selected base can be the total output. 5. Sometime exclusion of interest cost may lead the management to take wrong decisions. 3 marks) Answer Blanket overhead rate is one single overhead absorption rate for the whole factory.27 readiness would distort costs and render their comparison a difficult one. It may also be used in those units in which all products utilise same amount of time in each department. 4. 6 marks) Answer Idle Capacity: .

non availability of materials. skilled labour. 4 marks) . Idle capacity is associated with costs which are represented mostly by fixed charges such as depreciation. In brief. insurance premium.4. fuel or supplies. rent. (iii) Idle Capacity cost due to trade depression is abnormal in nature and thus it should be charged to costing profit and loss account. 2004. It usually arises due to factors which the management of a business concern considers beyond its control. (i) Normal Idle capacity cost due to unavoidable reasons may be included in works overheads and be absorbed into the cost of production either by inflating the overhead rate or by means of a supplementary overhead rate. Idle capacity in fact is the difference between the practical capacity and the capacity based on sales expectancy. repairs and maintenance. Question 18 Discuss the step method and reciprocal service method of secondary distribution of overheads. rates. (November. management supervisory costs. equipment or department which cannot be used gainfully. idle capacity is unused capacity of a plant. seasonal nature of product and lower sales expectancy. These costs may be treated in the following ways in cost accounts. Treatment of Idle Capacity in cost accounts: Idle capacity costs may be normal or abnormal. which cannot be absorbed or recovered due to under utilisation of plant capacity.28 Cost Accounting It is that part of the practical capacity which cannot be utilised due to lack of demand. shortage of power. (ii) Abnormal Idle Capacity cost due to avoidable reasons such as lack of proper planning and control should be charged to costing profit and loss account.

• Carry toward to accounting period if operating cycle exceeds one year.4 marks) Answer Treatment of under absorbed and over absorbed factory overheads in cost accounting. Reciprocal service method: This method recognises the fact that where there are two or more service dep't. . Factory overheads are usually applied to production on the basis pre-determined rate = E tim te n rm l o e e d fo th p rio s a d o a v rh a s r e e d B d e d N . The methods available for dealing with reciprocal servicing are: – – – Simultaneous equation method Repeated distribution method Trial and error method Question 19 Discuss the treatment of under absorbed and over-absorbed factory overheads in Cost Accounting. (May. thus sequence of apportionments has to be selected. The sequence here begins with the dep't that renders service to the max number of other service dep't. they may render service to each other and. 2004. the cost of service dep't serving the next largest number of dep't is apportioned. therefore. these inter dep't services are to be given due weight while re-distributing the expense of service dep't. After this.Overheads 4.29 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 dep't. o u its d rin th p rio u g te o f n u g e e d The possible overheads are options for treating under / over absorbed • Use supplementary rate in the case of substantial amount of under / over absorption • Write it off to the costing profit & loss account in the event of insignificant amount / or abnormal reasons.

30 Cost Accounting Question 20 Discuss the problems of controlling the selling and distribution overheads (May. 2004.4. 3 marks) .

31 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. it is the process of identifying. 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. which method is conceptually preferable. Question 21 Distinguish between cost allocation and cost absorption (November.Overheads 4. The laid down standards on comparison with actual overhead expenses will reveal variances. In other words. (c) Standards of selling & distribution expenses may be set up for salesmen. Out of these three. unit. which are beyond the control of management. products etc. Question 22 Discuss in brief three main methods of allocating support departments costs to operating departments. 2 marks) Answer Cost allocation and Cost absorption: Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. 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. assigning or allowing cost to a cost centre or a cost. nature of competition etc. liking etc. ascertaining variances and finally taking suitable actions. (ii) They are dependent upon customers' behaviour. territories. which can be controlled by suitable action. (iii) These expenses are of the nature of policy costs and hence not amenable to control. . (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. 2001.

4 marks) .4.32 Cost Accounting (November. 1999.

cost centers or cost units. (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. process. 4 . support department costs are directly apportioned to various production departments only. The reciprocal service method is conceptually preferable. This method is widely used even if the number of service departments are more than two because due to the availability of computer software it is not difficult to solve sets of simultaneous equations. In this manner we finally arrive on the cost of production departments only. the rent charges of a (November 1994.Overheads 4. After this the cost of support department serving the next largest number of departments is apportioned.33 Answer The three main methods of allocating support departments costs to operating departments are: (i) Direct re-distribution method: Under this method. The methods available for dealing with reciprocal services are: (a) Simultaneous equation method (b) Repeated distribution method (c) Trial and error method. (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. For example. these interdepartmental services are to be given due weight while redistributing the expenses of the support departments. This method does not consider the service provided by one support department to another support department. the same item of expense may be treated as a chargeable expense or an indirect cost. Depending on the situation. products. therefore. These are also known as direct expenses. Question 23 Write short notes on Chargeable Expenses marks) Answer Chargeable Expenses: These are the expenses which can be charged directly to jobs.

Question 24 Explain Single and Multiple Overhead Rates. 3. Travelling expenses to site. Hire charge in respect of special machinery or plant. The following may also be treated as chargeable expenses in relation to a product or job: 1. (November. But if the same machine is used for various purposes. total labour hours.4. then the rent charges will be treated as an indirect cost and are apportioned to concerned cost centers on an equitable basis. etc. Multiple overhead rate: It involves computation of separate rates for each production department.34 Cost Accounting machine specifically hired to complete a particular job will be a direct charge on the job. Cost of patents. It may be computed as follows: Multiple overhead rate = O e e d a c te /a p o n d to e c d p rtm n /c s c n v rh a llo a d p p rtio e ah ea e t o t e tre o p d c r ro u t C rre p n in b s o s o d g ae . The single overhead rate may be applied in factories which produces only one major product on a continuous basis. cost center and each product for both fixed and variable overheads. Architects. 4 marks) Answer Single and Multiple Overhead Rates: Single overhead rate: It is one single overhead absorption rate for the whole factory. 2000. Freight inward on special material. service department. 5. surveyors and other consultant's fees. 4. It may also be used in factories where the work performed in each department is fairly uniform and standardized. It may be computed as follows: Single overhead rate = O e e d c s fo th e tire fa to v rh a o ts r e n c ry T ta q a tity o th b s s le te o l un f e ae e c d The base can be total output. total machine hours. 2.

However. it may be noted that in the case of owned factory. However. 2 marks) Answer Notional Rent: It is a reasonable charge raised in the cost accounts for the use of owned premises. cost for the same is accounted for by means of depreciation. .35 Under multiple overhead rates. Question 25 What is notional rent of a factory building? Give one reason why it may be included in cost accounts. One reason for the use of such a nominal charge is to enable comparison between the cost of items made in factories which are owned and in rented factories. 1995. jobs or products are charged with varying amount of factory overheads depending on the type and number of departments through which they pass. (November.Overheads 4. the degree of accuracy desired and the clerical cost involved. the number of overhead rates which a firm may compute would depend upon two opposing factors viz.

The welfare activities on which these expenses are usually incurred may include canteen. These expenses should be separately recorded as Welfare Department Costs. 1996) (2 marks) (November. leave pay. Question 27 How would you treat the following in Cost Accounts? (i) Employee welfare costs (ii) Research and development costs (iii) Depreciation Answer (i) Employee Welfare Costs: It includes those expenses. Another view is that. especially where they arise in the normal course of trading. leave travel concession to home town or any place in India. 1999. etc. play grounds. bad debts are a part of selling and distribution overhead. hospital. These Costs may be apportioned to (2 marks) (2 marks) (May. (ii) Bad debts: There is no unanimity among various authors about the treatment of bad debts. Therefore they should be treated in cost accounts in the same way as any other selling and distribution expense. children education allowance. They include – Housing facility.4. etc. 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. holiday pay. Some authors believe that bad debts are financial losses and therefore should not be included in the cost of a particular product or job. 4 marks) .36 Cost Accounting Question 26 How do you deal with the following in cost accounts? (i) Fringe benefits (ii) Bad debts. 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. which are incurred by the employers on the welfare activities of their employees.

In costing. Treatment in Cost Accounts: Cost of Basic Research (if it is a continuous activity) be charged to the revenues of the concern. if relates-to all existing products and methods of production then it should be treated as a manufacturing overhead of the period during which it has been incurred and absorbed. Cost of applied research. (iii) Depreciation: It represents the fall in the asset value due to its use. For example.37 production cost centres on the basis of total wages or the number of men employed by them. depreciation on plant and machinery is normally treated as part of the factory overheads. It may be spread over a number of years if research is not a continuous activity and amount is large. (ii) Research and development costs: It is the cost/expense incurred for searching new or improved products. Both basic and applied research relates to original investigations to gain from new scientific or technical knowledge and understanding. It is an important element of cost and without this true cost of production cannot be obtained. The treatment of development expenses is same as that of applied research. If research proves successful. then the research costs treatment depends upon the outcome of such research. Re– search cost may be incurred-for carrying basic or applied research. Depreciation is an indirect cost of production and operations. it is solely incurred for it. If applied research is conducted for searching new products or methods of production etc. production methods/techniques or plants/equipments.Overheads 4. Development Costs begins with the implementation of the decision to produce a new or improved product or to employ a new or improved method. which is not directed towards any specific practical aim (under basic research) and is directed towards a specific practical aim or objective (under applied research). then such costs will be charged to the concerned product. wear and tear and passage of time. Such costs are directly charged to the product. Question 28 . if research findings are expected to produce future benefits or if it appears that such findings are going to result in failure then the costs incurred may be amortised by charging to the Costing Profit and Loss Account of one or more years depending upon the size of expenditure.

Factory overheads represent all those indirect costs that are incurred in the manufacturing process. Usually. consumable stores. 'allocation' and 'absorption' of overheads. Office and administrative Overheads and Selling and distribution Overheads. overhead costs are classified under three broad categories viz. sales-promotion expenses.4. 1998. factory rent. 5 marks) Answer Classification of overheads: It. factory building. For example. Help rendered in controlling overheads: .38 Cost Accounting Write a note on 'classification'. the overhead costs are either allocated or apportioned over different cost centres or cost units and afterwards they are absorbed on equitable basis by the output of the same cost centres. Absorption of overheads: It is defined as the process of absorbing all overhead costs allocated or apportioned over particular cost centre or production department by the units produced. How does it help in controlling overheads? (May. Absorption of overheads takes place only after the allocation and apportionment of overhead expenses. In other words. It includes salaries of sales staff and commission. Factory Overheads. Allocation of overheads: It refers to the allotment of whole items of overhead cost to cost centres or cost units. For example. undivided items of expense to a particular department or cost centre. repairs and maintenance. classes or groups in which overhead costs may he sub-divided. departmental salaries directly related to various departments are allocated to them. warehousing costs etc. allocation of overhead means the allotment of the whole. In other words. means determination of categories. depreciation of plant. advertising expenses. Selling and distribution overheads are the expenses incurred for selling and distribution of products. Office and administrative overheads represent costs which are associated with the administration and maintenance of the office.

Question 29 Distinguish between fixed and variable overheads. Secondly. These assigned costs are periodically totaled and listed on performance report which also has the figures of budgeted costs. the overhead costs assigned to cost centres are used for cost control and performance evaluation purposes. It increases or decreases in direct relation to any increase or decrease in output. the accumulated production cost centre overhead.Overheads 4. In other words. etc. the amount of fixed overhead tends to remain constant for volumes of production within the installed capacity of plant. Answer Fixed and Variable Overheads: Fixed overhead expenses do not vary with the volume of production within certain limits. Variable overhead cost varies in direct proportion to the volume of production. costs are assigned in the second stage of the procedure to products to satisfy financial accounting requirements for inventory valuation.39 The classification. allocation and absorption of overhead costs over different cost centres helps in two ways. Firstly. Differences between budgeted and actual costs for each item of expenditure are highlighted in the performance reports and provide feedback information for performance evaluation and cost control purposes. rent of office. . For example. salary of works manger.

3 marks) . the cost should be charged to Costing Profit and Loss Account. being abnormal in nature the cost should also be charged to the Costing Profit and Loss Account. Costs associated with idle capacity are mostly fixed in nature. etc. 2001. 2002. 4 marks) Answer Treatment of idle capacity cost in Cost Accounts: It is that part of the capacity of a plant. – Room / day (May. Question 31 Select a suitable unit of cost to be used in the following: (i) Hospital (ii) City Bus Transport (iii) Hotels providing lodging facilities Answer Industry of Product (i) Hospital (ii) City Bus Transport (iii) Hotels providing lodging facilities Unit of cost – Patient bed / day – Passenger – km.40 Cost Accounting Question 30 How would you treat the idle capacity costs in Cost Accounts? (November. etc. etc. These costs remain unabsorbed or unrecovered due to under-utilisation of plant and service capacity. (iii) If the idle capacity cost is due to trade depression. (i) If the idle capacity cost is due to unavoidable reasons .4.such as faulty planning.a supplementary overhead rate may be used to recover the idle capacity cost. Idle capacity costs are treated in the following ways in Cost Accounts. The idle capacity may arise due to lack of product demand. In this case.. shortage of power. shortage of skilled labour. no availability of rawmaterial. machine or equipment which cannot be effectively utilised in production. the costs are charged to the production capacity utilised. (ii) If the idle capacity cost is due to avoidable reasons .

Answer The relative merits and disadvantages of the three approaches recommended by Ventilators Ltd. Depreciation of small tools may be charged to: – – Factory overheads Overheads of the department using the small tool. files etc. (ii) Cost of small tools should be charged fully to the departments to which they have been issued. and get the off-season production stored on the premises. (May.Overheads 4. chisels. screw cutter. but maintain prices at levels that will enable regular movement of goods throughout the year. Discuss the proposals. specially in engineering industries. 2002. (c) Extend special terms to dealers. Revaluation method of depreciation may be used in respect of very small tools of short effective life. Such tools include drill bits. Question 33 Ventilators Ltd. The approaches recommended are: (a) Maintain production at an even pace throughout the year. (b) Maintain production at an even pace but offer dealers a special discount for off-season purchases.41 Question 32 Discuss the treatment in cost accounts of the cost of small tools of short effective life. are discussed below: Approach (a) Merits relative merits and disadvantages of above . wants to stabilize its production throughout the year. Treatment of cost of small tools of short effective life: (i) Small tools purchased may be capitalized and depreciated over life if their life is ascertainable. 4 marks) Answer Small tools are mechanical appliances used for various operations on a work place. if their life is not ascertainable.

For example. Disadvantages (1) It may reduce profitability of the firm. (4) It will help the organisation to deal effectively with unforeseen circumstances such as labour strike or load shedding. if a concern dealing in ready-made garments for winter builds up a large inventory. production throughout the year may involve a high degree of risk. (3) It will help in reducing costs per unit by avoiding shut down costs and maintaining production at an even pace and. thus. in fact.42 Cost Accounting (1) It will help the concern to make full and effective use of the plant. score over competitors. Disadvantages (1) Storing productions during the off-season will involve extra interest costs because of the need for higher working capital. it may suffer heavy losses due to fashion changes. (2) It will provide management ample time to think either of diversifying or entering into allied products. which will account for the increase of profit at a faster rate (3) It reduces risk of deterioration. obsolescence. (2) In case of seasonal consumer items.4. (4) It will reduce the inventory carrying cost. depending on the rate of discount to be offered. manpower and other resources. affecting sale for the year as a whole. (2) It will have a higher inventory turnover ratio. Here the risk is. etc. Approach (b) Merits (1) It involves less working capital in comparison with proposal (a). etc. Approach (c) Merits (1) It will ensure a regular product market round the year. . passed on to the dealers. (2) It will place the concern in a better position to meet the demand of the customers during the season. (3) The firm may face difficulty in meeting its short-term financial commitments due to cash outflows even during the off-season. (2) Dealers may offer the same lower price during the season as well.

. Disadvantages (1) It gives a low margin of profit (2) It is really difficult to maintain regular movement of a product having a seasonal demand only.Overheads 4.43 These two merits are in addition to those stated under (b). Question 34 Treatment of Interest paid in Cost Account. Proposal (b) appears to be more suitable for achieving the objectives of stabilising the production at an even pace throughout the year but the effect on profits needs to be very carefully seen.

5.44 Cost Accounting Answer (a) Treatment of Interest Paid in Cost Accounts: There is a wide difference of opinion among accountants about the treatment of interest paid on capital in Cost Accounts. It would be wrong to accept any capital expenditure proposal without taking into account the interest on capital investment along with other costs of operations. 2. Therefore. profits on different jobs or operations may not be comparable..4. Another merchant may buy already seasoned timber which is ready for use or sale. the former timber merchant must add interest on funds invested for the period he had to wait. he should include interest in his costs to arrive at the true profits from the business which may be considered as his reward for his exertions. For example. 4. It is argued that interest is the cost of capital as wages are the reward for labour. The significance of time-value of money is recognised only when interest is treated as an clement of cost. A person can invest his money in government or other safe securities and get regular income without much efforts. waiting for a number of years before he can use or sell it. being a financial charge should not be included in Cost Accounts. . The latter will pay a much higher price per unit. The exclusion of interest from Cost Accounts would distort cost in certain industries like wine-making timber-maturing. where the waiting period is long. One of the reasons for this higher price may be on account of interest charges on the investment during the period when timber was seasoned. Many times exclusion of interest cost may lead the management to take wrong decisions. particularly in the case of replacement of human labour by machines. Some favour its inclusion in the costs while others say that interest. If he invests the same money in business. Therefore if wages are included in cost of production. Both are factors of production. Without inclusion of interest on capital. 3. for proper comparison of costs. why not interest. etc. The following are the arguments given in favour of inclusion of interest in cost computations: 1. a timber merchant may buy standing trees and then season the timber himself.

It is not easy to calculate the interest cost on capital. e. there exists a variety of rates which are affected by a number of factors such as risk period of maturity. bank rate etc. (November.45 Arguments against the inclusion of interest in Cost Accounts are: 1. 4. capital employed.absorbed and underabsorbed amount of overheads can be treated in Cost Accounts by following any one of the methods explained below: Cost Accounts treatment of under-absorption and over. cannot be treated as an element of cost. But it should certainly be taken into account while making cost comparisons and preparing cost reports for management decisions (specially pricing decisions). determination of a proper rate of interest will also pose a problem. 1998. The over.Overheads 4.g. 2. Where one manufactures a number of products.absorption of overheads: . Irrespective of the method used for the recovery of overheads. 3. If the absorbed amount is more than the overheads actually incurred then such a difference is termed as an over absorption of overheads. 4 marks) Answer Production overheads are generally recovered or charged on the goods on some predetermined basis. Payment of interest by a firm depends purely on its financial policies. Its calculation may lead to various complications because of different interpretations of the term capital.. therefore. how under absorption and over-absorption of overheads are treated in Cost Accounts. interest on capital is difficult to apportion to each product as no specific basis for apportionment is acceptable. owner's capital. If the recovery is less than the actual overheads incurred then the difference is termed as under absorption of overheads. Question 35 Explain. It is argued that interest is a purely financial matter and. interest need not be recorded in cost accounts. etc. In the market. In conclusion it may be said that atleast on the ground of practical difficulty. fixed capital. it has been observed that a difference arises between the amount of overheads absorbed and the amount of overheads actually incurred. Moreover.

this method may be used when the normal business cycle extends over more than one year.46 Cost Accounting The under-absorption and over-absorption of overheads can be disposed off in cost accounting by using any one of the following methods. 1998. However. The negative rate. The effect of applying such a rate is to make the actual overheads get completely absorbed. then the said amount may be transferred to Costing Profit & Loss Account. This method is not considered appropriate as it allows costs of one period to affect costs of another period.4. 4 marks) . or in the case of a new project where the output is low in the initial years. In case under-absorption of overheads arises due to factors like idle capacity. Question 36 How do you deal with the following in Cost Account? (i) Research and Development Expenses (ii) Fringe benefits Answer (November.. defective planning etc. Therefore. however corrects the cost of production by deducting the amount of overabsorbed overheads. Further. (iii) Carrying over to the next year's account: Under this method the amount of under/over-absorbed overhead may be carried over to the next year's account. this method is not proper and has only a limited application. (ii) Writing off to Costing Profit & Loss Account: When under or over-absorbed amount is quite negligible and it is not felt worthwhile to absorb it by using supplementary rates. (i) Use of supplementary rates (ii) Writing off to Costing Profit & Loss Account (iii) Carrying over to the next year's account (i) Use of supplementary rates: This method is used to adjust the difference between overheads absorbed arid overheads actually incurred by computing supplementary overhead rates. Such rates may be either positive or negative. comparison between one period and another is rendered difficult. A positive rate is intended to add the unabsorbed overheads to the cost of production. it may also be transferred to Costing Profit & Loss Account.

Both basic and applied research relates to original investigations to gain from new scientific or technical knowledge and understanding. Such expenses are directly charged to the product. If research proves successful. Development expenses begins with the implementation of the decision to produce a new or improved product or to employ a new or improved method. production methods / techniques or plants / equipments. then such costs will be charged to the concerned product. If applied research is conducted for searching new product or methods of production etc.. if research findings are expected to produce future benefits or if it appears that such findings are going to result in failure then the costs incurred may be a mortised by charging to the Costing Profit and Loss Account of one or more years depending upon the size of expenditure. if it is solely incurred for it. which is not directed towards any specific practical aim (under basic research) and is directed towards a specific practical aim or objective (under applied research). For example. Expense of applied research. These additional benefits are popularly called fringe benefits. if relates to all existing products and methods of production then it should be treated as a manufacturing overhead of the period during which it has been incurred and absorbed.47 (i) Research and Development Expense: Research and Development expense is the expense incurred for searching new or improved products. They include: (i) Housing (ii) Children education allowance (iii) Holiday pay (iv) Leave pay . Research expense may be incurred for carrying basic or applied research. (ii) Fringe benefits: In every organisation.Overheads 4. workers are paid some benefits in addition to their normal wage or salary. It may be spread over a number of years if research is not a continuous activity and amount is large. Treatment in Cost Accounts: Expense of Basic Research (if it is a continuous activity) be charged to the revenues of the concern. then the research expense treatment depends upon the outcome of such research. The treatment of development expenses is same as that of applied research..

48 Cost Accounting (v) Leave travel concession to home town or any place in India etc. leave and absenteeism and idle time amount to 96 hours.000 lbs 66.000 lbs 20. of Employees Machine shop Assembly Machine shop Assembly Finished Goods Material Q Opening stock 33. The factory works 5 days of 8 hours a week in a normal 52 weeks a year.4.000 lbs Closing stock (Estimated) 30. Fringe benefits to office and selling and distribution staff should be treated as administration overheads and selling and distribution overheads respectively and recovered accordingly. On an average statutory holidays. 6 per lb Rs 4 per lb .20 per hour 600 180 Material P Material P Material Q Rs. in a year.000 54.000 lbs units Rs 4 per hour Rs 3. 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.000 units 25. 80 hours and 64 hours respectively. The other details are as under Purchase price Comprehensive Labour rate No. Overheads are absorbed at a blanket rate of 331/3% on Direct Labour. Manufactures and sells a single product and has estimated a sales revenue of Rs 126 lakhs this year based on a 20% profit on selling price. Question 37 Soloproducts Ltd. Expenses incurred on fringe benefits in respect of factory workers should be treated as factory overheads and apportioned among the production and service departments on the basis of number of workers in each department.

000 Rs.26.00. 4 Overheads 33-1/3% of Direct Labour Cost Cost (per unit) Selling price (per unit) 12 72 90 = Rs.6 Labour cost Machine shop 7 hrs x Rs. (a) The number of units of the product proposed to be sold Selling price (per unit) Total sales revenue 1. Statement of selling price per unit of the product Material cost P: 3 lbs x Rs.3. 28 36 Assembly shop 2.49 You are required to calculate: (a) The number of units of the product proposed to be sold. Answer Working Notes: 1.5 lbs x Rs.20 = Rs. 90 Number of units of the product proposed to be sold 1. (b) Purchased to be made of materials P and Q during the year in Rupees.40.5 hrs x Rs.Overheads 4. 18 Rs. Rs. along with your comments. 8 = Rs. (c) Capacity utilization of machine shop and Assembly section.4 = Rs Add: Profit 20% of selling price or 25% on cost 18 2.000 Units . The comprehensive labour rate has been assumed as direct labour. 6 24 Q: 1.

000 54.00 0 Working Note: Number of units of finished goods to be manufactured during the year = stock = Sales (units) during the year + Closing balance – Opening 1.840 hrs.500 Closing Opening Material Purcha Amount balanc balance to be se e of of purchased price Rs.000 units = 1.000 0x3= 4.000 units (c) Capacity Utilisation Statement of Machine shop and Assembly Section Machine shop Hours available during the year (See working 600 persons x 1.000 33.45.000x 1.500 6 24.45.000 66.4.000 units – 20.35.0 R. 1 6 0 00 s . 9 s 0 (b) Statement of material P and Q to be purchased during the year in Rupees Materi Material als Consumpt ion (lbs) (1) P (2) *1.17.66.000 2.2 . al (lbs) (lbs) (lbs) (3) (4) (2)+(3)(6) (5)x(6)= (4)=(5) (7) 30.00 0 Q Total 34.40.00 0 4 10. materi material Rs.45.000 4.11.50. .68.5 = 2.000 1.0 .50 Cost Accounting R . Assembly Section 180 Persons x 1.000 units +25.840 hrs.02.

To resolve the problem of deficit in assembly section.300) 109.000 units of the product. it is apparent that the total hours required in machine shop and assembly section would be 10.62.45.500 respectively. Under both the ways i.5 hrs. Whereas the available hours in machine shop and assembly section are 11.000 and 3.e resorting to overtime or increasing the strength in assembly section.31. 240 hrs.000 units. In this way there are 89.04.45.000 x 7 hrs.200 respectively.000 and 3.) 2080 hrs.200 1.45% Hours available during the year: 5 days x 8 hrs x 52 weeks Less: Statutory holidays. following suggestions are made: 1.840 hrs.04.300 hours in the assembly section. +80 hrs. =3. the profit of the concern will be reduced.000 91. + 64 hrs.000 units Surplus/(Deficit) hours Capacity utilisation Working note: =11.45. Comments: From the statement of hours required to manufacture 1.000 surplus hours in the machine shop and also a deficit of 31.000 1.31. 2.62.500 (31.15.45. =10. leave and absenteeism & idle time (96 hrs. If the workers can be interchangeable then the assembly section utilize the services of workers which may be transferred from the machine shop to meet the production target of 1.000 89.Overheads 4.51 note) Hours required to manufacture 1.94% = 3. 1.15.000 x 2. Question 38 In a factory following the job costing Method. If the workers are not interchangeable then the assembly section may either resort to overtime or increase the strength of workers to catch up the budgeted production.45. an abstract from the work in process as at 30th September was prepared as under: .

54 55 56 57 58 59 Job No. 640 400 380 1.775 Factory overheads Applied Rs.900 Material used in October were as follows : Material requisition No.4. 300 425 515 665 910 720 3. 115 118 120 1. 118 118 118 120 121 124 Cost Rs.52 Cost Accounting Job No.325 810 765 2.535 A summary of Labour Hours deployed during October is as under: Job no 115 118 120 121 124 Indirect Labour: Waiting for material Machine Breakdown 20 10 10 5 Number of Hours Shop A Shop B 25 25 90 30 75 10 65 — 20 10 275 75 . 400 hours 250 hours 300 hours 800 500 475 1. Material Director Labour Rs.420 Rs.

A material Transfer Note issued in October indicated that material issued under requisition No. What would be the invoice price of these three jobs? Answer Factory Cost Statement of Completed Jobs Month Job No.765 225 2. 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.990 1. 2 per hour. it is Rs. 800 125 925 500 330 830 Rs. Materials Direct labour Factory Overhead s (80% of direct labour cost) Rs. 3 per hour while at shop B.Overheads 4.55 for job 118 was directed to job 124. 640 100 740 400 264 664 Factory cost Rs.325 Rs.109 2. 2. You are asked to compute the factory cost of the completed jobs. The hourly rate in shop A per labour hour is Rs.819 . Jobs 115. that material issued under Requisition No. 118 and 120 were completed in October. Septembe r October Total Septembe r October Total 118 118 115 115 1.710 1. 54 was returned back to stores as being not suitable.325 810 515 1.325 — 1. The Factory Overhead is applied at the same rate as in September.53 Indle time Overtime Premium 5 6 316 6 5 101 A shop credit slip was issued in October.

80 281.620 1.000 3.598. 2.475 80.000 30 15 2.500 P3 3.6 2. 2.72 115 Rs.990 118 Rs.18 272. P2 and P3 and two Service Departments S1 and S2 the details pertaining to which are as under:P1 Direct Wages (Rs.726 .) Working Hours Value of Machines (Rs.000 10 10 2.000 S1 1.070 60.000 4.32 Note: In the above solution it has been assumed that indirect labour costs have been included in the factory overhead and they have been recovered as 80% of the labour cost.000 – 5 500 299 3.000 P2 2.4.00 0 50 20 3.08 3.) HP of Machines Light Points Floor (Sq.000 2.000 S2 195 – 5.106 2. 2.289 657. Factory cost Administration and Selling overheads @ 10% of factory cost Total Cost Profit (20% of Total cost) Invoice price 3.54 Cost Accounting Septembe r October Total 120 120 765 665 1.819 120 Rs.Ft..) space 3.90 620.00.60 599.80 3. Have three production department P1.721.500 – 5.726 Invoice price of completed jobs Job no.90 3.000 60 10 2.998.419 1.430 475 245 720 380 196 576 1. Question 39 Modern manufacturers Ltd.100.946.

695 The expenses of the service departments are allocated as under:P1 S1 S2 20% 40% P2 30% 20% P3 40% 30% S1 – 10% S2 10% – Find out the total cost of product X which is processed for manufacture in Departments P1. 5.000 600 1.25 0 150 400 300 P3 Rs. Answer Statement Showing Distribution of Overheads of Modern Manufacturers Ltd..5 and 3 hours respectively. P1 Rs. 250 50 39 – .939 1.500 10.500 Production Depts.Overheads 4. 1.939 1. 1. 1. S1 Rs. 50 Direct Labour cost Rs. P2 and P3 for 4.000 9.000 100 300 100 S2 Rs. Total Rs. Particulars Basis Rent and Rates General Lighting Indirect Wages Power Area Light points Direct Wages H. 1.00 0 100 600 600 P2 Rs. 5.P.55 The following figures extracted from the Accounting records are relevant: Rent and Rates General Lighting Indirect Wages Power Depreciation on Machines Sundries Rs.30.000 600 1. given that its Direct Material cost in Rs.50 0 200 600 500 Service Depts.

054 421.00 0 9.280 Service Depts.08 31. Total Overheads Dept.80 0 200 200 1.4 0 21.800 1. S1 Rs. 7.54 . 7.200 S2 Rs.: 10) Dept.54 4.200 195 734 Redistribution of Service Departments’ Expenses Over Production Departments Particulars Total Rs.054 105.56 Cost Accounting Depreciati Value of on of machines machines Sundries Direct Wages 10.70 0 3.00 0 3.4.73 4 2. 3.40 0 3.4 0 – 1.02 105. 734 320 1.695 28.54 10.16 – 105.6 0 210. S1 Overheads apportioned in the ratio (20:30:40:– : 10) Dept.4 0 10.500 3.00 0 7.8 0 316.00 0 7.200 Production Depts. S2 Overheads apportioned in the ratio (40:20:30:10:–) 28. P1 Rs. S1 Overheads apportioned in the ratio (20:30:40: . 9.73 4 3.700 640 P2 Rs. S2 Overheads apportioned in the ratio (40:20:30:10:–) Dept.00 0 9.22 2.05 10.16 1.200 – 3.11 3.30 0 4.300 960 P3 Rs.62 42.20 0 2.

475 1.10 0. 87 4.05 0.90 11.73 Rs.441 .504.02 0. S1 Overheads apportioned in the ratio (20:30:40:– 10) Dept.32 0. 13 .10 8. 50 30 35.05 0.42 -1. 1) Cost of the product 'X' Direct Material Cost Direct Labour Cost Overhead Cost (See Working Note 2) 1.86 8.070 2. S2 Overheads apportioned in the ratio (40:20:30:10:–) Total Working hours Overhead rate per hour (See working Note.13 ______ 115.05 0. 16 3.419 4.787.57 Dept.79 2.21 0.Overheads 4.03 — -0.10 0.

— 1. 2.50 0 200 Service Depts.00 0 600 Production Depts.35.13 Note: The service departments have only indirect costs which are to be absorbed by production departments.1. 9. 1.25 0 150 P3 Rs. 7 Similarly overhead rate for production departments P2 and P3 are Rs.50 0 1.19 = Rs.73 2.44 + Rs.69 5 5. — 1. 2. Overhead rate per hour for production department P1 = R .90 x 5 + Rs. Overhead cost Rs.90 and Rs. 14.4.87 7. 195 250 50 . which have not been accounted for. 4. — 1.58 Cost Accounting Working Note: 1. 1. 4. Particulars Basis Direct Wages Rent Rates General Lighting Actual & Area Light Points Total Rs.86 x 4 + Rs.00 0 100 S2 Rs. by any other activity carried on in the service departments. 1.00 0 100 P2 Rs.11.73 x 3 = Rs.50 + Rs. If this assumption holds good the alternative solution can appear as under: ALTERNATIVE SOLUTION Statement Showing Distribution of Overheads of Modern Manufacturers Ltd. However if the direct wages appearing in the question are assumed to be incurred on the service department only. 8 6 = Rs.1 s .86 30 0 . P1 Rs. then total expenses of the service departments including the aforesaid direct wages would also be charged to the respective production departments. S1 Rs.

: 10) 30.70 0 400 300 3.410 P3 Rs.6 0 279.399 559.00 0 3.59 Indirect Wages Power Depreciatio n of Machines Sundries Direct Wages H. Total Rs.Overheads 4.98 41.880 S1 Rs.P. 4.20 0 2.9 – 1.42 9 4.99 .50 0 4.00 0 9.700 P1 Rs.8 419.700 4.00 0 7. 929 470 1.800 1.4 29 600 600 2.300 1. Total Overheads Dept.00 0 7.50 0 10.0 00 9.399 139. Value of Machines Direct Wages 1.97 55.70 0 195 929 Redistribution of Service Departments Expenses over Production Departments.69 5 30.7 139.93 9 1.9 13. 9.96 – 139.80 0 300 100 200 39 — 200 1.40 0 3. S2 Overheads apportioned in the ratio (40:20:30:10:–) Dept.9 0 27. S1 Overheads apportioned in the ratio (20:30:40: . 7. 7.30 0 600 500 4.700 940 P2 Rs.700 S2 Rs. S1 Overheads apportioned in the ratio (20:30:40:– : 10) Dept.

14 Rs.60 Cost Accounting Dept.15 = 37.14 0.02 × 5 + Rs.80 4.99 5.06 ______ _ 9.2 5 - -0. S1 Overheads apportioned in the ratio (20:30:40:– 10) Dept.00 0. 12 + Rs. 5. 52 3.20 1. 15.070 3. 10. Overhead cost: = = 13.56 -1. 2.14 0.42 0.40 0.47 2.25 ______ 117. S2 Overheads apportioned in the ratio (40:20:30:10:–) Total Working hours Overhead rate per hour Cost of the Product 'X' Direct Material Cost Direct Labour Cost Overhead Cost (See Working Note 1) Total Cost Working Note 1.03 ______ _ 9.60 2.03 × 3 Rs.03 Rs.160 .475 2.99 1. 02 4.035.28 0. 3 × 4+ Rs.40 13.4.02 0.419 5.25 Question 40 .40 0.05 _______ _ 12.10 + Rs. 50 30 37.233. S2 Overheads apportioned in the ratio (40:20:30:10:–) Dept.

‘X’ Service Dept. 5 Y % 10 - .00 0 15 500 10 1. 1.00 0 20 250 10 1.00 0 2.Overheads 4. ‘Y’ Required: 45 60 B % 15 35 C % 30 X %.00 0 Y Rs.00 0 40 500 20 4.00 0 25 4. 2.00 0 1.61 PH Ltd.50 0 1.00 0 9. 2. 4.00 0 B Rs.00 0 5.00 0 C Rs.00 0 2.00 0 8.) Capital Value (Rs.00 0 A Rs. ‘A’ ‘B’ and ‘C’ and two service departments ‘X’ and ‘y’.00 0 A technical assessment or the apportionment of expenses of service departments is as under: A % Service Dept. is a manufacturing company having three production departments. The following is the budget for December 1981: Total Rs Direct Material Direct Wages Factory rent Power Depreciation Other overheads Additional information Area( Sq. Lacs) of assets Machine hours Horse power of machines 500 20 1.00 0 2.00 0 X Rs.00 0 50 250 40 2. 1.ft.

000 5.00 0 1.000 3. Answer (i) Basis Tota l Rs. Direct materials Direct wages Factory rent Power Depreciation Other Overheads M/c hrs.000 1..000 2.00 0 500 150 100 Y Rs.00 0 4.700 4.000 1. B Rs. X apportioned in overhead the ratio 2.700 712 C Rs. ‘B’ and ‘C’.00 0 – (ii) expenses: A Rs.700 2.000 250 100 Redistribution of Service Department’s .50 0 1. C Rs. 9.7 00 2.00 0 1. 1.350 475 1.350 Direct . 3. Cap. (iii) Machine hours rates of the production departments ‘A’.62 Cost Accounting (i) A statement showing distribution of overheads to various departments. 6. 5.75 0 1.425 X Rs. Value 4. X Rs. Area H.750 4.P X M/c Hrs.00 0 2. 4. 2.00 0 1.750 Y Rs. (ii) A statement showing re-distribution of service departments expenses to production departments.138 B Rs.00 0 6. Total Overheads Dept .00 0 800 200 Overhead Distribution Summary A Rs.4.0 00 500 200 500 800 400 1.0 00 2.

5.63 (45 : 15 : 30 : 10 ) Dept . Y overhead apportioned in the ratio ( 60: 35 : -. X overhead apportioned in the ratio (45 : 15 : 30 : 10 ) 3.2 -- 8.: 5 ) Dept .48 6. Answer Treatment of under and over absorption of overheads in Cost Accounts: Under and over absorbed overheads can be disposed off in Cost Accounts by using any one of the following methods: (ii) Use of supplementary rates. Y overhead apportioned in the ratio ( 60: 35 : -.039 -291 . The negative rate.Overheads 4. (i) Use of Supplementary Rates: This method is used to adjust the difference between overheads absorbed and overheads actually incurred by computing supplementary overhead rates.513 – – Machine hours Machine hour rate (Rs.: 5 ) Dept . (iii) Writing off to Costing Profit and Loss Account. however.88 Explain how under and over absorption of overheads are treated in cost accounts.825 131 44 87 -.) Question 41 2. Such rates may be either positive or negative.291 29 17 10 -- 2 .29 1 -- 1 -. X overhead apportioned in the ratio (45 : 15 : 30 : 10 ) Dept .482 (iii) Machine Hour rate 1.000 1.000 3. A positive rate is intended to add the unabsorbed overheads to the cost of production.495 2. (iv) Carrying over to the next year’s account.25 4. corrects the cost of production by deducting the amount of over-absorbed .505 7.000 8.

000.050 Rs.the amount of over/under absorbed overhead is carried over to the next period this method is not considered desirable as it allows costs of one period to affect cost of another/period. 8 lakhs. (ii) Writing off to Costing Profit & Loss Account: When under or over absorbed amount of overheads is quite negligible and it is not felt worth while to absorb it by using supplementary rates. comparison between one period and another is rendered difficult. defective planning etc.4. Other Sundry works expenses Rs.200 . The machines cannot be worked without an operator wholly engaged on it.20 15% on wages Rs. 1.000 208 18 20 10 Rs. Then also it may be transferred to Costing Profit & Loss Account. the said amount is transferred to Costing Profit & Loss Account. Depreciation 10% on original cost. this method may be used when the normal business cycle extends over more than one year. The effect of applying such rate is to make the actual overhead get completely absorbed. Further. Insurance Rs. 3.hours Leave (with pay)-hours Normal idle time unavoidable-hours Average rate of wages per day of 8 hours Production Bonus estimated Value of Power consumed Supervision and Indirect Labour Lighting and Electricity These particulars are for a year: Repairs and maintenance including consumables 3% on the value of machines. However. These particulars are furnished for a 6 month period:Normal available hours per month Absenteeism (without pay). 40. The original cost of all these 8 machines works out to Rs.300 Rs. In case under absorption of overheads arises due to factors like idle capacity.8. Question 42 A machine shop has 8 identical Drilling Machines manned by 6 operators. (iii) Carrying over to the next year’s accounts: Under this method. the output is low in the initial years. 12.64 Cost Accounting overheads. or in the case of a new project.

Overheads

4.65

General Management expenses allocated Rs. 54,530 You are required to work out a comprehensive machine hour rate for the Machine Shop. Answer Computation of Comprehensive Machine Hour Rate of Machine Shop Operator’s Wages (See Note 2) Production Bonus (15% on wages) Power Consumed Supervision Lighting and Electricity Repairs and Maintenance Insurance Depreciation Sundry Works Expenses General Management Expenses Rs. 17,100 2,565 8,050 3,300 1,200 12,000 20,000 40,000 6,000 27,265 1,37,480

Machine Hour Rate

= =

T ta O e e d o M c in S o o l v rh a s f a h e h p H u o M c in s O e tio o rs f a h e p ra n R . 13 ,4 0 s , 7 8 (See Note 1) 57 0 h us , 6 or

= Rs. 23.87 Notes : Computation of Hours, for which 6 operators are available for 6 months. Normal available hours p.m. per operator Less: Absenteeism hours Leave Hours Idle Time Hours Utilisable Hours p.m. per operator Total utilisable hours for 6 208 18 20 10

48 160

4.66

Cost Accounting

Operators and for 6 months are = 160 X 6 X 6 = 5,760 hours. As machines cannot be worked without an operator wholly engaged on them therefore, hours for which 6 operator are available for 6 months are the hours for which machines can be used. Hence 5,760 hours represent total machine hours. 2. Average rate of wages:
R .2 s 0 = Rs. 2.50 per hour. 8h u o rs

Hours per month for which wages are paid to a worker = 190 (208 hours – 18 hours) Total wages paid to 6 operators for 6 months = 190 hours × 6 × 6 × Rs. 2.50 = Rs. 17,100 Question 43 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 Rs. 4,20,000/- per annum. The expenses regarding the machine are estimated as follows. Rs. Rent for the quarter Depreciation per annum Indirect charges per annum 17,500 2,00,000 1,50,000

During the first month of operation the following details were taken from the job register : Job Number of hours the machine was used : (a) Without the use of computer (b) With the use of the computer 600 400 900 600 – 1,000 A B C

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

Overheads

4.67

Answer Working Notes : (i) Total machine hours used (600 + 900 + 400 + 600 + 1,000) (ii) Total machine hours without the use of computers (600 + 900) (iii) (iv) Total machine hours with the use of computer ( 400 + 600 + 1,000) Total overhead of the machine per month Rent (Rs. 17,500 /3) Depreciation ( Rs. 2,00,000 / 12) Indirect charges (Rs. !,50,000/12) Total Rs. 5,833. 33 16,666 .67 12,500 .00 35,000 .00 2,000 1,500 3,500

(v) Computer hire charges for a month = Rs. 35,000 (Rs. 4,20,000 / 12) (vi) Overheads for using machines without computer = Rs. 15,000
R .3 ,0 0  s 5 0   35 0 h .  × 1,500 hrs. rs   , 0 

(vii) Overheads for using machine with computer = Rs. 55,000
R .3 , 0  s 50 0  , 0 r s 5 0 0  35 0 h s. × 20 0 h s.+ R .3 , 0  r  , 0 

(a) Machine Hour Rate of Gemini Enterprises for the firm as a whole, for a month. (1) hour. (2) When the computer was not used : hour. (b) Job
R . 3 ,0 0 s 5 0 = Rs.10 per 35 0 h u s , 0 or

When the computer was used :

R .5 ,0 0 s 5 0 = Rs27.50 per 20 0 h u s , 0 or

Machine hour rate for the individual jobs. Rate A B C

0 00 Rs. Productions X Y Z Services P Q R S 100 125 85 10 50 40 50 3.50 Machine hour rate Question 44 Deccan Manufacturing Ltd.000 1.00 0 11. Estimates of factory overhead costs to be incurred by each department in the forthcoming year are as follows.000 The overhead costs of the four service departments are distributed in the same order.. 27.05.500 1.5 00 Rs.000 No.000 3.Q.00 0 Rs.68 Cost Accounting per hr.0 00 Rs.000 1.000 5.500 1.000 75.000 6. P.R and S respectively on the following basis: Department P Q _ _ Basis Number of Employees Direct Labour Hours .00 0 16.000 4.0 00 1. have three departments which are regarded as production departments.000 64. Overheads Without computer With computer 10 2750 Hrs 600 40 0 1. 6.000 3. 1.000 1.4.000 1.93. Data required for distribution is also shown against each department: Department Factory overhead Rs.000 45.000 83.5 00 25. 9.500 Rs. 17 Hrs 900 600 1.of Employees Area in sq.0 00 17. 27.000 Direct Labour Hours 4.500 500 1. viz. Rs. m.500 27.50 0 Rs.000 30. 17 Hrs 1. Service departments’ costs are distributed to these production departments using the “Step Ladder Method” of distribution .

50 0 8.00 0 243 .33. Overhead cost 45.000 28. 30.000 57.00 0 Z Rs.`R` _ _ (1. and (b) calculate the overhead recovery rate per direct labour hour for each of the three production departments.Overheads 4.000 Q Rs.000 4.`S` _ _ _ (66.00 0 1.000 R Rs.0 of 19.50 0 of 24.69 R S _ _ Area in square meters 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.000 12.000 10.000 16. 64.93.00 24.60.500 of Y Rs.000 ) Distribution Overhead Costs of Dept.00 0) Distribution Overhead Costs of Dept.05.00 0) Distribution Overhead Costs of Dept.00.000 12.00 0 16.35.000 12.000 S Rs. 1.000 5.00 0 1.`P` (45. 75.0 24.00 0 of 5.000 Production X Rs.50 0 28. OVERHEAD 83. Answer : (a) DECCAN MANUFACTURING LIMITED Schedule Showing the Distribution of Overhead Costs among Departments Service P Rs.00 0) Total 3.00 0 Distribution Overhead Costs of Dept. 1.`Q` _ (80.000 18.

(B) Overhead recovery rate per hour: [(A)/(B)] Rs.0 machine hour Rs.5 machine hours Product B: 1. In applying overheads..000 3. 6. the basis adopted is as follow: costs to production (i) Cost of Department S1 to Department P1 and P2 equally.4.000 S1 S2 Rs.75. The rate of Department P1 is based on direct machine hours. and (ii) Cost of Department S2 to Department P1 and P2 in the ratio 2:1 respectively. Budgeted raw material cost per unit: Product A – Rs.45/ - Rs.70 Cost Accounting 0 00 00 ….000. The following budgeted and actual data are available: Annual profit plan data: Factory overhead budgeted for the year: Department s P1 P2 Budgeted output in units: Product A– 50.00. manufactures two products A and B.000 ….50. while the rate of Department P2 is based on direct labour hours.40/ - Question 45 A Ltd. 75/- Rs.000 4. For allocating the service department departments. Budgeted overhead rates are used in the production departments to absorb factory overheads to the products.the predetermined rates are multiplied by actual hours.000 4.50. B – 30. (A) (b) hours Direct Labour 4. Budgeted time required for production per unit: Department P1: Product A: 1. Product B –Rs.000 21. 150. 25. 120 .The manufacturing division consists of two production departments P1and P2 and two services S1 and S2.000.000 .

100 hours. All materials are used in Department P1 only. P1 P2 25.000 Rs. Product B-4.5 Direct labour hours Average wage rates budgeted in Department P2 are: Product A – Rs72 per hour and Product B – Rs.000 Rs.0 00 00 Service Deptts. 75 per hour. (ii) Prepare a performance report for July.000 units Product B: 3. 2.75.00 0 Budgeted factory overheads for the year in . 1993 that will reflect the budgeted costs and actual costs. 5.000 Rs.91. Actual data (for the month of July.900 Rs.50. Answer (i) Computation of predetermined overhead rate for each production department from budgeted data Production Deptts.1993) Units actually produced: Product A: 4. 60.Overheads 4.00 0 S2 4.00.000 Product B Rs.71 Department P2: Product A: 2 Direct labour hours Product B: 2.150 hours. 5.50.000 units – – Actual direct machine hours worked in Department P1 On product A – 6.04. 4. 4.89. 231. S1 6.56.200 hours.000 P2 Rs. 48. Cost actually incurred: Raw materials: Wages: Overheads: Department P1 Product A Rs. Rs.400 hours.000 Rs. Actual direct labour hours worked in Department P2 On product A – 8.000 S1 S2 You are required to: (i) Compute the predetermined overhead rate for each production department.0 21. Rs. Product B-7.52.

000) (ii) 3.00 0 3.00 0 6. 4.) Allocation of service department S2’s costs to production department P1 and P2 in ratio of 2:1 in (Rs.00 0 4.05.75. 26. 31.00 0 _ _ 4.00.25.50.000/1.00 0 – 26.00 0 .00.00 0 Rs.000 units ×Rs.50.56.00 0 3.89.75.000/1. 30 Rs.80.50.72 Cost Accounting (Rs.0 00 1.00 0 4.50.4.000 and 3. 150 in 4.05.000 units of products and B respectively were actually produced) Budgeted Rs.00 0 1.000 units ×Rs.25.00 0 Raw material used department P1 A : 4. 15 Performance report for July. Actual Rs. 1993 (When 4.) Budgeted machine hours in department P1 (Refer to working Note1) Budgeted machine hours in department P2 (Refer to working Note 1) Budgeted machine hour rate (Rs.00 0 31.) Allocation of service department S1’s costs to production departments P1 and P2 equally in (Rs.000) Budgeted machine hour rate (Rs.00.) Total (Rs. 120 A : 3.0 00 Nil Nil 1.00.50.

000 2.000 75.00 0 1.71.000 Total .18.18.) 75.Overheads 4.000 30.00.000 1.) Total 1.75 5.) 1.30 B.000 × 1 hr.64 9 Overhead absorbed On machine hour basis in department P2 A: 4.00 0 90.15 B: 3.5 48 26.× Rs. × Rs.62.000 (50.000 × 2 hrs.80.91.31.5 hrs.00 0 5.05.5 hrs.000 × 2 hrs. Actual output Product A 4.8 61 * (Refer to working Note 4) **(Refer to Working Note 5) Working Notes: 1. ×Rs.) Product B 30.50 0 25.5 hrs.× Rs.000 (30.0 00 1.40 0* 1.76.30 1.000 × 2 hrs. × Rs.12.000 (50.000 × 2.000 1.5 hrs.52.75.000 × 2.000 ×1 hrs.15 1.72 3.50 0 5.000 × 1.31. 3.000 ×1. Budgeted output (in units) Budgeted machine hours In department P1 Budgeted labour hours In department P2 Product A 50. × Rs.000 Product B 3.000 × 2.90 0 5.000 (30.5 hrs.00 0 Overhead absorbed On machine hour basis in department P1 A: 4.73 Direct Labour Cost on the basis of labour hours worked in department P2 4.36 4** 1.74.20.

4.400 10.74 Cost Accounting (in units) Actual machine hours utilised in department P1 Actual labour hours utilised in department P2 6.250 15.150 7.200 4.600 .100 8.

74.59 = Rs. Actual overheads absorbed (based on machine hours): A: 6.02 = Rs.000 30.000 – 32.) over production departments P1 and P2 in the ratio of 2:1 Total (Rs.× Rs.649 (say) 5.000 48.04.× Rs. Actual overheads absorbed (based on labour hours): A: 8.600 — — Rs.100 hrs.18. 28.600) 30.× Rs.000 –60.548 Question 46 .31. 1. 1.Overheads 4. 1993 in (Rs.000/15.000 _______ 2.000/10. 16.000 10.18.400 (say) B: 4. 2.000 Actual factory overheads for the month of July. 16.000 _______ 2.59 Rs.75 3.000 Service Deptts.250) Labour hour/ rate (Rs.93.02 4.59 = Rs.× Rs.02 = Rs.50.364 B: 7. 28. 2. 28.93. Computation of actual overhead rate for each production department from actual data Production Deptts.200 hrs.400 hrs. 1.50. S1 S2 60.) Actual machine hours in department P1 (Refer to Working Note 2) Actual labour hours in department P2 (Refer to Working Note 2) Machine hour rate (Rs.000 — – ___ Nil — –48.000 ___ Nil — — 15. 16.250 16.) over production departments P1 and P2 equally. P1 P2 2. 1.31.150 hrs.000 2.) Allocation of service department S1’s costs in (Rs. Allocation of service department S2’s costs in (Rs.

76 Cost Accounting In a manufacturing unit.000 units produced during a period.000 were sold . 25 per man – day.4. 30. .50 lakhs and 1. 41. Out of the 40.5 lakhs man-days respectively.determined rate of Rs. factory overhead was recovered at a pre. The total factory overhead expenses incurred and the man-days actually worked were Rs.

000) Unabsorbed Overheads Unabsorbed Overheads due to defective planning (i.000 Treatment of Unabsorbed Overheads in Cost Accounts (i) The unabsorbed overheads of Rs.e.e.77 On analysing the reasons.000 .40.000 _______ 1. 40.000 40.u.00. 41.50.60.000 due to defective planning to be treated as abnormal and therefore be charged to Costing Profit and Loss Accounts. 25 × 1. 25%/per man .000 4.60.e 60% of Rs 4.000) Balance of Unabsorbed Overheads 1.per unit . (ii) The balance unabsorbed overheads of Rs.000 Rs.50.50.20. 4/-p. 1. (Refer to Working Note) Rs. Rs.000 37.day (Rs.u. How would unabsorbed overheads be treated in Cost Accounts? Answer Computation of Unabsorbed Overheads Man – days worked Overhead actually incurred Less: Overhead absorbed @ Rs.Overheads 4.40.p. it was found that 60% of the unabsorbed overheads were due to defective planning and the rest were attributable to increase in overhead costs.000 units @ Rs.000 units @ Rs.) Total Working Note: 1.000 _______ 1.000 be charged to production i. 2. 4/.) Add: To Closing stock of finished goods (10. 4/.00.50.60. Charge to Costing Profit and Loss Account as part of the cost of units sold (30.000 units at the supplementary overhead absorption rate i.000 2.

= R .78 Cost Accounting Supplementary Overhead Absorption Rate = Rs. 0 s .u. 16 .p. 4/. 00 0 R . 0 s 00 0 .4.4 .

Overheads

4.79

Question 47 A machine shop has 8 identical drilling machines manned by 6 operators. The machine cannot be worked without an operator wholly engaged on it. The original cost of all these machines works out to Rs. 8 lakh. These particulars are furnished for a 6 month period. Normal available hours per month per worker Absenteeism (without pay ) hours P.M. per worker Leave (with pay) hours per worker P.M. Normal idle time Unavoidable hours per worker P.M. Average rate of wages per worker for 8 hours a day Average rate of production bonus estimated Value of Power consumed Supervision and indirect Labour Lighting and electricity These particulars are for a year: Repairs and consumables Insurance Depreciation. maintenance including 3% of value of machines Rs. 40,000 10% of original cost Rs. 12,000 Rs. 54,530 208 18 20 10 Rs.20 15% on wages Rs. 8,050 Rs. 3,300 Rs. 1,200

Other sundry works expenses General management expenses allocated

You are required to work out a comprehensive machine hour rate for the machine shop (May 2000, 8 marks) Answer Computation of comprehensive machine hour rate of machine shop Operator’s wages (Refer to working note 2) Production bonus (15% on wages) Power consumed Rs. 17,100 2,565 8,050

4.80

Cost Accounting

Supervision and indirect labour Lighting and electricity Repairs and maintenance Insurance Depreciation Other sundry works expenses General management expenses allocated Total overhead of machine shop Machine hour rate =
R .13 ,4 0 s , 7 8

3,300 1,200 12,000 20,000 40,000 6,000 27,265 1,37,480

T ta o e e d o m c in s o o l v rh a f ah e hp H u o m c in s o e tio o rs f a h e p ra n

= 57 0 h u s , 6 or = Rs. 23.87 Working notes:

(Refer to working note 1)

1. Computation of hours, for which 6 operators are available for 6 months. Normal available hours p.m. per operator Less: Absenteeism hours Less: Leave hours Less: idle time hours Utilizable hours p.m. per operators Total utilizable hour for 6 operators and for 6 months are =160 hours × 6 operators × 6 months = 5,760 hours. As machines cannot be worked without an operator wholly engaged on them, therefore hours for which 6 operators are available for 6 months are the hours for which machines can be used. Hence 5,760 hours represents total machine hours. 2 Computation of operator’s wages Total rate of wages per hour = Rs. 2.50 (Rs. 20/8 hours) Hours per month for which wages are paid to a worker = 190 hours (208 hours – 18 hours) Total wages paid to 6 operators for 6 months = Rs. 17,100 18 20 10 48 160 208

Overheads

4.81

(190 hours × 6 operators × 6 months × Rs.2.50) Question 48 A company has two production departments and two service departments. The data relating to a period are as under:

00 0 13. 4 per hour respectively. 5 and Rs.) (Rs.00 0 80.000 The power requirement of these departments are met by a power generation plant.00 0 PD2 40.00 0 23.) PD1 50% 60% PD2 40% 20% SD1 --20% SD2 10% --- (ii) Re-apportion departments.21.875 out of which a sum of Rs.82 Cost Accounting Production Department Direct materials Direct wages Overheads Power requirement at normal capacity operations During Power Consumption during the period (Rs.00 0 35. The said plant incurred an expenditure. 84.000 20.) (Kwh) PD1 80.500 SD2 20.) (Rs.4.00 0 Service Department SD1 10.250 10. the power service generation plant costs to to the four (Rs. given that the direct wage rates of PD1 and PD2 are Rs.000 20. the service department overheads are to be redistributed on the following bases: SD1 SD2 You are required to: (i) Apportion departments.00 0 50.500 (Kwh) 10. (iii) department cost production Calculate the overhead rates per direct labour hour of production departments.00 0 20.00 0 50. which is not included above of Rs. Answer (i) Statement of apportionment of Power generation plant costs to the four departments Total Basis of Production Service .000 30.000 12. After apportionment of power generation plant costs to the four departments.00 0 95.000 17.) (Rs. 1.375 was variable and the rest fixed.000 10.

37 Actual power 5 consumption (kwh) ______ { 13:23 : _ 10.0 00 3.21.50 0 ______ 28.9 41 10.8 75 --80.25 : 10 } 1.7 20 Statement of Reapportionment of service department cost to production department by using repeated distribution method Total Production departments PD1 Rs. Service departments SD1 Rs.4 41 Variable expenditure Total Overheads summary: Direct materials Direct wages Overheads Total (ii) 84. 15.8 90 15.0 00 72. SD1 apportioned overheads 3.61.7 20 30.00 0 1.0 00 _____ _ 22.445 99.72 0 Fixed expenditure 37.80. SD2 Rs.9 41 15.5 } PD1 Rs. 7.089 .0 00 20.51 5 SD1 Rs.3 75 _____ _ 20. Rs.0 00 80. PD2 Rs.08.8 75 19.08.0 00 30.324 5 80.0 00 1. apportionment of power generation cost departments department s SD1 Rs.32 4 34.61.50 Normal capacity 0 (kwh) { 4:7 :2:3 :3.824 PD2 Rs.890 72.720 32.Overheads 4.941 80.0 00 10.87 1.356 80. 5.83 Costs Rs.3 24 --50.8 90 20.890 40.0 00 99. 8.00 0 30.0 00 20.890 8.5 00 _____ _ 49. Total overheads Dept.

162 16.485 16. SD2 apportioned overheads 0.40 0.0 (iii) Computation of Overhead rates per direct labour hour of production departments Production departments .385.78 09 0.: 10] Dept.616 In the ratio [ 50: 40 : .20 2.616 970 323 323 -1. SD2 apportioned overheads 1.40 6.4. SD1 apportioned overheads 6.616 In the ratio [ 60: 20 : 20 : -] Dept.84 Cost Accounting In the ratio [ 50: 40 : .162 80.64 0.809 In the ratio [ 60: 20 : 20 : -] Dept.20 6. SD1 apportioned overheads 16.809 48.465 -16162 1.06. SD2 apportioned overheads 32 19.13 0.64 In the ratio [ 60: 20 : 20 : -] Total 2.40 3.081 6.38 0.13 0. SD1 apportioned overheads 323 162 129 -323 32 In the ratio [ 50: 40 : .55.162 8.64 In the ratio [ 50: 40 : .: 10] Dept.0. .13 .: 10] Dept.489 1. SD2 apportioned overheads 80.56 -6.: 10] Dept.40 -32 In the ratio [ 60: 20 : 20 : -] Dept.

Overheads

4.85

PD1 Total direct wages (Rs.) : (A) Direct wage rate per hour (Rs.) : (B) Direct labour hours (A/B) = (C) Overheads (Rs.) : (D) Overhead rate per Direct labour hour (Rs.) : (D)/ (C) Question 49 95,000 5/19,000 2,06,489. 78 10.87

PD2 50,000 4/12,500 1,55,385. 09 12.43

X Ltd. having fifteen different types of automatic machines furnishes information as under for 1996-97 (i) Overhead expenses: Factory rent Rs. 96,000 (Floor area 80,000 sq.ft.), Heat and gas Rs. 45,000 and supervision Rs. 1,20,000. (ii) Wages of the operator are Rs. 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 Rs. 5,000 (ii) Annual expenses on special equipment attached to the machine are estimated as Rs. 3,000 (iii) (iv) Estimated operation time of the machine is 3,600 hours while set up time is 400 hours per annum The machine occupies 5,000 sq.ft. of floor area.

(v) Power costs Rs. 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 Machine (Hours) Machine set up time time Work – order 31 10 90 Work order – 32 20 180

operation

4.86

Cost Accounting

(Hours)

Overheads

4.87

Answer X Ltd. Statement showing comprehensive machine Hour rate of Machine B Standing Charges: Factory rent (Rs. 96,000/80,000 sq.ft) × 5,000 Sq.ft. Heat and Gas (Rs. 45,000/15 machines) Supervision (Rs. 1,20,000/ 15 machines) Depreciation [(Rs. 45,000 – Rs. 5,000)/ 10 years] Annual expenses on special equipment Rs. 6,000

3,000 8,000 4,000

3,000 ______ 24,000 6/-

Fixed cost per hour (Rs. 24,000/ 4,000 hrs.)

Fixed cost Power Wages Comprehensive machine hour rate per hr.

Set up rate Operational rate Per hour Per hour Rs. Rs. 6 6 -2 6 3 12 11

Statement of ‘B’ machine costs to be absorbed on the two work orders Work order 31 Hour s Rate Rs. Amoun t Rs. Work order 31 Hour s Rate Rs. Amount Rs.

4.88

Cost Accounting

Set up time cost Operation cost Total cost Question 50 time

10 90

12 11

120 990 1,110

20 180

12 11

240 1,980 2,220

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 Corporate Sales Consumer Sales Administrative Information system Rs. 16,67,750 Rs. 8,33,875 --42 28 14 21 Processing Time used (in minutes) 2,400 2,000 400 1,400

Cost incurred in each of four departments for October, 2003 are as follow: Corporate Sales Consumer Sales Administrative Information systems Rs. 12,97,751 Rs. 6,36,818 Rs. 94,510 Rs. 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.

Overheads 4. (Nov. Use this ranking to allocate support costs based on the step-down allocation method. 2+2+1+5=10 marks) . 2003.89 (ii) Rank the support departments based on percentage of their services rendered to other support departments. (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.

1 668 31 Ranking of support departments based on percentage of their services rendered to other support departments • Administration support department provides 23.66.33%   40 0  1 0 24 0+ .90 Cost Accounting Answer (i) Statement showing the allocation of support department costs to the sales departments (using the direct method) Sales department Corpor Consu ate mer sales sales Rs.04. 12.810. Thus 23.04.36.077%  2×0 1 10   4 + 8+ 2 of its services to information systems support 1  2 2  department.706 37.72 0) _______ ________ _ 15.804 Support department Administr ative Rs. Rs. 25.13.510 = Rs.720 = Rs.4.50 9 (3.72 0 Particulars Basis of allocati on Cost incurred Re-allocation of Number cost of of administrative employ department ees (6:4:–:–) Re-allocation of Processi costs of ng time information (6:5:–:–) systems department Total (ii) 1.077% of Rs. . • Information system support department provides 8.33% of Rs.38.510 (94. Thus 8. 0 + 0 × 0  of its services to Administration . 94. 94.20.510) Informat ion systems Rs.04.97.383.21.81 751 8 56. 0 20 0 4 0   support department. 8.2 11 1. 3. 3. 6.

12.36.080 Support department Administr ative Informat ion systems . Particulars Service departments Administr Informat Sale departments Corporat Consume .19. Rs.26.97.810 provided to information systems). 21. as first Allocated administrative overheads as second (Rs.25. Working notes: (1) Percentage of services provided by each service department to other service department and sales departments.1 07 1.Overheads 4.48.14. 8.78.520 Rs. 751 43.510 Re-allocation of Number cost of of administrative employ department ees (6:4:–:– 3) Re-allocation of Processi costs of ng time information (6:5:–:–: systems –) department Total (94.383 provided to administrative).26.810 3.91 Statement showing allocation of support costs (By using step-down allocation method) Sales department Corpor Consu ate mer sales sales Rs. 94.72 0 21. using the rupee figures obtained under requirement (ii) This approach would use the following sequence of ranking. 3.04.81 8 29.510) 1.42 3 (3.53 0) _______ ________ _ 15.53 0 Particulars Basis of allocati on Cost incurred Rs. • • (iv) Allocation of information systems overheads (Rs. 6.3 478 21 (iii) An alternative ranking is based on the rupee amount of services rendered to other service departments.

383 + 0.98078AD or AD and = = = = = = IS 94.2307 AD 94.4.77% 41.0833 IS 3.2307 94.510 + 25.243 = Rs.720 + 0.19.510 + 0. department: Let AD and IS be the total costs of support departments Administrative and Information systems respectively.510 + 0.04.33% ion system 23.67% (By using (2) Total cost of the support simultaneous equation method).22.0833 {3.92 Cost Accounting ative Administrative Information systems – 8.922 . 3.720 + 0. These costs can be determined by using the following simultaneous equations: AD IS or AD AD} or AD or 0.01922 AD 1.16% 50% r Sales 30.07% – e Sales 46.04.32.893 Rs. 1.

97. These expenses in cost accounting are treated as part of prime cost.729 _______ 15.243) Re-allocation of costs of information systems department (50% and 41.639 8.427 37. 12.77% of Rs.36.67% of Rs.20. cost of making a specific pattern.32.461 ________ 1. process or job are treated as chargeable or direct expenses.818 56.13.922) Total Question 51 Explain what do you mean by Chargeable Expenses and state its treatment in Cost Accounts.93 Statement showing the allocation of support department costs to the sales departments (Using reciprocal allocation method) Particulars Costs incurred Re-allocation of cost administrative department (46. sales Rs.66.22. 3.16% and 30. royalty. (November.Rental of a machine or plant hired for specific job. Product Annual output (Units) 5.000 Total number of purchase orders 160 Total number of set-ups 20 Sales department Corporate Consumer sales Rs.614 1. 2002. Examples of chargeable expenses include .38. 3 marks) Answer Chargeable expenses: All expenses. design. other than direct materials and direct labour cost which are specifically and solely incurred on production.000 Total Machine hours 20.161 A .571 6. 1.Overheads 4. Question 52 A company manufacturing two products furnishes the following data for a year. drawing or making tools for a job.

20.000 1.4.94 Cost Accounting B 60.000 384 44 .

3.1 . 14. 8 0 0 s 98 . 0 h u s . 1.Overheads 4.20 per = (approx.03 5 4 od r 4 r es . Cost of one set-up = = 4. 0 s . 61 .82 .93 T ta c s ts re te to s t − p o l o la d e us T ta n m e o s t − p o l u br f e us R . 9 marks) = Rs. 0 s . Machine hour rate = Total annual overhead cost fo v lu e r la d a tiv s r o m e te c itie T ta m c in h u o l a h e o rs T ta a n a o e e d o l n u l v rh a s T ta m c in h u o l a h e o rs R . 00 0 = 14 .20.18.50.) 3. 00 0 o r (November.000 Set up related costs Purchase related costs 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. 2002.50 6 st−p 4 e us T ta c s ts re te to p rc a e o l o la d u hss T ta n m e o p r h s o d r o l u b r f uc a e r e R . Answer Working notes: 1. 00 0 o r Rs. 0 s . 0 14 . 12.95 The annual overheads are as under: Rs.000 6. Machine hour rate = = hour 2. 0 h u s . 00 0 = Rs.136.000 8. Cost of a purchase order = = R .812.55 . 80 0 = Rs. Volume costs related activity 5.

812. (f) = [(c) + (d) + (e)] 5.17.80 (Rs.80 Rs.000 hrs.000 Total machi ne hours 20.614 . 32 A 5.20.4.20.40 (Rs.×Rs. (a) (b) (c) Cost related to purchas es Cost related to setups Total cost Cost per unit Rs.75 0 (44 set ups B 60.00 0 1. Note 1) Rs.04.71. 14.23 5. × Rs. (d) Rs.93) 4. (e) Rs.63.20.03 ) 4. 2. 2.00 0 (ii) Statement showing overhead cost per unit (based on activity based costing method) Produ cts Ann ual outp ut units Total Machi ne Hours Cost relate d to volum e activiti es Rs.80 (160 orders × Rs. 1136.20) Overhead cost per unit Rs.84.000 units) 28.56.000 / 5.04.58 5. 1.60 0 (20.000 (1. 56.5 3 .0 00 1.20) 17.84. 14.25 0 (20 set ups × Rs.6 00 (1. 3.000 hrs.20.96 Cost Accounting (i) Statement showing overhead cost per unit (based on traditional method of charging overheads) Produc ts Annua l output (units) 5.00 0 78.00 0 hrs × Rs.52 (384 2.81.0 00 14.0 00 Overhead cost component (Refer to W. (g) = (f)/ (a) 103.16.52 24.76 4. 50) 5.000 (20.00 0 units) A B 60. 12.36.71.00 0 20.000/60.

.03 ) × Rs.93) orders × Rs. set-ups and purchases respectively. 50) Note: Refer to working notes 2. 1136. 12.Overheads 4.3 and 4 for computing costs related to volume activities.97 000 hrs × Rs. 3.812.

7 2 × 100 12 1 a new order for manufacturing of a direct materials and direct wages are Rs. 2 s .000 Rs. = Rs. A profit of 20% on You are required to compute (i) The rates of Factory overheads and Selling and Administration overheads to be charged.325 8% Rs. (ii) The Selling price of the new order (November.000 and Rs. 99. Computation of total cost of jobs Total cost of Job 1102 when 8% is the profit on cost Total cost of job 1108 when 12% is the profit on cost = R .500 Rs. The company has received similar job.98 Cost Accounting Question 53 In the current quarter. 64.10 .4.41. a company has undertaken two jobs. 50. 15 . 1. 37. 1. 73 5 × 100 18 0 R . 54. The data relating to these jobs are as under: Job 1102 Selling price Profit as percentage on cost Direct Materials Direct Wages Rs. 42.000 sales is required. 30.375 = = Rs.920 12% Rs. 9 marks) Answer Working notes 1. 1.000 Job 1108 Rs.000 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..000 2. Factory overheads = F% of direct wages = Selling & Administrative overheads A% of factory cost .07. The estimate of relating to the new order respectively.57.9 0 s . 2002.

Overheads 4. .99 (i) Computation of rates of factory overheads and selling and administration overheads to be charged.

000 .000 + 42.000 67. 1.000 31.000 0.000 F) A (96.000 F + 67.100 Cost Accounting Jobs Cost Sheet Job 1102 Rs.000 F) (1 + A) = = 99.375 1.000F (96.000 F) (1 + A) (96.000 respectively.4.500 30.000 F + 67.000 + 42.000 A + = 42.41.000 99.41.375 and Rs.375 1.500 + 30.000 + 42.000 F) Since the total cost of jobs 1102 and 1108 are equal to Rs.41.875 45.000 F) A 37.500 + 30.000 F) Job 1108 Rs.000 F)(1+A) and (67.000 FA or 30. 99.000 F) (1 + A) (96.500 + 30.000 42.40 (3) (4) (1) (2) or 67.500 A + = 30.000 A + 42. therefore we have the following equations (Refer to working note 1) (67.000 F + 96.25 and F Hence A = 25% and F = 40% (ii) Selling price of the new order: Direct materials = = = Rs.000 + 42.000 F + 96.000 FA On solving (3) and (4) we get : A = 0.500 30.000F (67.500 + 30.500 + 30.000 FA 96.000 FA 42. 64. Direct materials Direct wages Prime cost Add: Factory overheads Factory cost (Refer to Working note 2) Add: Selling Administration Overheads (Refer to Working note 2) Total cost (67. 54.000 42.500 A + 30.000 + 42.000 96.

Annual budgeted practical capacity fixed costs are Rs.000 60.50.500 If selling price of new order is Rs.Overheads 4.67.000 1. using the dual -rate method in which fixed costs . 20 and Cost is Rs. which has two users. 0 s .375 Question 54 PQR Ltd has its own power plant. 75 0 × 100 = Rs.34. Overheads (25% × Rs.000 60.000) Total cost 1. 8 0 1.00.50.4 per machine-hour.000 Total R .000 20. (ii) Allocate the power plant's cost to the cutting and welding departments.000 1. The following data are available: Cutting Departmen t Actual Usage in 2002-03 Machine hours) Practical capacity for each department (machine hours) Required 90.000 and budgeted variable costs are Rs. 100 then Profit is Rs.000 33.14. 80 Hence selling price of the new order = 2.16 .000 (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.09. When the plans were prepared for the power plant.9.000 Welding Departmen t 40. 50. top management decided that its practical capacity should be 1.000) 50. 1.101 Direct wages Prime cost Factory overheads (40% × Rs.00.000 machine hours. Cutting Department and Welding Department.000 Factory cost Selling & Admn.500 1.34.

(ii) and (iii).102 Cost Accounting are allocated based on practical capacity and variable costs are allocated based on actual usage. Variable costs are allocated based on actual usage. (iv) Comment on your results in requirements (i). 2003) (2+2+2+2=8 marks) . (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.4. but fixed costs are allocated to the cutting and welding department based on actual usage. (May.

000 Rs. Budgeted rate per machine hour (using practical capacity): Fixed practical capacity cost per machine hour + Budgeted variable cost per machine hour Rs.00.000 hours) Variable cost Rs.000 .000 (50.00. 0 0 R . 0 0 3 .000 4.00.000 3.60.50.40. 5. 10) Welding Departmen t Rs. Fixed practical capacity cost machine hour: Practical capacity (machine hours) Practical capacity fixed costs (Rs.) Fixed practical capacity cost machine hour (Rs. 10.103 Answer Working notes: 1.000 s .Overheads 4.50.000 Power plants cost allocation by using actual usage (machine hours) (Refer to working note 2) (ii) Statement showing Power Plant's cost allocation to the Cutting & Welding departments by using dual rate method. Total Fixed Cost (Allocated on practical capacity for each department i. 9.000 hours : 60.000 9.00. 4.000 / 1.40.000 hours × Rs.60.00.0 0× R .90 .00. Cutting Departmen t Rs. 4 = Rs.): (90. 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.90 .000 hours) = = per 1.000 1.000 9.0 0×2  s    5 5    2. 10) Total Rs.e. 6 + Rs. Cutting Department Welding Department Rs. Rs.00.000 (40. 6. 6 per 2.000 hours × Rs.

000 .000 (40.4) 5. 4) 7.20.00.4.000 hours × Rs.000 hours × Rs.000 13.80.104 Cost Accounting (Based on actual usage of machine hours) Total cost (60.

000 Total Rs. the cheaper it becomes. 6) 1. 3.000) will not be allocated to the user departments. 4) 4.000 hours × Rs.00.60.00.000 hours × Rs.000 Fixed Cost Allocation of fixed cost on actual usage basis (Refer to working note 1) Variable cost (Based on actual usage) 4.000 (60. 6) 2. This highlights the cost of unused capacity. (if one travels in his own vehicle) will decline when he travels more kilometers.00. 1995.000 Total cost (iv) Comments: 10." Comment briefly on this statement. 9. (November.000 (40. The major advantage of this approach is that the user departments are allocated fixed capacity costs only for the capacity used.000 – Rs.00. 4) 6.000 hours × Rs.105 (iii) Statement showing Power Plant's cost allocation to the Cutting & Welding Departments using dual rate method Cutting Departmen t Rs. The unused capacity cost Rs.00 (Rs.Overheads 4. so all fixed costs are allocated and there is no unused capacity identified with the power plant. Question 55 "The more kilometers you travel with your own vehicle.00. the allocation of fixed cost of practical capacity of plant over each department are based on single rate.40. This is because the majority of costs for running and maintaining vehicles are of fixed nature and the component of fixed cost per kilometre goes on .00.000 (60. 6. under (iii) and single rate method under (i).40.000 Under dual rate method.2 marks) Answer The cost per kilometre. 2.60. 3.00.000 Welding Departmen t Rs. 6.000 hours × Rs.00. Under (ii) fixed cost of capacity are allocated to operating departments on the basis of practical capacity.000 (40.

4. Hence. (November. the given statement is true. Question 56 Define Selling and Distribution Expenses. 1999.106 Cost Accounting decreasing with an increase in kilometre travel. 4 marks) . Discuss the accounting for selling and distribution expenses.

380 3.000 40.25) Unabsorbed overheads Reasons for unabsorbed overheads (i) 50% of the unabsorbed overhead was on account of increase in the cost of Rs.93. 3.66. Percentage on cost of production / cost of goods sold. How would you proceed to close the books of accounts. 1.93.380. there were 200 equivalent units in work-inprogress? On investigation. 1. Rate per unit sold.107 Answer Selling expenses: Expenses incurred for the promoting.104. 6 marks) Answer Actual factory overhead expenses incurred Less: Overhead recovered from production (2.800 units produced of which 7. Question 57 The total overhead expenses of a factory are Rs..25 per hour.000 were sold. These expenses may be recovered by using any one of following method of recovery. Percentage on selling price.380 ______ 80. The actual hours worked were 2.46.104 hours × Rs. to purpose delivery of and Accounting treatment for selling and distribution expenses Selling and distribution expenses are usually collected under separate cost account numbers. unabsorbed of indirect was due to the method (November. 2.Overheads 4.000 . 4. 1. Distribution expenses: Expenses relating despatch of goods/products to customers. 4.46. marketing and sales of different products. Also give the profit implication of suggested. 2000. overhead was recovered in production at Rs. it was found that 50% of the overhead was on account of increase in the cost materials and indirect labour and the remaining 50% factory inefficiency. Taking into account the normal working of the factory. assuming that besides 7.

4.108 Cost Accounting indirect materials and indirect labour (ii) 50% of the unabsorbed overhead was due to factory inefficiency.000 . 40.

40. 5) Rs. 5 per unit (78 0 + 2 0 u its . Unabsorbed overhead amount of Rs.00 20. 1.000. which was due to increase in the cost of indirect material and labour should be charged to units produced by using a supplementary rate. Question 58 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.00 80.000 Direct Wages Rs. 35. Budget Machining 6. 4. Director Labour Hour Machine Hours .0 0 s 0 0 = Rs.000 units × Rs. 40. would reduce the profit for the period by Rs.000 80.Overheads 4.000 The use of cost of sales figures. Factory Overhea ds Rs. of Rs.50. as this is an abnormal loss. 0 0 ) n The sum of Rs. 2. 5) Work-in-progress (200 units × Rs. 5) Finished goods (800 units × Rs. The balance amount of unabsorbed overheads viz.000 1.000 3.109 Treatment of unabsorbed overheads in cost accounting 1.000 and Rs. 4 . Supplementary rate = R .000 and will increase the value of stock finished goods and work-in-progress by Rs. finished goods and work-in-progress as below: Cost of sales (7.000 (unabsorbed overhead) should be distributed by using a supplementary rate among cost of sales.000 4.40. The relevant data for a month are given below: Department Direct Material s Rs.000 respectively.60.000 due to factory inefficiency should be charged to Costing Profit & Loss Account. 35.000 ______ 40.

(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.40.00 0 84.00 0 3.000 96. 000 2.000 10.50.110 Cost Accounting 0 Assembly Packing Actual Machining Assembly Packing 1.70.000 11.80.000 1.000 – 96. (November.00.00 0 1.000 24.00.70. 16 marks) .00 0 7.00 0 90.4.35. CW 7083.00 0 1.25.00 0 1.00 0 1. (iii) Determine the selling price of Job CW 7083 based on the overhead application rates calculated in (ii) above.00 0 3. (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.000 0 1.36. 1994.00 0 70.00 0 50.000 The details of one of the representative jobs produced during the month are as under: Job No.20.000 60.000 90. 1. 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 Department Direct Materials Rs.00 0 1. 240 360 60 Director Labour Hour 60 120 40 Machine Hours 180 30 – Machining Assembly Packing The factory adds 30% on the factory cost to cover administration and selling overheads and profit.90.200 600 300 Direct Wages Rs.

000 Machinery Assembly Packing Total Overhead absorption rate B d e d fa to o e e d u g te c ry v rh a s × 100 B d e d d c wg s u g te ire t a e = R .200 + Rs.25. 0 s .25. 50 0 (ii) Methods available for absorbing factory overheads and their overhead recovery rates in different departments. 0 0 = 125% of Direct wages Selling price of the Job No. 60) Overheads (125% × Rs. Hence machine hour rate should be used to recover overheads in this department. 660) Total factory cost Add: Mark-up Selling price Rs.0 0 × 100 s .000 1.000 3. the use of machine time is the predominant factor of production.000 70.50 . 3.50.000 5.50 R .00 825.00 3. 600 + Rs.111 Answer (i) Department Computation of overhead absorption rate (as per the current policy of the company) Budgeted Factory Overheads Rs.00 660.50 4.100.000 6.40.585.62 .Overheads 4. 300 Direct Wages (Rs. The overhead recovery rate based on machine hours has been calculated as under: Machine hour rate = B d e d fa to o e e d u g te c ry v rh a s B d e d m c in h u u g te a h e o rs .60.660.00 1. 80. 240 + Rs. 2.075. 1. CW – 7083 Direct Materials (Rs. 1.000 = Budged Direct Wages Rs. 360 + Rs.00.000 1. Machining Department In the Machining department.

838) Selling Price Working Note Rs.40 per hour 3. 0 0 or = Rs.151. Hence direct labour hour rate method should be used to recover overheads in this department. 2. 0 0 8 . The overheads recovery rate in this case is: Direct labour hour rate = = B d e d d e t la o r h u u g te ir c b u o rs B d e d fa to o e e d u g te c ry v rh a s R .40 .00 1.0 0 h u s 0 0 or = Rs.0 0 s .36 . 3. Assembly Department In this department direct labour hours is the main factor of production. 0 0 10 .0 0 h us .00 3.078.100. The overhead recovery rate is in this case comes to: Direct labour hour rate = = B d e d fa to o e e d u g te c ry v rh a D c la o r h u ire t b u o rs R . Packing Department Labour is the most important factor of production in this department.00 660.40 _______ 4. 4. 1. 5 0 5 .838. Hence direct labour hour rate method should be used to recover overheads in this department.4.989.50 per hour 2.112 Cost Accounting = R .0 0 s .0 0 h u s 0 0 or = Rs.50 per hour (iii) Selling price of Job CW-7083 [based on the overhead application rates calculated in (ii) above) Direct materials Direct wages Overheads (Refer to Working Note) Factory cost Add: Mark up (30% of Rs. 2.00 1. 12 .0 0 s .14 .

810 168 100 1.50 1.113 Overhead Summary Statement Dept. Machining* Assembly Packing Basis Machine hour Direct labour hour Direct labour hour Hours 180 120 40 Rate Rs.Overheads 4.40 2.07 8 . 4.50 Total Overheads Rs.

500) 6.09.53.4.000 (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? (November. 1995. 14.50 4.12.000 Direct labour hours 60.37.): (A) Actual overheads (Rs.000 1.000 42.40 1.000 1.20.000 (39.50.000 1.00 0) 84.500 Total Rs.): (B) (Under)/Over recovery: (A – B) Question 59 96. 3 marks) (b) B & Co.00 90.000 99.90.70. 96.000 (22. y Rs.500 1.) Overhead recovered (Rs.000 42.000) As per methods suggested Basis of overhead recovery Machine hours Direct Labour hours 90.000 4.500 1.50 1.35.000 7.114 Cost Accounting (iv) Department-wise statement of total under or over recovery of overheads (a) Under current policy Departments Machinin Assembl Packing g Rs. Direct Wages (Actual) Overheads recovered @ 125% of Direct wages: (A) Actual overheads: (B) (Under)/Over recovery of overheads: (A – B) (b) 5.000 2.000 84.26.000 3.000 2.08.000 3. Rs.70.32.35.000 2.000 15.70.000 3.600 Volume of production (Units) 800 .000 Total Rs. Hours worked Rate/hour (Rs.09.000 6.000 (2.90. has recorded the following data in the two most recent periods: Total cost of production Rs.

115 19.200 What is the best estimate of the firm's fixed costs per period? (November.Overheads 4. 3 marks) .400 1. 1995.

000 uncompleted units which may be reckoned at 50% complete.116 Cost Accounting (c) In a manufacturing unit overhead was recovered at a predetermined rate of Rs. How would unabsorbed overheads be treated in cost accounts? (November.4. the overhead charged varies from period to period due to changes in direct wages. at the end of the period there were 10.000 labour-hours respectively.800 400 D r n e in t ta c s t o p o u t n iffe e c o l o f r d c io D r n e in v lu e o p o u tio iffe e c o m f rdc n = 4 0u it = Rs. Similarly.48 0 s . though there was no stock of uncompleted units at the beginning of the period. 0 .20 per labour-hour. Therefore.200 Difference 4.400 1.) Volume of production (units) Variable cost per unit = Period I 14.600 800 Period 2 19.45. During this period 30. 1995. In the case of labour intensive operations. In fact.000 units were sold. (b) Total cost of production (Rs.000 units were held in stock while there was no opening stock of finished goods.00.00. Direct wages percentage rate method do not possess the aforesaid features In other words. 12 0 ns R . it was found that 60% of the unabsorbed over-heads were due to defective planning and rest were attributable to increase in overhead costs. a time base overhead absorption rate method is always preferred over any other method. it is advisable to use labour hour method for overhead absorption. The total factory overhead incurred and the labour-hours actually worked were Rs. 10 marks) Answer (a) A method of overhead absorption is considered appropriate if the total amount of overhead absorbed in a period does not fluctuate materially from the actual expense incurred in the period. overhead expenses are generally a function of time. At the end of the period 5. On analysing the reasons.000 and 2.

14. 5.600 – 800 units × Rs.600 – Rs.600 = Rs. 12 = Rs. 9.000 .Overheads 4. 14.117 Fixed cost = Total cost of production (of a period) – Total variable cost = Rs.

000 units × Rs.000 25.000 Overheads actually incurred : (A) Overheads absorbed at Rs.000 40. 20) Unabsorbed overheads: (A – B) Unabsorbed overheads due to Defective planning (i.per labour hour (B) (2.00 Rs. 0 s . 5/.118 Cost Accounting (c) Computation of un-absorbed overheads Labour hours actually worked 2.00. 3.000 may be treated as normal and therefore should be charged by a supplementary overhead absorption rate computed as under: Total production during the year Units produced Add: Equivalent units of work-in-progress 10.00. 2. 0 00 0 35.000) Balance of unabsorbed overheads due to increase in overhead costs. 1.000 25. 50% complete Total (units) Supplementary overhead absorption rate is: = R .000 finished goods in stock @ Rs.00. (ii) Balance of unabsorbed overheads of Rs.000 due to defective planning may be treated as abnormal and should therefore be charged to Costing Profit and Loss Account.000 5. 45.00.per unit 4 . 60% of Rs.000 units.000 Disposition of normal unabsorbed overhead of Rs. Disposition of unabsorbed overhead (i) The unabsorbed overheads of Rs. 50% complete Rs. 5 per unit Add: To work in progress: 10.000 units.00.00.000 . 00 0 = Rs.50.4. 2. 5) Add: To closing stock of finished goods: 5.00. 5.20 .000 Charge to Costing Profit Loss A/c (as part of cost of unit sold: 30.000 ______ 40.000 hours × Rs.000 2.000 5.00.000 3.00.00.e. 20/.00.

5/.119 i.000 equivalent units @ Rs.e.per unit Total _______ 2.000 . 5.Overheads 4.00.

1996.40. ) (Rs.000 2.000 1.4.50. ) (uni ts) 10.000 8. indirect selling and distribution costs to be allocated between the two products are as under: Insurance charges for inventory (finished) Storage costs Packing and forwarding charges Salesmen salaries Invoicing costs Other details are Product A 500 300 Product B 1.000 800 2. 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.50.000 Selling price per unit Cost per unit (exclusive of indirect selling and distribution costs) Annual sales in units Average inventory Number of invoices (Rs. In addition to direct costs. (May. Required (i) Set-up a schedule showing the apportionment of the indirect selling and distribution costs between the two products.20. 78.000 One unit of product A requires a storage space twice as much as product B.120 Cost Accounting Question 60 A company is making a study of the relative profitability of the two products – A and B.000 600 Rs.000 1.000 4.500 8.000 7. 7 marks) (ii) Prepare a statement showing the relative profitability of the two products (3 marks) Answer (i) Schedule showing the apportionment of the indirect selling and distribution . The cost to packing and forwarding one unit is the same for both the products.

of invoices (2500 : 2000) Total Rs. 50.00.0 00 7.00.100) Average Inventory storage space (1000 × 2) : (800 × 1) Annual sales in units (10000) : (8000) Efforts of Salesmen (1:1) Annual sales value (5:8) No.50.00.0 00 6.0 00 _______ _ 14. 000 40. 500) Less: Cost of sales 30.000 (8.0 00 2.00 14.000 units × Rs.33.000 (10. 1000) 48.88.0 00 4.20. 78. 300) Gross Profit Less: Indirect selling and Distribution cost 20. 500) : (800 × Rs.000 units × Rs.0 00 _______ _ 28.000 B Rs.0 00 8.00.50.000 Storage cost Packing & Forwarding charges Salesmen salaries Salesmen Commission Invoicing Costs 1.000 units × Rs.000 (10.0 00 2.33. 30. 000 1.00.40.55.50.00.25.000 .50.000 (8.888 units × Rs. 80.20.00.50.0 0 4.000 Products A B Rs.121 costs between the two products Items Insurance charges Basis of apportionment Average inventory value (1000 × Rs.0 00 4. 000 (ii) Statement showing the relative profitability of the two products Products Annual sales value A Rs.25.50. Rs.0 00 4.00.0 00 2. 600) 32.00.Overheads 4.0 00 _______ _ 14.0 00 2.000 14.55.000 48.000 3.

0  s . 0 0 0 ×1 0  s 00 .000 on account of 'written off' obsolete stores and Rs.67.00. 45. 50 0   1 0 0  R . manufactures a single product and absorbs the production overheads at a pre-determined rate of Rs.45.000 22. 0 0 0 × 0  R . it has been found that actual production overheads incurred were Rs.08%  R . 0    Question 61 ABC Ltd.000 being the wages paid for the strike period under an award.5 .000 10.9% ________ 17.122 Cost Accounting [Refer to (a)(i)] Profit Profitability as percentage of sales _______ 5.8 . 30. 6. It included Rs. 10 per machine hour.000.54 .1 . . 0  s 00 .4. At the end of financial year 1998-99. 7 0 0  s 76 . 0  R .

30. 6.80.000 machines hours @ Rs.000 units 8. and (ii) Show the accounting treatment of under – absorption of production overheads. 10 per hour: (B) Amount of under-absorption of production overheads: [(A)–(B)] Rs.000 45.25.000 units 18.000 75.123 The production and sales data for the year 1998-99 is as under: Production: Finished goods Work-in-progress (50% complete in all respects) Sales: Finished goods 20. 6 marks) Answer (i) Amount of under-absorption of production overheads during the year 1998-99 Total production overheads actually incurred during the year 1998-99 Less: 'Written off' obsolete stores Rs. 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.000 (ii) Accounting treatment of under absorption of production overheads . You are required to: (i) Calculate the amount of under – absorption of production overheads during the year 1998-99.Overheads 4. (November.000 4.000 5. 45.000.00.000 units The actual machine hours worked during the period were 48.000 Net production overheads actually incurred: (A) Production overheads absorbed by 48. 1999.000 Wages paid for strike period Rs.

work-in-progress.000 over. finished goods and cost of sales by using supplementary rate Total under-absorbed overheads Rs. one third of the under-absorbed overheads were due to lack of production planning and the rest were attributable to normal increase in costs.e.000 units were completely finished and 8. 45.000 of under – absorbed overheads should be distributed over work-in-progress.000 24.4.500 Rs. Dr.000 30.000 18. Work-in-progress (4. Dr. 22.124 Cost Accounting It is given in the statement of the question that 20.25) Cost of sales (18. Balance (66-2/3% of Rs. Rs.500 30. 1. 15. This being abnormal.000 ______ 45.000 of under – absorbed overheads were due to lack of production planning.000 .000 Apportionment of unabsorbed overheads of Rs. 1.000 units × Rs.000 Rs.000 2. 1. 2. finished goods and cost of sales. 30.25) Accounting treatment: Work-in-progress control A/c Finished goods control A/c Cost of Sales A/c Profit & Loss A/c Dr. 1.000) i.000) i.e. (33-1/3% of Rs. Dr. 15.500 Rs.500 22. 15.000 Rs.000 units were 50% complete.000 2. 5. 5. 30. should be debited to the Profit and Loss A/c 2. Rs.000 units × Rs.000 units × Rs. Equivalen t Complete d units 4.25) (Refer to working note) Finished goods (2. 45.000 Rs.

125 To Overhead control A/c Working note: Supplementary overhead absorption rate R . 20. 20.000 Using two methods of disposal of under-absorbed overheads show the implication on the profits of the company under each method. a supplementary rate may be used to adjust the overhead cost of each cost unit.Overheads 4. on the basis of values of the balances in each of these accounts are as follows: .000 3. 0 s 00 0 2 . stock of finished goods and work-in-progress in this question. Rs. The following data are available for the year ended 31st March. Prorated figures of under-absorbed overhead over cost of goods sold.000 1. The under-absorbed amount in total may. 1997. According to second method. at the end of accounting period be apportioned on proportionate basis over cost of goods sold. 8 marks) Answer Computation of unabsorbed overheads: According to first method. 1997. the total unabsorbed overhead amount of Rs.70. The use of this method will reduce the profits of the concern by Rs. Apportionment of under-absorbed overheads may be carried out on the basis of the value of cost of goods sold. stock of finished goods and work-in-progress.000 will be written off to Costing Profit & Loss Account. Manufacturing overheads Amount actually spent Amount absorbed Cost of goods sold Stock of finished goods Works-in-progress 1.000 48.3 .000 = = Rs. 0 u it 40 0 n s 45. 1. uses a historical cost system and absorbs overheads on the basis of predetermined rate. stock of finished goods and work-in-progress.000 for the period. (Nov.000 96.50.36.25 per unit Question 62 Sweat Dreams Ltd..

00 0 × Rs. Working note: Under-absorbed overhead to be absorbed by cost of goods sold Under-absorbed overheads to be absorbed by stock of finished goods Under-absorbed overhead to be absorbed by WIP s .000 = Rs. 14.4.000 1.33 .000 4.000 5.000 = Rs.0 0 R . Cost of goods sold Stock of finished goods Work-in-progress 3. 20.000 48. 00 0 2. R . 0 ` s 80 0 × Rs.000 2. 00 0 × Rs. 20.00. 0 s .000 = Rs.80. 0 s .000 50.48 .4 8 . 14. 4.000 20.000 Rs. 0 s 60 0 R . 6 0 = R .36.50. 20.000 = R . 3.9 .126 Cost Accounting Appointment of overhead under absorbed (Refer to working note) Rs.000 = R .4 .000.000 Rs. 0 s .00.000 4. 14.000 The use of the above method would reduce the profit of the concern by Rs.48 .000 96.000 .

2 per unit 60.00. Estimated scrap value at the end of life is Rs.000 2. The Supervisor and Operator are permanent.000. does not require power. Standing charges per hour 200 180 . (i) Effective hours for standing charges (208 hours – 8 hours) (ii) Effective hours for variable costs (208 hours – 28 hours) 2. Required Calculate a two-tier machine hour rate for (a) set up time. 8 marks) Answer Working notes: 1.520 72. Life 10 years. It includes maintenance time of 8 hours and set up time of 20 hours. 20. Repairs and maintenance and consumable stores vary with the running of the machine. though productive. The expense data relating to the machine are as under: – Cost of the machine is Rs.480 47. a machine is considered to work for 208 hours in a month.000 Power is required for productive purposes only. 2002. and (b) running time (May.Overheads 4. Set up time.127 Question 63 In a factory. Rs. – – – – – – – Repairs and maintenance per annum Consumable stores per annum Rent of building per annum (The machine under reference occupies 1/6 of the area) Supervisor's salary per month (Common to three machines) Wages of operator per month per machine General lighting charges per month allocated to the machine Power 25 units per hour at Rs.000.500 1. 5.000 6.

60.500 Set up time rate per machine hour Rs. 2.000 Per hour Rs.000 / 200 hours) 3. General Lighting Rent (Rs.000 (Rs. Total machine expenses Computation of Two – tier machine hour rate Running time rate per machine hour Rs. (Rs. 72. 3.500 / 200 hours) 132.000 / 3 machines) Per month Rs.500 ______ 24. 4.000 1. 2. 20.040 (Rs.520 / 12 months) Power (25 units × Rs. 2 × 180 hours) Wages Per month Rs.000 Per hour Rs. 5. Machine expenses per hour 1.000 / 180 hours) 12. 9.000 / 200 hours 28 5. 4.50 2. 47.480 / 12 months) Consumable stores (Rs.000 _____ 4.50 5.960 / 180 hours) 50 9.000 – Rs.040 / 180 hours) 22 3.000) / (10 years × 12 months) Repairs & maintenance Rs.000 / 6 × 12) Total standing charges Standing charges per hour (Rs. 4. .000 20 Depreciation (Rs.00.128 Cost Accounting Supervisor's salary (Rs.4. 6. 20 (Rs.960 (Rs.

00 140.50 52.00 12.50 152.00 – – – 40.Overheads 4.129 Standing Charges (Refer to working note 2) Machine expenses: (Refer to working note 3) Depreciation Repair and maintenance Consumable stores Power Machine hour rate of overheads Wages Comprehensive machine hour rate 20.00 50.00 20.00 20.00 22.50 20.50 .00 12.00 28.

120 per month.75 p. out of which three points are for the machine Rs.ft.h. for 5 lakhs. 800.ft. Lighting charges for 20 points for the whole department. Area occupied by other machine 1. 4.000 Rent (See Note 3) 600 Light Charges (See Note 4) 216 Total Standing Charges 52.904 Note: .500 sq.75p p. (p. Scrap value at the end of ten years Rs. ______ @ 0. 5. Machine hour rate 31.000 hours Insurance premium annually for all the machines Rs.500 Insurance premium (See Note 2) 300 Repair and Maintenance 2.000 hours) Machine Expenses: Electricity Consumption: 25 units 18.4.1990. The following further particulars are available: Expected life of the machine 10 years.154 (Rs.) (per hour) Depreciation (See Note 1) 49. Repairs and maintenance for the machine during the year Rs.a. Rent per month of the department Rs. 75 lakhs. Rs. 2.500 Electricity consumption for the machine per hour (@ 75 paise per unit) 25 units.130 Cost Accounting Question 64 A machine was purchased January 1. Compute the machine hour rate for the new machine on the basis of the data given above.u.000. Area occupied by the machine 100 sq.000 Expected number of working hours of the machine per year. Answer (c) Standing charges Computation of Machine Hour Rate Rs.616 Hours rate for Standing Charges 13. 4. The total cost of all machinery inclusive of the new machine was Rs.616 / 4. 52.

7 .49 .50 .14 0× p in s s .) = R . Light charges for the machine p.a. 3. 0 75.440. s . 00 0 R .000 49.000 R . Distribution summary of overheads is as follows: Production Departments A Rs. 1.000 Y Rs.600 B Rs.600 Toal Area occupied = 1600 Sq.500 = Rs.45 0× s . 9.500 (2) Total cost of all the machines Total Insurance premium paid for all the machines Total annual insurance premium of the new Machine = R . 0 0 0 s 50 . 0 s .Ft. 600 (4) Total annual light charges of 20 Points for the whole department is Rs. 14. 0 s . 0 q t = Rs.00 4. 0 10 q t 16 0 s . Question 65 A company has three production departments and two service departments.000. Rent for the area occupied by New machine (100 sq. 50 0 = Rs. 1 y as 0 er Rs.ft.95. 216. 13.f .700 C Rs. 4 3 o t = 2 p in s 0 o t . = Rs. 12.96 0 × 0 s . 0 R .000 5.00.131 (1) Cost of new machine: Less: Scrap Value Net Cost of the machines Life of the machine 10 years: Depreciation = R . 9.Overheads 4. .000 4.00.f .800 Service Departments X Rs. 5. 300 (3) Rent paid per annum = Rs.

40% 30% 20% – Y Deptt. 1998.4. 30% 30% 20% 20% Y 10% – Apportion the cost of Service Departments by using the Repeated Distribution method.132 Cost Accounting The expenses of service departments are charged on a percentage basis which is as follows: A B C X X Deptt. 8 marks) . (November.

800 -9. Rs.133 Answer Statement showing apportionment of the cost of Service Departments to Production Departments by using the Repeated Distribution Method.170 780 780 -3. Rs.60 summary 0 14. Production Departments Service Departments A B C X Y Rs.600 2. Total overheads as per distribution 13.000 Department X overheads apportioned in the ratio of (40:30:20:-:10) 3.170 1.800 9.000 3.700 1.900 Department X overheads apportioned in the ratio of (40:30:20:20:-:10) 312 234 156 -780 78 Department Y overheads apportioned in the ratio of (30:30:20:20:-) 23 23 16 16 -78 Department X overheads apportioned in the ratio of (40:30:20:-:10) 6 5 3 -16 2 Department Y overheads apportioned in the ratio of (30:30:20: 20:-) 1 1 — — -2 . Rs.Overheads 4. Rs.700 12.000 900 Department Y overheads apportioned in the ratio of (30:30:20:20:-) 1.

Idle time may be normal or abnormal . which account for idle time may be grouped under the following two heads: . Such idle time is uncontrollable. Normal idle time is the time.555 — — Question 66 What is idle time? Explain the causes leading to idle time and its treatment in cost accounts? Answer Idle time : It refer to the labour time paid for but not utilized on production .This is the period during which workers remain idle . but during which no output is given out by the workers . Abnormal idle time is the time.In other words it represents the time for which wages are paid.833 15.71 2 18.134 Cost Accounting 18. which arises on account of abnormal causes.4. in normal course of business. Causes leading to idle time: The major causes. which cannot be avoided or reduced.

it result in the generation of abnormal idle time. Machine break. Time spent to overcome fatigue.135 Normal causes: The main causes. are: 1. 2. Time taken by workers to travel the distance between the main gate of factory and the place pf their work. which lead to the occurrence of normal idle time. by adopting a factory overhead absorption rate. 4. Question 67 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. 2. This is done by inflating the labour rate.Overheads 4. non-availability of raw materials. Actual Direct labour wages. Treatment of Idle time in Cost Accounts: Normal idle time: The cost of normal idle time should be charged to the cost of production. Abnormal causes: The main causes. 3. . Time spent to meet their personal needs like taking lunch. Plant value. 3. are as follow 1.down. power failure. tea etc. Abnormal Idle time: The cost of abnormal idle time due to any reason should be charged to Costing Profit & Loss Account. which account for the occurrence of abnormal idle time. It may be transferred to factory overheads for absorption. Such a factor too. In the case of seasonal goods producing units may not be possible for them to produce evenly throughout the year. Conscious management policy decision to stop work for some time. Answer Item (i) Supplies departments (ii) Repair Direct Bases of apportionment supplies made to different labour hours. Time lost between the finish of one job and starting of next job. Machine hours. tools or waiting for jobs due to defective planning.

Number of workers.136 Cost Accounting (iii) Maintenance of building Floor area occupied by each department (iv) Executive salaries Actual basis.4. (v) Rent Floor area .

26. Floor readings (light) Capital cost of plant and building.588 Dr. Answer Actual overheads Rs.65.640 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. Finished goods stocks Rs. Manufacturing overheads applied Rs.65.904 Cr. space.732 Dr.640 for the period.30. Work-in-progress Rs. 60. the total unabsorbed overhead amount of Rs.640 will be written off to Costing Profit & Loss Account.Overheads 4. at the end of the accounting period.544 Overhead recovered Rs. (2) Use supplementary rate.4. 60. be . Cost of goods sold Rs. 8. 3.544 Dr. The following are the figure from the Trial Balance as at 30-9-83:Manufacturing overheads Rs.41. 4.3. 60. Give two methods for the disposal of the unabsorbed overheads and show the profit implications of each method. Meter (vii) Fire insurance of stock (viii) Indirect labour Question 68 Your company uses a historical cost system and applies overheads on the basis of “pre-determined” rates.40. 1. a supplementary rate may be used to adjust the overhead cost of each cost unit.26.137 (vi) Power and light K W hours or H P (power) Number of light points. 2. According to first method.904 Under absorbed Overhead Rs. The use of this method will reduce the profits of the concern by Rs. The under-absorbed amount in total may. Value Direct labour cost. According to second method. to recover the under-absorbed overhead.480 Dr.

Rs.41. workin-progress.588 42.138 Cost Accounting apportioned on ratio basis to the three control accounts.30. finished goods stock and cost of goods sold in this question on the basis of values. This .82. 0 42.732 11. then the salary paid to him should be charged to Board of Studies account.41.640 12. The latter will affect the profit of the subsequent period.617 12.12. 6 .029 and the value of stock will increase by Rs. 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.029*** 8.6 .611.074* 1.30. 4 s 06 0 ***Overhead to be absorbed = × 8. 42.800 60. by cost of goods sold 1 .6 0 s 0 4 *Overhead to be absorbed by = × 1. Prorated figures of underabsorbed overhead over work-in-progress.48. 0 11. 18.554 Finished Goods Stock 2.440 By using this method. viz. Answer Cost allocation and Cost Absorption: Cost allocation is defined as the allotment of whole items of cost to cost centers. 28 0 21 .029 Question 69 Distinguish between cost allocation and cost absorption.480 7.074 R . Work-in-progress 1. of the balances in each of these accounts are as follows:Additional Overhead (Under-absorbed) Total Rs.4. 28 0 21 .537** 2.588 = Rs.40. 0 7. For example.73. finished goods stock and cost of goods sold on the basis of their value in the respective account is as follows:R .269 Cost of Goods Sold 8. work-in-progress 1 . Working Notes The apportionment of under-absorbed overhead over work-inprogress.6 .42.40. by finished goods 1 . as the basis. 28 0 21 .480 = Rs.732 = Rs. Rs. the profit for the period will be reduced by Rs. if a typist works exclusively for Board of Studies. 4 s 06 0 **Overhead to be absorbed = × 2. finished goods stock and cost of goods sold account.537 R .

Cost absorption can take place only after cost allocation. 1996. In other words. (Nov. Cost absorption is defined as the process of absorbing all overhead costs allocated to or apportioned over particular cost centre or production department by the units produced. State your arguments to convince him the need to introduce a cost accounting system. the overhead costs of a lathe centre may be absorbed by a rate per lathe hour.Overheads 4. For example. Question 70 A factory manufactures only one product in one quality and size. the overhead costs are either allocated or apportioned over different cost centres and afterwards they are absorbed on equitable basis by the output of the same cost centres. 4 marks) .139 technique of charging the entire overhead expenses to a cost centre is known as cost allocation. 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.

(iii) Treat as a separate element of total cost: Here administration overhead considered as a cost of a distinct and identifiable operation of the organisation necessary to carry on its activity.40. Therefore these overheads should be divided on equitable basis between production and selling and distribution activity.00. (ii) Apportionment between production and selling and distribution: According to this method it is assumed that administrative overheads are incurred both for production and for selling and distribution. Treatment of Administrative Overheads in Cost Accounting (i) Charge to Costing Profit and Loss Account: According to this method administration overheads should be treated as fixed cost as they are concerned with the formulation of policy. In other words. all expenses incurred on policy formulation. Question 71 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. Therefore these overheads are recovered separately on some equitable basis which may be cost or sales basis.140 Cost Accounting Answer Definition of Administration overhead: These are costs of formulating the policy. Budgeted cost data and relevant cost drivers are as follows: Departmental costs: Snow mobile engine Boat engine Factory office Maintenance Cost drivers: Factory office department: No. Hence these overheads should be transferred to the costing profit and account.00.000 3.00. 6. These are not related directly to production activity or function. directing the organisation and controlling the operation of an undertaking. direction.4.000 17. office administration and business management are included in administration overheads.000 2.000 . control. of employees Rs.

Snowmobile engine Boat engine Total Maintenance dept Number of employees 1.141 Snow mobile engine department Boat engine department Maintenance department 1.080 270 1.Overheads 4. of work orders 570 orders 190 orders 40 orders 800 orders (i) Compute the cost driver allocation percentage and then use these percentage to allocate the service department costs by using direct method.500 employees Maintenance department: Snow mobile engine department Boat engine department Factory office department Required: No. (2+3= 5 marks) Answer 71 (i) Cost Driver Allocation percentage Factory office dept.080 employees 270 employees 150 employees 1. (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.350 Number of work orders Percent used 80% 20% 100% .

40. Total . 2.80.000 18. office (3.000) 0 (2. Rs.40.000 1.00.00. 3.142 Cost Accounting Snowmobile engine Boat engine 570 190 760 75% 25% 100 Service department allocation: Factory office dept.000 60. 17.000 Rs.20.000 Snowmo bile engine Rs.000 Maintena nce dept.000 Maintenance Dept.00 0 60.000 10. Departmental Cost Allocated costs (Rs): Factory Dept.40.00.00.4.20.00 0) 0 2.000 Boat engine Rs. 6.

25.080 270 150 1.000 67.143 (ii) Cost Driver allocation percentage Factory office dept Snowmobile engine Boat engine Maintenance dept Maintenance dept Snowmobile engine Boat engine Service department allocation: Factory office Dept.592 based on 8 hours per day for 324 days.000) 0 30.500 Work order 570 190 760 Percent used 72% 18% 10% 100% Percent used 75% 25% 100% Allocated (Rs): Factory office costs (3.70. 6.40.).21.5 00 Maintenance dept Total cost Question 72 A manufacturing unit has purchased and installed a new machine of Rs.000 ) 0 2.000 Boat engine Rs.000 (2.Overheads 4.16.00. 2.0 00 Number of employees 1. (ii) Estimated cost of maintenance of the machine is Rs.000 Maintena nce Dept.00.a. .000 as scrap at the end of its working life. 17.000 20. The new machine has an estimated life of 12 years and is expected to realise Rs.000 to its fleet of 7 existing machines. 70.500 18.00.70.18. Departmental costs Rs. This includes 300 hours for plant maintenance and 92 hours for setting up of plant.000 Snowmo bile engine Rs.00. 12.50 0 54. Other relevant data are as follows: (i) Budgeted working hours are 2. 3.2500 10. Rs.000 (p.

420 per week plus 15% fringe benefits. 3 per unit. which is replaced at the end of each week (6 days in a week) at a cost of Rs.4. . No current is taken during maintenance and setting up. 400 each time. (iv) Four operators control operation of 8 machines and the average wages per person amounts to Rs. (v) Electricity used by the machine during the production is 16 units per hour at a cost of Rs.144 Cost Accounting (iii) `The machine requires a special chemical solution.

000) Total Std.72 0 13.000. During the current year it is estimated to increase 10% of this amount.200 19.145 (vi) Departmental and general works overhead allocated to the operation during last year was Rs.91 6 9.3 28 19.916/2.000)/ 45.Overheads 4.59.59.328/8 Cost per Machine hour 19.000 -70. Calculate machine hour rate.000 + 5.592300-92) = 2200 Setting time productive (2.60 8 1.292 Machine hours: Setting time unproductive (2. 50.70. (b) setting up time is productive. if (a) setting up time is unproductive. (2+3= 5 marks) Answer 72 Computation of Machine hour Rate Per year Standing charges Operators wages 4× 420 × 54 Add: Fringe Benefits 15% 90.45 55.200) (12. Charging for 8 machines Cost per Machine 1.05 8.00 0 1.916/2.592-300) = 2.292 Machine expenses Depreciation (12 × 2.3 28 Departmental and general overhead (50.04.69 Per hour (unproduc tive) Per hour (product ive) .

91 118.70.00 43.292) Machine Hour Rate 123.292 Maintenance (25.292) Special chemical solution (400 × 54)/2.82 11.000)/(12 × 2./ 2.146 Cost Accounting (12.63 46.68 9.200) (25.07 9.72 .4.000-70.200)/2.000/2.42 10.292) Electricity (16× 3) (16× 3× 2.200.000/2.36 48.

75 per day (of 8 hours) Rs.575 per month. Production bonus payable to workers in terms of an award is equal to 33.000 Rs.000 200 hours Wages for attendant) Helper Power cost for the month for the time worked Supervision charges apportioned for the machine centre for the month Electricity & Lighting for the month Repairs & including maintenance (machine) Rs. 16. 17. 15.000 Rs. (14 Marks) Answer Computation of Comprehensive Machine Hour Rate .24.250 Rs.500 Consumable stores per month Insurance of (apportioned) for the year Plant & Building Rs.147 Question 73 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) Normal working hours for the month (The machine works to only 75% of capacity) Wages of Machineman Rs.500 Rs. 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. 1. 125 per day (of 8 hours) (machine Rs.33% of basic wages and dearness allowance.Overheads 4. 7.500 Other general expense per annum The workers are paid a fixed Dearness allowance of Rs. 27. 3. 3.

00 44. 1. 200 hrs.450 1. 2.575 Rs. Rs.267 Rs.575 Rs.4.m.600 Helper .845.567 6.500 15. 75× 25) D.291. 125× 25) (Rs.000 112.000 7.91 32. × 75% = 150 hrs. 3.67 100. 4.700 Production bonus (1/3 of above) 1.31 116.400×1/12) Variable Cost Repairs and maintenance Power Wages of machine man Wages of Helper Machine Hour rate (Comprehensive) Effective machine working hour’s p.A.125 Rs.700 16.97 Rs406. 3.250×1/12) Plant and building 3.86 Wages per machine hour Machine man Wages for 200 hours (Rs. 1.84 17.500×1/12) Depreciation (32.875 Rs.17 Other General Expenses (27.500 1.67 2.150 4.148 Cost Accounting Per Per month(Rs hour(Rs) ) Fixed cost Supervision charges Electricity and lighting Insurance of (16. 1.354.

00.00. The budgeted costs in these service departments are as follows: HR Rs. (iii) Use the step-down method to reapportion the firm’s service department cost.000 The usage of these Service Departments’ output during the year just completed is as follows: Provision of Service Output (in hours of service) Users of Service HR Maintenance Design Machining Finishing Total Required: (i) Use the direct method to re-apportion RST Ltd. 32.000 4.500 1. 44. (ii) Determine the proper sequence to use in re-apportioning the firm’s service department cost by step-down method.91 345 4.000 3.60.’s service department cost to its production departments. 1. There are three service departments: Human Resource (HR).97 RST Ltd.000 Design − − − 4.00.00.000 8.60.000 Design Rs.737 Rs. has two production departments: Machining and Finishing.000 3. Answer Providers of Service HR Maintenanc e − − 500 − 500 500 4. 1.000 .945 Rs. Variable Fixed 1.500 6.500 5.000 10.00.00.000 7.00.149 Leave wages (10%) Effective wage rate per machine hour (150 hrs in all) Question 74 470 6.Overheads 4.000 4.000 5.000 6.000 Maintenance Rs. Maintenance and Design.000 4.

5.00 0 2.00 2.60.60. 5.00.22 2 1. Overhead as per primary distribution Apportionment HRD 4 : 5 : − : − Rs.11 9 1 (ii) The proper sequence for apportionment department overheads is First Second Third (iii) Apportionment of amongst production method. Overhead as primary distribution Apportionment design 4.77.000 Design Rs.75.0 0 00 (− )5.33 3 2. 7.500 per Finishi ng Rs.0 00 5.000 2. 4.50.500 : 4.000 25.14.61.00.45.98.22. Service Deptts.000 9.000 Maintena nce Rs.88 6.500 1. Machin ing Rs. HR Maintenance Design Service Department departments using of service The sequence has been laid down based on service provided.66 7 2.00. HR Rs.4.000 7.000 HR 4. overheads step-down Production Department Machini Finishi ng ng Rs.00.00 0 2.0 25. 4. Design Rs.00.25. − Service Department HR Rs.000 .000 : 5.77 8 Mainten ance Rs.0 00 : Maintenance 3.150 Cost Accounting (i) Apportionment of Service Department Overheads amongst production departments using Direct Method: Production Deptts.00.

500 S1 18. ft) P1 37. P2 and P3 and two service departments S1 and S2.85.151 0.5 Maintenance 7 : 8: − 1 : Design 3 : 1 2.00.81.250 62.67 6.48 1.000 2. Rent and rates General lighting Indirect Wages Power Depreciation on machinery Insurance of machinery Other Information: Direct wages (Rs.312 (− )7.000 10 25.88.000 30 4. has three production departments P 1.00 0 − 30.00 0 2.500 18.12.000 − 25.) Floor space (Sq.500 50 5.42.500 7.00.66.3 12 ABC Ltd.000 500 Number of light points Production 10 15 20 10 5 .000 P3 37.) Horse Power of Machines used Cost of machinery (Rs. The following data are extracted from the records of the Company for the month of October.00 0 2.00.3 2 28 Question 75 − − 00 (− )4.8 4 28 9.000 20.00 0 3.750 25.Overheads 4.750 S2 6.5 : 0.18 2.500 P2 25.000 60 3. 2007: Rs.78.000 50.5 8 00 5.55.

) 3.62 5 1.500 P1 (Rs.875 P3 (Rs.100 Expenses of the service departments reapportioned as below: P1 S1 S2 Required: 20% 40% P2 30% 20% P3 40% 30% S1 − and S1 − S2 are S2 10% − 10% − (i) Compute overhead absorption rate per production hour of each production department.75 0 2. 5 7. 3 hours and 4 hours respectively.333 1. 375.050 4.000 10. 5 937.625 3.50 0 1.00 0 5.) 15. (No vember 2007.) 62.4.750 5. 625 and direct labour cost is Rs.500 Total (Rs.000 8.667 − 18.750 5. 10 Marks) Answer (i) Item of cost Rent and Rates General lighting Primary Distribution Summary Basis of apportion ment Floor area 4 : 5 : 6 : 4:1 Light points 2 : 3 : 4 : 2:1 Indirect wages Direct wages 6 : 4 : 6 : 3:1 Power Horse Power of machines used 6 : 3 : 5 : 1 25.) 12.) 12.250 S2 (Rs.50 0 1.152 Cost Accounting hours worked 6. given that its direct material cost is Rs.625 2812. P2 and P3 for 5 hours.) 18.12 5 625 . (ii) Determine the total cost of product X which is processed for manufacture in department P1.250 P2 (Rs.500 S1 (Rs.225 4.

83.517 6.000 400 400 _______ 1.8 + 0. 48.000 12.10 S1 Substituting the value of S2 in S1 we get S1 = 19.10 S2 S2 = 6.7 50 _____ _ 46.133 1.177 2. 63.175 P2 Rs.400 8.630 + 0.440 73. 46.088 + 0.626 56. S1 = 19.443 8.10 S1) S1 = 19.630 + 0. 8.20 8 _____ _ 19.000 1.63 0 _____ 6. 20.10 × 20. Secondary Distribution Summary Particulars Allocated and Apportioned overheads as per primary distribution S1 S2 Total Rs.800 6.00 0 20.00 0 20. = 6.00 0 16.409 8.01 S1 0.208 20.089 3.000 4.132.253 53.153 Depreciat ion of machiner y Insurance of machiner y Value of machinery 12 : 16 : 20 : 1 : 1 Value of machinery 12 : 16 : 20 : 1 : 1 50.132 4.99 S1 = 20.17 5 _____ _ 48. 1.825 .10 (6.65 0 ______ 63.58.650 P3 Rs.8 ∴ S1 ∴ S2 = Rs.Overheads 4.630 + 608. = Rs.03 3 P1 Rs.08 8 Overheads of service cost centres Let S 1 be the overhead of service cost centre S1 and S2 be the overhead of service cost centre S2.00 0 1.443.088 + 0.088 + 0.443.238.

60 P2 Rs.60 = 43 P2 3 hours × Rs. 18. 13. 6.000 . 53. 156.100 Rs. 73.79.409 4.000 Rs. 10.000 Rs. 45. 8.000 Production on overheads P1 5 hours × Rs. 18.04 Factory cost Question 76 Rs.01 Cost of Product X Rs.4. 42. 18. The budgeted production overheads of the factory are Rs. 13.225 Rs. 56. 625 Rs.08.000 and budgeted machine hours are 96.93 P3 Rs.000.000 Rs.050 Rs.000 Rs. following information were extracted from the books: Actual production overheads Amount included in the production overheads: Paid as per court’s order Expenses of previous year booked in current year Paid to workers for strike period under an award Obsolete stores written off Rs.825 4. 1. 375 Rs. 10.93 = 41.154 Cost Accounting Overhead rate per hour P1 Total overheads cost Production hours worked Rate per hour (Rs.157 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.83 Rs. 8.) (ii) Direct material Direct labour Prime cost Rs.01 = 72. For a period of first six months of the financial year 2007 −2008. 1.79 P3 4 hours × Rs.517 6.

You are required: (i) to determine the amount of under absorption of production overheads for the period.0 00 6.000 hours.79.000 units The actual machine hours worked during the period were 48. 10 Marks) Answer (i) Amount of under absorption of production overheads during the period of first six months of the year 2007-2008: Amoun t (Rs.15. (May 2008.000 units .000 10.000 units 22.Overheads 4.000 42.155 Production and sales data of the concern for the first six months are as under: Production: Finished goods Works-in-progress (50% complete in every respect) Sale: Finished goods 18. and (iii) to apportion the unabsorbed overheads over the items. 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.000 18.000 1.) Total production overheads actually incurred during the period Less: Amount paid to worker as per court order Expenses of previous year booked in the current year Wages paid for the strike period under an award Obsolete material written off 45.0 00 16. (ii) to show the accounting treatment of under-absorption of production overheads.

15. finished goods and cost of sales by applying supplementary rate*.000.0 00 60.000 units *1.000 units *1.000 6.5 p r h u s 0 0 e or 9 .000 Amount (in Rs. one fourth of the under absorbed overheads were due to defective production policies. this being abnormal.50) Cost of sales (18.) 12.50) .50) Finished goods (4. Balance of under absorbed production overheads should be distributed over Works in progress. 1 .0 0 s 5 0 =R . 45. 1 0p r u it s .0 00 Less: Production overheads absorbed as per machine hour rate* Amount of under absorbed production overheads Budgeted Machine hour rate (48. 4 . 10.64.000 * ¼) Rs. finished goods and cost of sales: Equivalent completed units 8.0 .5 e n 3 .000 units *50%*1. hence should be debited to Profit and Loss Account. Supplementary rate = R . Amount to be debited to Profit and Loss Account = (60.000 18.4.0 0 s 0 8 0 =R . 1 .000 4.0 0 h u 6 0 o rs (ii) Accounting treatment of under absorbed production overheads: As.000 Work-in-Progress (16.000 hours * Rs.04.000 * ¾) Rs. Amount to be distributed = (60.000 27.156 Cost Accounting 5.000.0 0 u its 0 0 n (iii) Apportionment of under absorbed production overheads over WIP.50) 5.0 00 = R .

25.000 Rs.) 15.Overheads 4.000 45.000 + 250 x +400 y + 2.000 Direct Labour Rs. 15.000 + 150 x + 340 y + 1. then the total cost of product A and product B will be as follows: Product A (Rs. 60.000 Profit 25% on cost You are required to find out: (ii) The Answer Let. the percentage of factory overheads on direct labour is ‘x’ and the percentage of office overheads on factory cost is ‘y’.157 Total Question 77 30.000 25.5 xy 40.000 40. 15. overheads on factory cost (November 2008. The following informations are available related to the year ending 31st March. 80.5 xy 34.000 250 x 40.000 Sales Rs.000 150 x 34.) Direct Materials Direct labour Prime Cost Factory overheads (Direct labour × x) Factory cost (i) Office overheads (Factory cost × y) (ii) Total Cost [(i) + (ii)] 19. 2008 : Product A Direct Materials Rs.000 25% on sales price (i) The percentage of factory overheads on direct labour. 6 Marks) .000 34. 19.000 + 250 x 400 y + 2.000 Rs.000 15.000 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.000 + 150 x 340 y + 1.5 x y Product B (Rs.5 x y percentage of office Product B Rs.

000 60.200 or x = 40.5 xy = 12. Question 78 .000 or 150x + 30x = 14.4.. Hence.5 xy = 48. we get 150x + 14.000 + 250x + 400y + 2.5xy = 150x + 340y + 1.000…………… .800 or 180x = 7..(i) Total Cost of B is 40.000………….5x × 20 = 14.6 and after deducting from equation (i).000 20.5 xy = 60.) Sales Less: Profit Product A – 25% on cost or 20% on Sales Product B – 25% on sales Total Cost Thus.000 20 Putting value of y in equation (i).(i) ………(ii) 340y + 1.000………………………….(ii) Equation (ii) multiplied by 0..158 Cost Accounting Total cost on the basis of sales is: Product A (Rs.000 _150x ± 240y ±1. we get 150x + 340 × 20 + 1.000 60.5xy = _12.000 Product B (Rs..000 ______ 48.. Total Cost of A is 34.) 80.000 or 14.000 + 150x + 340y + 1.5 xy = 20.000 – 6.000 or 250x + 400y + 2.000……………….…. 40 and (i)the percentage of factory overheads on direct labour = (ii) the percentage of office overheads on factory cost = 20. 100y = or y = 2.

5.29. but it is expected to work at 90 per cent capacity for the remaining nine months.000 per month which ever is higher Prime cost (A) 11.000 9×90% × × = 78. what selling price per unit should be fixed for the remaining nine months to yield a total profit of Rs.000 84.60.50.000 units Rs.000 = 3.70.20. 15 per unit Direct wages @ 9 per unit or Rs.20.59. 2.000 1. You are required.000 units per annum Particulars Capacity utilized Production First 3 months 60% 12 Next 9 months 90% 12 Total 5. 8 Marks) Answer Statement of Cost and Sales for the year 2008 Maximum production capacity = 5. 8 per unit. Direct wages Rs.20.50. 44 during the first three months.09.60.Overheads 4.000 units Rs.000 per annum for every 25 per cent increase in capacity or a part of it.000 7.20. worked at 60 per cent capacity for the first three months during the year 2008.000 39.000 19.03. Direct materials @ Rs. Variable overheads Rs. (November 2008.000 3×60%5. 64. 2.000 per annum up to 50 per cent capacity and additional Rs.35.50.44.000 4. Fixed overheads Rs. The selling price per unit was Rs. Details of estimated cost of production are as follows: − − − − − Direct material Rs.000 31. Semi-variable overheads are Rs. 15 per unit.00 0 .159 Maximum production capacity of JK Ltd. 15.20.500 for the whole year. JK Ltd.000 per month).65. 1. 9. is 5.51.24.000 units Rs. 9 per unit (subject to a minimum of Rs.50.000 units per annum. 52.62.000 per annum.

3 6 . 9 eurn it .500) (D) Sales required for next 9 months (E) [(C + D)] Total profit Total Sales 2. 1.60.500 4. 8 per unit Semi Variable Total overheads (B) Total Cost (C) [(A + B)] Profit during first 3 months Sales @ Rs. 7.0 0 0 Workings: (1) Semi-variable overheads: (a) For first 3 months at 60% capacity = Rs.50. p 3 5 .000 + Rs.22.000) × 9/12 = Rs.25.000 41.50 0 __________ 1.41.21.1 0 . 15. 1.97.000 × 3/12 = Rs.10.73.500 1. (5.62.000 8.77.500 1.20. 8.45.000 6.14.000 + Rs.32.62.92.000) × 3/12 = Rs. 0 0 8 =Rs.500 10. 3.4.77.000 1.36.500 29.160 Cost Accounting Overheads Fixed Variable @ Rs.000 9.500.00.40.000 6.000 34.70.60.000 28. = R s3.60.0 9 .24.000 15. 4.32. (5.08.71.89.000 7.500 34.55.58.000 10.00 0 T ta s le re u d fo la t 9m n s o l a s q ire r s o th U its p d c d d rin la t 9m n s n ro u e u g s o th R q ire s llin p e p r u it fo la t 9m n s = e u d e g ric e n r s o th 1 . 44 per unit Desired profit during next 9 months (Rs.70.500 52.500 – Rs.60.000 1.000 × 9/12 Question 79 Calculate machine hour rate for recovery of overheads for a machine from the following information: .61. (b) For remaining 9 months at 90% capacity = Rs.

000 and estimated salvage value is Rs.000 Light charges : R .50. Setting-up time of the machine is 156 hours per annum to be treated as productive time.000 in the factory.0 0 1 3 Rate per hour Rs. Wages of an operator is Rs. (November 2008. having 48 points in all.00. 1.000 50. 9. 2 0 × 2× s . 2.0 0 2 0 . 25. Fixed Charges (Standing Charges): Operator’s wages: R.000.000. The machine is required 400 hours per annum for repairs and maintenance.4 . Estimated working life of the machine is 10 years. Light charges for the department is Rs. out of which only 8 points are used at this machine. A chemical required for operating the machine is Rs. Annual working hours are 3.880 per annum. Other indirect expenses are chargeable to the machine are Rs. 6 marks) Answer Computation of Machine Hour Rate Running Hours (3. 3.161 Cost of machine is Rs. No power is consumed during maintenance and setting-up time.49.000 1.500 × 12 Total Standing charges Hourly rate for fixed charges : R.500 per month.600 per annum Particulars Total Amount Rs. The operator. Cost of repairs and maintenance for whole working life of the machine is Rs. 16. 4.Overheads 4.000 57.000 5. Power used 15 units per hour at a cost of Rs. Annual insurance charges 2 per cent of cost of machine. 6.000 – 400) = 2.000 78.31 Insurance: 2% of Rs.500 per month. 6.1 9 0 s . 5 per unit.5 0 1 8 4 8 Other indirect expenses: Rs. 25.00.6 0 . 00. 4 0 × 2 s .000 per month. devoted one-third of his time to the machine.

0 0 1 ×2 0 0 .0 0 1 ×2 0 0 .4.3 0 0 s . 2 . 1 0 0 s 5 0 0 s .6 0 13.46 Power: R .0 0 −R .31 Repairs and Maintenance : R.4 4 s 1 2 4 2 0 .5 . 9 8 s . 6. 5× 5× .45.6 0 70.38 = Rs.0 .8 0 2 0 .80 237.6 0 92.0 .000.50 3.6 0 R.162 Cost Accounting Variable Expenses (Machine Expenses) per hour Depreciation : R . Chemical : Machine Hour Rate .

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