Chapter 4 Overheads | Cost Of Goods Sold | Depreciation

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

300: of this Rs.000 7. X Y . For example the total overheads of each department may be divided by labour hour. Answer (a) To arrive at the department overhead rates it is necessary to have complete account of overhead expenses. As the service departments in an organization are meant for rendering service to other production departments. 2. A and B are 1650 hours and 2175 hours respectively. Particulars Basis Total Production A B Service Deptts. production departments. (b) Statement of overhead Distribution of a Selfhelp Ltd. the total overhead expenses are apportioned to the concerned production departments. Thus by using primary and secondary distribution processes. This process of distributing overhead expenses between the production and service departments is known as primary distribution. their expenses are apportioned to the users viz.4.000 13.4 Cost Accounting Used during month of May the 8.000 6. These total overhead expenses of each production department may be absorbed by using a suitable method of overhead absorption. This process of apportioning service department expenses to the production departments by using suitable basis is known as secondary distribution.000 During the month of May costs for generating power amounted to Rs.. 9. X renders service to A. These overhead expenses are either completely assigned to the production and service departments or are apportioned by using suitable basis. to arrive at departmental overhead recovery rate. while Y renders service to A and B in the ratio 31:3. Service Deptt. find the Power Cost per labour hour in each of these two Deptts. B and Y in the ratio 13:6:1. Given that the direct labour hours in Deptts. machine hours etc.500 was considered to be fixed cost.

500 Rs.600 600 Service Deptts.100 3.P.00 – – .00 1. 600 Rs.600 Redistribution of Service Expenses to Production Departments Particulars Total Production Deptts. X 2.5 Rs. 500 Rs. Because of this.00 4.800 1.600 1.600 2. 400 Variable Cost 6. A Total overheads (Rs.600 2. Y overhead (Rs. X overhead (Rs.) apportioned to A. 1.000 – 2.550 150 –1.950 1.400 1.600 100 1. Fixed Cost H.) Labour hours Power Cost per labour labour Question 3 The level of production activity fluctuates widely in your company from month to month. Hours needed at capacity production (5:10:6:4) H.B And Y in the ratio (13:6:1) Deptt.100 1. Hours used (8:13:7:6) 2.200 9.000 Rs.175 2.Overheads 4.700 4.) Deptt.630 3.P.300 B 3.300 Departments' 2.000 Y 1.350 2. the incidence of — 9.30 0 2.) apportioned to A and B in the ratio (31:3) Total overheads (Rs.

000. due to wide fluctuations in the production activity can be overcome by using the method known as production unit method.12. is spread over the estimated life of the asset to arrive at the annual depreciation charge. 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.1. but only the usage factor. On dividing the cost of the machine with estimated output.6 Cost Accounting depreciation on unit cost varies considerably.1. 2 and Re. Its life is.000 p. the incidence of depreciation only arises when the asset is employed in production and not when it remains idle. This method is suitable when the units of production are identical or uniform.00. which is known as depreciation rate per unit. The use of this method for charging depreciation on output will overcome the .4. Answer Depreciation is usually charged on the basis of time. depreciation is charged at a rate per unit of production. consider the following example.00. According to this method. suppose the cost of a machine used by a concern for manufacturing its products is Rs.0000 units during its entire life and has no scrap value. For example. It does not recognize the time factor.000 or Rs. no depreciation is provided only for any lapse of time.20. Under production unit method.000. Its capacity is to manufacture 2. Then the rate of depreciation to be charged to each unit manufactured in the month of March and April will be Rs. the cost of acquisition plus the installation charges minus the scrap value. Suppose further that the units manufactured by this machine in the months of March and April are 500 and 1. we arrive at a figure of Re. Consequently. One simple method used for the purpose is known as straight line method. This incidence of depreciation on unit cost.0. 1 respectively.50 per unit. To be more clear about this method. 10 years. Suppose the cost of a machine used for manufacturing products is Rs. It satisfies the costing requirement that the cost of an asset should be evenly spread over the work done by it. Under this method. Then the charge of depreciation per annum would be Rs.1. say. by dividing the cost of the assets by the estimated number of unit to be produced during the life of the asset.m.000 respectively. The management decides that you should find out a suitable method to correct this.

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

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

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. This vitiates comparison of cost of production from period to period 2. even though overheads figures remain unchanged. Production unit method: To absorb the overhead costs by this method either a pre-determined or actual rate of overhead absorption is calculated. (2) It given consideration to time element. It is useful where production is uniform. Thus. But its usefulness is limited normally to those situations where only one product is produced.9 (a) Direct labour hour rate. 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. (3) Labour rates fluctuate less frequently than the rate of materials. The main advantages of this method are: (1) It is simple to operate and understand. 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. (b) Machine hour rate.Overheads 4. all the workers employed earn more or less the same hourly rate and labour is predominant. . overheads are recovered on the basis of a pre-determined or actual rate. Most of the overhead expenses vary with time. Material prices fluctuate quite often and this phenomenon leads to high or low charges in respect of overhead. This method is the simplest one. by dividing the cost to be absorbed by the number of units produced or expected to be produced. But the use of direct material cost bases totally ignores the time considerations. 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.

. . Machine hour rate means the cost or expenses incurred in running a machine for one hour. 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. 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. (b) Where labour is the main factor of production. supplies etc. This rate is calculated by dividing the amount of factory overheads concerning a machine the number of machine hours. so that share of overhead should be rather less. 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. To operate this method successfully additional records of labour must be maintained to get the number of direct labour hours by departments and product. In such a case if. Under this method.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.4. labour hours are taken as a basis for the overhead absorption. It is difficult to name a single method which is suitable for the absorption of overhead costs under different circumstances. It can be calculated by dividing the overheads to be absorbed by the labour hours expended or expected to be expended. Machine hour rate: This is one of the most scientific methods for the absorption of factory overheads. The main disadvantage of using this method is that it givens equal weightage to both material and labour. The labour hour circumstances: rate can be adopted under the following (a) Where production is not uniform and. where a percentage method would not give accurate results. Percentage of prime cost method: This method is infact a combination of direct material and the direct wage cost basis.

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

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

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

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

But the proposition for consideration is whether interest on borrowing should be taken into costing for the purpose of price determination or not. is not an element of cost of production whereas cost accounting is concerned with determination of true cost of production. In price determination effort should be made to accumulate as much costs as can be attributable to the production activity. as the same is payable even in a loss situation. Without inclusion of interest. Both are factors of production and as such no distinction should be made between the remuneration of these two factors. based on interest being a financial charge. Accordingly. bonus linked with productivity is definitely a part of the overhead cost. however. The other viewpoint.15 1. therefore. . may be included in a direct labour cost to the extent of the minimum bonus. incurred directly or indirectly. to narrow down the risk of wrong pricing decision. This consumption. Interest is the cost of the borrowed capital as wages are rewards for the labour. 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. The amount of bonus. Care should be taken to see that no interest on borrowings for asset acquisition is included in cost account. for the purpose.33% is. Any amount paid as bonus in excess of the minimum may be considered as an appropriation of profit. However. it is indeed directly linked with the wages and is not by any means related to the profits. it is advisable that interest on borrowings attributable to production process should be taken in the cost statement meant to help the pricing decision. 2. profits on different jobs requiring different amounts of capital or requiring different periods for completion are not comparable.Overheads 4. So far as gratuity is concerned. (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. payable irrespective of profit or loss earned by the concern. Accordingly. A minimum bonus of 8. 3. Comparison of cost is rendered difficult if no interest is taken in business where raw materials in different states of readiness are used.

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

production method/techniques or plants/ equipments. 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. Both basic and applied research relates to original investigation to gain from new scientific or technical knowledge and understanding. It may be spread over a number of years if research is not a continuous activity and amount is large. Research Cost may be incurred for carrying basic or applied research. Cost of applied research. For example.Overheads 4. Development Costs. Treatment in Cost Accounts Cost of Basic Research (if it is a continuous activity) be charged to the revenues of the concern. begins with the implementation of the decision to produce a new or improved product or to employ a . If research proves successful. 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 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.. then such costs should be charged to the concerned product. then the research costs treatment depends upon the outcome of such research. Answer (a) Research and Development Cost: Research and Development Cost is the cost/expense incurred for searching new or improved products. If applied research is conducted for searching new products or methods of production etc. Such costs are directly charged to the product.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. if it is solely incurred for it.

paste etc. The treatment of development expenses is same as that of applied research. tying.erection of Machinery: Expenses are sometime incurred on removal and re-erection of machinery in factories. are called fringe benefits. state insurance. . leave pay. subsidised facility etc. Fringe benefits to office and selling and distribution staff should be treated as administration and selling and distribution overheads respectively and are recovered accordingly. If such expenses are incurred due to faulty planning or some other abnormal factor. (ii) It may be treated as distribution overhead if packing expenses are incurred to facilitate the transportation of finished products. an addition or alteration in the factory building. 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. containers or bags etc. (d) Expenses on Removal and Re. gratuity and pension schemes. Such expenses may be incurred due to factors like change in the method of production. (c) Fringe Benefits: Additional Benefits paid to the employees of a concern and are not related to the direct efforts of the employees. it may be spread over a period of time. Bread. medical benefits. For example ink-pot . employer’s contribution to provident fund. (iii) It may be treated as advertisement cost and included in selling overheads if it is incurred for advertisement to make the product attractive. (b) Packing Expenses: It includes the expenses incurred on wrapping. boxes.18 Cost Accounting new or improved method. etc.4. 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. bottles. change in the follow of production. then they may be charged to Costing Profit and Loss Account. All such expenses are treated as production overheads. They include holiday pay. When amount of such expenses is large.

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

In case underabsorption of overheads arises due to factors like idle capacity. comparison between one period and another is rendered difficult. 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. however corrects the cost of production by deducting the amount of over-absorbed overheads. The negative rate. 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. or in the case of a new project. this method is not proper and has only a limited application. (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. (vi) Seasonal fluctuations in the overhead expenses from period to period. The total expenses . However. 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. Further.20 Cost Accounting (v) Under-utilisation of the available capacity. Therefore. overhead of a particular department are recovered on the basis of Rs. Such rates may be either positive or negative. this method may be used when the normal business cycle extends over more than one year. the output is low in the initial years.. defective planning etc. A positive rate is intended to add the unabsorbed overheads to the cost of production. 5 per machine hour. (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. then the said amount be transferred to costing profit & loss Account. The effect of applying such a rate is to make the actual overhead get completely absorbed.4.

000 was in respect of expenses of the previous year booked in the current month (August). 80. Actual production was 40. (3) Unanticipated changes in methods of production. (4) Seasonal fluctuations in the overhead expenses from period to period.000 units of which 30. Some difference is inevitable. The amount of expenses actually incurred and the amount of overhead applied to production will seldom be the same. 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.Overheads 4. 5. Whereas in the case of over.000 became payable due to an award of the Labour Court and Rs. 80. Rs. Under – absorption of overheads is set right by increasing the rate of overhead absorption to the extent of supplementary rate.The pre-determined rates may be based on estimated costs.absorption of overheads. there is a case of under absorption. 15. there is said to be an over absorption of production overheads. On analysing the reasons.000 and 10. The under/over absorption of overheads arise due to the following reasons: (1) Error in estimating overhead expenses. Of the amount of Rs. . 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. the rate of overhead absorption is reduced to the extent of supplementary rate. If the actual expenses fall short of the amount applied to production.000 units were sold.000 hours respectively. If the actual expenses exceeds the amount applied to production. it was found that 60% of the under absorbed overhead was due to defective planning and the rest was attributed to normal cost increase.21 incurred and the actual machine hours for the department for the month of August were Rs. 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 .000. (2) Error in estimating the level of production.

4. should be debited to Profit and Loss A/c (60% of Rs. 5. 6.000) 2.000 units were produced out of which 30.000 Treatment of under – absorbed overhead in the Cost Accounts It is given in the question that 40. This being abnormal.000 Rs. (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. 10.22 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 50.000) Rs. 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. 10.000 ______ 10.000 40. (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.000 .000 Rs. 60 percent of under absorbed overhead is due to defective planning. 5/.000 60. Finished Goods and Cost of Sales by supplementary rate (40% of Rs.000 units were sold.000 20. 1.per hour Under absorbed overheads 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. 15. Balance 40 percent of under-absorbed overhead should be distributed over.000 hours @ Rs. 80.

23 Rs.000 Cost of Sales *Rs. 3.000 may be distributed over Finished Goods and Cost of Sales as follows. Finished Goods *Rs.4.Overheads 4. 1.000 .

Apportionment and Absorption of Overheads: Allocation: According to ICMA terminology: “ the allotment of whole items of cost to cost centres or cost units”. 1. (8) Sales Assistants Salaries. Sales Commission .000 – Rate of Under. (9) Personal Department expenses. (7) Advertisement.000 – Units produced : 40. 0. (4) Purchase Department Expenses.10P) – Amount of under–absorbed overheads charged to Cost of sales (30. (2) Rent (3) Delivery Expenses.4.000 ×0. (b) A departmental store has several departments. What bases would you recommend for apportioning the following items of expense to its departments (1) Fire insurance of Building.10 per unit Rs.absorbed overhead recovery – Amount of under–absorbed overheads charged to finished goods (10.000 ×0. (5) Credit Department Expenses. (6) General Administration Expenses. (10) Answer (a) Distinguish between Allocation.24 Cost Accounting *Working notes – Under absorbed overhead :Rs 4. is known as allocation.10P) Question 13 Re. 3.000 Rs. apportionment and absorption of overheads.000 (a) Distinguish between allocation.

(b ) (1) (2) (3) (4) (5) (6) (7) (8) (9) (1 0) Items of expenses Fire Insurance of Building. (Nov. Absorption of overheads takes place only after the allocation and apportionment of overhead expenses. Rent Delivery Expenses.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. 4 marks) Answer . of Employees Actual Credit Department 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. 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. of Purchase order/Value of Purchases Credit Sales Value Administration Works cost Actual sales Actual/Time devoted Department No. In other words . Question 14 Define administration overheads and state briefly the treatment of such overheads in Cost Accounts.Overheads 4. Purchase Expenses General Expenses. Sales Commission Basis For apportioning Floor Area Floor Area Volume or Distance or Weight department No. 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. Sales Assistants Salaries. 1996. Personal expenses.

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

the use of blanket rate will give misleading results in the determination of the production cost . Sometime exclusion of interest cost may lead the management to take wrong decisions. specially when such a cost ascertainment is carried out for giving quotations and tenders. The significance of time value of money is recognized only when interest is treated as an element of cost. total labour hours. If such conditions do not exist. Question 17 What is ‘Idle Capacity ‘? How should this be treated in cost accounts? (May 1997.Overheads 4. machine hours etc. 5.27 readiness would distort costs and render their comparison a difficult one. Question 16 What is blanket overhead rate? In which situations. It may also be used in those units in which all products utilise same amount of time in each department. 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. 6 marks) Answer Idle Capacity: . blanket rate is to be used and why? (May 1999. 3. 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. 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. 4. 3 marks) Answer Blanket overhead rate is one single overhead absorption rate for the whole factory.

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

. 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. the cost of service dep't serving the next largest number of dep't is apportioned. After this. 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. thus sequence of apportionments has to be selected. these inter dep't services are to be given due weight while re-distributing the expense of service dep't. they may render service to each other and. therefore.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. The sequence here begins with the dep't that renders service to the max number of other service dep't. Reciprocal service method: This method recognises the fact that where there are two or more service dep't. • Carry toward to accounting period if operating cycle exceeds one year. (May.4 marks) Answer Treatment of under absorbed and over absorbed factory overheads in cost accounting. 2004.

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

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

4. 4 marks) . 1999.32 Cost Accounting (November.

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

Question 24 Explain Single and Multiple Overhead Rates. then the rent charges will be treated as an indirect cost and are apportioned to concerned cost centers on an equitable basis. 2. Hire charge in respect of special machinery or plant. It may also be used in factories where the work performed in each department is fairly uniform and standardized. etc.4. 2000. The following may also be treated as chargeable expenses in relation to a product or job: 1. service department. 5. But if the same machine is used for various purposes.34 Cost Accounting machine specifically hired to complete a particular job will be a direct charge on the job. The single overhead rate may be applied in factories which produces only one major product on a continuous basis. Cost of patents. total machine hours. (November. 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 . Architects. 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. surveyors and other consultant's fees. Travelling expenses to site. total labour hours. 3. Multiple overhead rate: It involves computation of separate rates for each production department. Freight inward on special material. cost center and each product for both fixed and variable overheads. 4. 4 marks) Answer Single and Multiple Overhead Rates: Single overhead rate: It is one single overhead absorption rate for the whole factory.

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

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

Question 28 . it is solely incurred for it. It is an important element of cost and without this true cost of production cannot be obtained. Such costs are directly charged to the product. Development Costs begins with the implementation of the decision to produce a new or improved product or to employ a new or improved method. Depreciation is an indirect cost of production and operations. depreciation on plant and machinery is normally treated as part of the factory overheads. 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. (iii) Depreciation: It represents the fall in the asset value due to its use.37 production cost centres on the basis of total wages or the number of men employed by them. Re– search cost may be incurred-for carrying basic or applied research. For example. 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 research proves successful. (ii) Research and development costs: It is the cost/expense incurred for searching new or improved products. production methods/techniques or plants/equipments. wear and tear and passage of time. In costing. Cost of applied research.Overheads 4. If applied research is conducted for searching new products or methods of production etc. then such costs will be charged to the concerned product. Both basic and applied research relates to original investigations to gain from new scientific or technical knowledge and understanding. It may be spread over a number of years if research is not a continuous activity and amount is large. The treatment of development expenses is same as that of applied research. 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. then the research costs treatment depends upon the outcome of such research. Treatment in Cost Accounts: Cost of Basic Research (if it is a continuous activity) be charged to the revenues of the concern.

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

It increases or decreases in direct relation to any increase or decrease in output. Question 29 Distinguish between fixed and variable overheads.Overheads 4.39 The classification. In other words. rent of office. . Firstly. salary of works manger. the accumulated production cost centre overhead. Variable overhead cost varies in direct proportion to the volume of production. Secondly. costs are assigned in the second stage of the procedure to products to satisfy financial accounting requirements for inventory valuation. 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. allocation and absorption of overhead costs over different cost centres helps in two ways. the overhead costs assigned to cost centres are used for cost control and performance evaluation purposes. 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. For example. These assigned costs are periodically totaled and listed on performance report which also has the figures of budgeted costs. etc.

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

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

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

43 These two merits are in addition to those stated under (b). . 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. 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. Question 34 Treatment of Interest paid in Cost Account.Overheads 4.

a timber merchant may buy standing trees and then season the timber himself. profits on different jobs or operations may not be comparable. 2. If he invests the same money in business. 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. The latter will pay a much higher price per unit. The following are the arguments given in favour of inclusion of interest in cost computations: 1. etc. Both are factors of production. Many times exclusion of interest cost may lead the management to take wrong decisions. Another merchant may buy already seasoned timber which is ready for use or sale. It is argued that interest is the cost of capital as wages are the reward for labour. 5. Without inclusion of interest on capital. where the waiting period is long. 3. 4.. Some favour its inclusion in the costs while others say that interest. waiting for a number of years before he can use or sell it. The exclusion of interest from Cost Accounts would distort cost in certain industries like wine-making timber-maturing. being a financial charge should not be included in Cost Accounts.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. 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. the former timber merchant must add interest on funds invested for the period he had to wait. Therefore. For example. A person can invest his money in government or other safe securities and get regular income without much efforts.4. why not interest. . The significance of time-value of money is recognised only when interest is treated as an clement of cost. for proper comparison of costs. particularly in the case of replacement of human labour by machines. 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. Therefore if wages are included in cost of production.

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

this method is not proper and has only a limited application.4. 4 marks) . This method is not considered appropriate as it allows costs of one period to affect costs of another period. defective planning etc. 1998. 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. The negative rate. however corrects the cost of production by deducting the amount of overabsorbed overheads. A positive rate is intended to add the unabsorbed overheads to the cost of production. (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. then the said amount may be transferred to Costing Profit & Loss Account. this method may be used when the normal business cycle extends over more than one year. comparison between one period and another is rendered difficult. Further. Such rates may be either positive or negative. or in the case of a new project where the output is low in the initial years. However.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. (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.. it may also be transferred to Costing Profit & Loss Account. Therefore. (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. The effect of applying such a rate is to make the actual overheads get completely absorbed.

It may be spread over a number of years if research is not a continuous activity and amount is large. (ii) Fringe benefits: In every organisation. Treatment in Cost Accounts: Expense of Basic Research (if it is a continuous activity) be charged to the revenues of the concern. 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. Expense of applied research.Overheads 4. They include: (i) Housing (ii) Children education allowance (iii) Holiday pay (iv) Leave pay . If applied research is conducted for searching new product or methods of production etc. then such costs will be charged to the concerned product. then the research expense treatment depends upon the outcome of such research. The treatment of development expenses is same as that of applied research..47 (i) Research and Development Expense: Research and Development expense is the expense incurred for searching new or improved products. For example. production methods / techniques or plants / equipments. 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. if it is solely incurred for it. Research expense may be incurred for carrying basic or applied research. If research proves successful. Both basic and applied research relates to original investigations to gain from new scientific or technical knowledge and understanding.. These additional benefits are popularly called fringe benefits. Such expenses are directly charged to the product. workers are paid some benefits in addition to their normal wage or salary. Development expenses 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).

leave and absenteeism and idle time amount to 96 hours. The other details are as under Purchase price Comprehensive Labour rate No. The factory works 5 days of 8 hours a week in a normal 52 weeks a year. 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. of Employees Machine shop Assembly Machine shop Assembly Finished Goods Material Q Opening stock 33.000 lbs Closing stock (Estimated) 30. 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.4.000 lbs 20.000 54. 80 hours and 64 hours respectively. 6 per lb Rs 4 per lb .000 units 25. Fringe benefits to office and selling and distribution staff should be treated as administration overheads and selling and distribution overheads respectively and recovered accordingly. in a year.000 lbs 66. On an average statutory holidays. Question 37 Soloproducts Ltd.20 per hour 600 180 Material P Material P Material Q Rs.48 Cost Accounting (v) Leave travel concession to home town or any place in India etc. 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 lbs units Rs 4 per hour Rs 3. Overheads are absorbed at a blanket rate of 331/3% on Direct Labour.

26. 8 = Rs.3. The comprehensive labour rate has been assumed as direct labour.Overheads 4. Answer Working Notes: 1. (a) The number of units of the product proposed to be sold Selling price (per unit) Total sales revenue 1.6 Labour cost Machine shop 7 hrs x Rs.5 lbs x Rs. 6 24 Q: 1. (c) Capacity utilization of machine shop and Assembly section.000 Units . 4 Overheads 33-1/3% of Direct Labour Cost Cost (per unit) Selling price (per unit) 12 72 90 = Rs.000 Rs.49 You are required to calculate: (a) The number of units of the product proposed to be sold. 90 Number of units of the product proposed to be sold 1.00.40.20 = Rs. 18 Rs. Statement of selling price per unit of the product Material cost P: 3 lbs x Rs.5 hrs x Rs.4 = Rs Add: Profit 20% of selling price or 25% on cost 18 2. 28 36 Assembly shop 2. Rs. (b) Purchased to be made of materials P and Q during the year in Rupees. along with your comments.

000 1.50 Cost Accounting R .000 units (c) Capacity Utilisation Statement of Machine shop and Assembly Section Machine shop Hours available during the year (See working 600 persons x 1.0 R.50. 1 6 0 00 s . . al (lbs) (lbs) (lbs) (3) (4) (2)+(3)(6) (5)x(6)= (4)=(5) (7) 30.500 Closing Opening Material Purcha Amount balanc balance to be se e of of purchased price Rs.00 0 Q Total 34.000 0x3= 4.17.000 units = 1.11.45. Assembly Section 180 Persons x 1.35.000x 1.000 66.000 4.00 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. 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) *1.02.000 units – 20.66.68.000 33.00 0 4 10.5 = 2.0 .40.4.000 2.45.000 54.2 . materi material Rs.000 units +25.840 hrs.840 hrs.45.500 6 24.

31. =10.840 hrs.04.45. In this way there are 89.51 note) Hours required to manufacture 1. an abstract from the work in process as at 30th September was prepared as under: .45. 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 1.62.500 respectively. leave and absenteeism & idle time (96 hrs. it is apparent that the total hours required in machine shop and assembly section would be 10.500 (31.000 1. =3.e resorting to overtime or increasing the strength in assembly section.000 and 3.45% Hours available during the year: 5 days x 8 hrs x 52 weeks Less: Statutory holidays.15.000 x 2.45.Overheads 4. 240 hrs. following suggestions are made: 1. Under both the ways i.200 respectively. Question 38 In a factory following the job costing Method.300) 109.200 1.04.000 units of the product.000 89. 2.000 91.300 hours in the assembly section.000 and 3. 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.000 units.000 units Surplus/(Deficit) hours Capacity utilisation Working note: =11. Comments: From the statement of hours required to manufacture 1. +80 hrs. + 64 hrs. 1.000 x 7 hrs.5 hrs.45.45.15.62.) 2080 hrs. the profit of the concern will be reduced.94% = 3. To resolve the problem of deficit in assembly section. Whereas the available hours in machine shop and assembly section are 11.31.000 surplus hours in the machine shop and also a deficit of 31.

900 Material used in October were as follows : Material requisition No. 118 118 118 120 121 124 Cost Rs. 115 118 120 1. 640 400 380 1.325 810 765 2. Material Director Labour Rs. 54 55 56 57 58 59 Job No. 400 hours 250 hours 300 hours 800 500 475 1.535 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 .52 Cost Accounting Job No.420 Rs.775 Factory overheads Applied Rs.4. 300 425 515 665 910 720 3.

640 100 740 400 264 664 Factory cost Rs. 2 per hour.325 — 1. The hourly rate in shop A per labour hour is Rs. You are asked to compute the factory cost of the completed jobs. 2.109 2.325 810 515 1.325 Rs.53 Indle time Overtime Premium 5 6 316 6 5 101 A shop credit slip was issued in October. it is Rs. What would be the invoice price of these three jobs? Answer Factory Cost Statement of Completed Jobs Month Job No. 54 was returned back to stores as being not suitable.765 225 2. Septembe r October Total Septembe r October Total 118 118 115 115 1.55 for job 118 was directed to job 124. Jobs 115. Materials Direct labour Factory Overhead s (80% of direct labour cost) Rs. The Factory Overhead is applied at the same rate as in September. A material Transfer Note issued in October indicated that material issued under requisition No. that material issued under Requisition No.990 1. 3 per hour while at shop B. 118 and 120 were completed in October. 800 125 925 500 330 830 Rs.819 .710 1. 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.Overheads 4.

) Working Hours Value of Machines (Rs.721.106 2.000 30 15 2.90 620.000 2.000 3.54 Cost Accounting Septembe r October Total 120 120 765 665 1.90 3.000 – 5 500 299 3. Factory cost Administration and Selling overheads @ 10% of factory cost Total Cost Profit (20% of Total cost) Invoice price 3. 2.6 2.80 3.4.) space 3.598..475 80.726 .726 Invoice price of completed jobs Job no. 2.Ft.000 60 10 2.000 S1 1.000 S2 195 – 5.289 657. Question 39 Modern manufacturers Ltd. P2 and P3 and two Service Departments S1 and S2 the details pertaining to which are as under:P1 Direct Wages (Rs.430 475 245 720 380 196 576 1.000 10 10 2.419 1.819 120 Rs.100.620 1.) HP of Machines Light Points Floor (Sq.00.000 4.500 P3 3.18 272.60 599. Have three production department P1.070 60.946.00 0 50 20 3.80 281.08 3.32 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. 2.72 115 Rs.500 – 5.998.990 118 Rs.000 P2 2.

5.500 10.. S1 Rs. 250 50 39 – .000 9.500 Production Depts.5 and 3 hours respectively. 50 Direct Labour cost Rs. P2 and P3 for 4. Particulars Basis Rent and Rates General Lighting Indirect Wages Power Area Light points Direct Wages H. 1.55 The following figures extracted from the Accounting records are relevant: Rent and Rates General Lighting Indirect Wages Power Depreciation on Machines Sundries Rs. 1.000 600 1.30.939 1. Total Rs.000 600 1. 1.695 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.Overheads 4. P1 Rs.000 100 300 100 S2 Rs. Answer Statement Showing Distribution of Overheads of Modern Manufacturers Ltd.25 0 150 400 300 P3 Rs.00 0 100 600 600 P2 Rs. 1.P. given that its Direct Material cost in Rs.50 0 200 600 500 Service Depts.939 1.

200 S2 Rs.73 4 2.80 0 200 200 1.054 421.6 0 210.200 – 3.00 0 9.700 640 P2 Rs.00 0 7.54 4. 7. S2 Overheads apportioned in the ratio (40:20:30:10:–) Dept.54 .54 10.16 – 105. 9. P1 Rs.200 Production Depts.4 0 10.: 10) Dept.30 0 4. S1 Overheads apportioned in the ratio (20:30:40: .22 2.8 0 316.695 28.08 31. 7.73 4 3. S1 Rs.00 0 9. S1 Overheads apportioned in the ratio (20:30:40:– : 10) Dept.05 10.4 0 – 1.200 195 734 Redistribution of Service Departments’ Expenses Over Production Departments Particulars Total Rs.62 42.11 3.56 Cost Accounting Depreciati Value of on of machines machines Sundries Direct Wages 10. S2 Overheads apportioned in the ratio (40:20:30:10:–) 28.280 Service Depts.00 0 7.4.300 960 P3 Rs.02 105.4 0 21.00 0 3. 3. 734 320 1.054 105.20 0 2.800 1. Total Overheads Dept.70 0 3.500 3.40 0 3.16 1.

13 . 50 30 35.419 4.10 0. 1) Cost of the product 'X' Direct Material Cost Direct Labour Cost Overhead Cost (See Working Note 2) 1. 16 3.21 0. 87 4. S2 Overheads apportioned in the ratio (40:20:30:10:–) Total Working hours Overhead rate per hour (See working Note.03 — -0.05 0.441 .10 8.32 0.79 2.57 Dept.02 0.90 11.73 Rs.13 ______ 115.475 1.86 8.070 2.05 0.10 0.42 -1. S1 Overheads apportioned in the ratio (20:30:40:– 10) Dept.504.787.05 0.Overheads 4.

69 5 5. Particulars Basis Direct Wages Rent Rates General Lighting Actual & Area Light Points Total Rs. 1. Overhead cost Rs.50 + Rs.73 2. by any other activity carried on in the service departments.90 and Rs. 1.00 0 600 Production Depts. 195 250 50 .1.87 7. which have not been accounted for.73 x 3 = Rs.58 Cost Accounting Working Note: 1.90 x 5 + Rs. 2. However if the direct wages appearing in the question are assumed to be incurred on the service department only. 7 Similarly overhead rate for production departments P2 and P3 are Rs. S1 Rs. — 1. — 1.86 30 0 . 1. 4.00 0 100 P2 Rs. 4. then total expenses of the service departments including the aforesaid direct wages would also be charged to the respective production departments.11.86 x 4 + Rs.19 = Rs. 9. 2. 14. Overhead rate per hour for production department P1 = R .1 s .4. — 1. P1 Rs. If this assumption holds good the alternative solution can appear as under: ALTERNATIVE SOLUTION Statement Showing Distribution of Overheads of Modern Manufacturers Ltd. 8 6 = Rs.25 0 150 P3 Rs.00 0 100 S2 Rs.13 Note: The service departments have only indirect costs which are to be absorbed by production departments.50 0 1.50 0 200 Service Depts.35.44 + Rs.

00 0 3. S1 Overheads apportioned in the ratio (20:30:40:– : 10) Dept.69 5 30.70 0 400 300 3. 929 470 1.99 .700 P1 Rs. Total Rs. Total Overheads Dept.300 1.4 29 600 600 2.6 0 279.98 41.399 559.30 0 600 500 4.800 1. 7.50 0 10.20 0 2.880 S1 Rs.399 139.410 P3 Rs.70 0 195 929 Redistribution of Service Departments Expenses over Production Departments.00 0 7.9 – 1.700 940 P2 Rs.80 0 300 100 200 39 — 200 1.40 0 3.9 0 27.0 00 9.7 139. 9.42 9 4.59 Indirect Wages Power Depreciatio n of Machines Sundries Direct Wages H.96 – 139. 7. 4.00 0 7. S2 Overheads apportioned in the ratio (40:20:30:10:–) Dept.: 10) 30. Value of Machines Direct Wages 1.700 4.00 0 9.8 419.97 55.Overheads 4.P.9 13.93 9 1.700 S2 Rs. S1 Overheads apportioned in the ratio (20:30:40: .50 0 4.

15 = 37.40 0. 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 1.14 0.160 .475 2.419 5.03 × 3 Rs.14 0.20 1.00 0.56 -1.42 0.070 3. 15. 52 3.2 5 - -0.035. S2 Overheads apportioned in the ratio (40:20:30:10:–) Dept.4. 10.99 5.03 ______ _ 9. 5. 2.28 0.40 13.02 × 5 + Rs.05 _______ _ 12.40 0.99 1. Overhead cost: = = 13. 12 + Rs.233.06 ______ _ 9. 02 4. 50 30 37.25 Question 40 . 3 × 4+ Rs. S1 Overheads apportioned in the ratio (20:30:40:– 10) Dept.02 0.60 Cost Accounting Dept.03 Rs.80 4.60 2.25 ______ 117.10 + Rs.47 2.14 Rs.

1.50 0 1.00 0 2.ft.00 0 A Rs. 2.61 PH Ltd.00 0 Y Rs.00 0 C Rs.00 0 1.00 0 2. 2. ‘Y’ Required: 45 60 B % 15 35 C % 30 X %.00 0 50 250 40 2. Lacs) of assets Machine hours Horse power of machines 500 20 1. 1.00 0 A technical assessment or the apportionment of expenses of service departments is as under: A % Service Dept.00 0 9.00 0 8. 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.00 0 40 500 20 4. ‘A’ ‘B’ and ‘C’ and two service departments ‘X’ and ‘y’. ‘X’ Service Dept.00 0 15 500 10 1.00 0 X Rs.00 0 2.) Capital Value (Rs.00 0 B Rs. 5 Y % 10 - .00 0 20 250 10 1.00 0 5.Overheads 4.00 0 25 4. 4.

00 0 1.00 0 6.000 1. 6.700 4. Direct materials Direct wages Factory rent Power Depreciation Other Overheads M/c hrs. Value 4.138 B Rs. B Rs..0 00 2.700 712 C Rs. 9.00 0 4.00 0 500 150 100 Y Rs.00 0 1.750 Y Rs. 1.000 1.00 0 2. Area H.350 475 1.75 0 1. (iii) Machine hours rates of the production departments ‘A’. C Rs. ‘B’ and ‘C’.00 0 800 200 Overhead Distribution Summary A Rs.750 4.000 3. Answer (i) Basis Tota l Rs. (ii) A statement showing re-distribution of service departments expenses to production departments. 4.50 0 1. 5.425 X Rs.000 5. X apportioned in overhead the ratio 2. 3.62 Cost Accounting (i) A statement showing distribution of overheads to various departments.7 00 2.700 2.000 250 100 Redistribution of Service Department’s . 2. X Rs.00 0 1.350 Direct . Cap. Total Overheads Dept .000 2.4.P X M/c Hrs.00 0 – (ii) expenses: A Rs.0 00 500 200 500 800 400 1.

482 (iii) Machine Hour rate 1.29 1 -- 1 -.825 131 44 87 -.039 -291 .513 – – Machine hours Machine hour rate (Rs.: 5 ) Dept . X overhead apportioned in the ratio (45 : 15 : 30 : 10 ) Dept .505 7. The negative rate. Such rates may be either positive or negative.2 -- 8. however.48 6.63 (45 : 15 : 30 : 10 ) Dept . Y overhead apportioned in the ratio ( 60: 35 : -. Y overhead apportioned in the ratio ( 60: 35 : -.Overheads 4.495 2.: 5 ) Dept . (iii) Writing off to Costing Profit and Loss Account.000 3. (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.291 29 17 10 -- 2 .000 8. (iv) Carrying over to the next year’s account.25 4. A positive rate is intended to add the unabsorbed overheads to the cost of production. X overhead apportioned in the ratio (45 : 15 : 30 : 10 ) 3.88 Explain how under and over absorption of overheads are treated in cost accounts.) Question 41 2.5.000 1. corrects the cost of production by deducting the amount of over-absorbed . 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.

In case under absorption of overheads arises due to factors like idle capacity. defective planning etc. the said amount is transferred to Costing Profit & Loss Account. 1.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. 8 lakhs. Further. The machines cannot be worked without an operator wholly engaged on it.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.8.300 Rs. Depreciation 10% on original cost.050 Rs. However. (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.64 Cost Accounting overheads. the output is low in the initial years.200 .20 15% on wages Rs. Other Sundry works expenses Rs. this method may be used when the normal business cycle extends over more than one year. 12. 40.4. Question 42 A machine shop has 8 identical Drilling Machines manned by 6 operators. The effect of applying such rate is to make the actual overhead get completely absorbed. comparison between one period and another is rendered difficult. Insurance Rs. The original cost of all these 8 machines works out to Rs. Then also it may be transferred to Costing Profit & Loss Account.000.000 208 18 20 10 Rs. (iii) Carrying over to the next year’s accounts: Under this method. These particulars are furnished for a 6 month period:Normal available hours per month Absenteeism (without pay). or in the case of a new project. 3.

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

500 Rs.000 30.00 0 11.000 1.500 500 1.Q.000 1.50 0 Rs.0 00 Rs. 17 Hrs 1. 6.0 00 1. Service departments’ costs are distributed to these production departments using the “Step Ladder Method” of distribution .0 00 Rs.000 64.000 3.5 00 Rs. 9. P. viz. have three departments which are regarded as production departments.0 00 17.000 5. Productions X Y Z Services P Q R S 100 125 85 10 50 40 50 3.93. Overheads Without computer With computer 10 2750 Hrs 600 40 0 1.000 6.000 1.00 0 16.500 27..000 75.05.000 The overhead costs of the four service departments are distributed in the same order.4.R and S respectively on the following basis: Department P Q _ _ Basis Number of Employees Direct Labour Hours . 27.000 No.5 00 25. m. 17 Hrs 900 600 1.000 3.68 Cost Accounting per hr. Estimates of factory overhead costs to be incurred by each department in the forthcoming year are as follows. Rs.000 Direct Labour Hours 4.000 1.50 Machine hour rate Question 44 Deccan Manufacturing Ltd. Data required for distribution is also shown against each department: Department Factory overhead Rs.000 4.500 1.of Employees Area in sq.500 1. 27. 1.00 0 Rs.000 83.000 45.

50 0 of 24.000 18.000 S Rs.000 Production X Rs. 1.000 R Rs.0 of 19.33.`P` (45.00.000 5.00 0 Distribution Overhead Costs of Dept. 64.35.00 0 Z Rs.60.500 of Y Rs.50 0 8. OVERHEAD 83.`Q` _ (80. 75.00 24.00 0 of 5.93.00 0) Total 3.000 57.000 4.00 0 16.50 0 28.000 10.00 0 1.05.00 0) Distribution Overhead Costs of Dept.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. Overhead cost 45.000 12.`R` _ _ (1.000 ) Distribution Overhead Costs of Dept.000 28.000 12. 30.00 0 243 . 1.0 24.00 0) Distribution Overhead Costs of Dept. and (b) calculate the overhead recovery rate per direct labour hour for each of the three production departments.`S` _ _ _ (66.Overheads 4.000 16.00 0 1. Answer : (a) DECCAN MANUFACTURING LIMITED Schedule Showing the Distribution of Overhead Costs among Departments Service P Rs.000 12.000 Q Rs.

manufactures two products A and B.000 4. The rate of Department P1 is based on direct machine hours. while the rate of Department P2 is based on direct labour hours.45/ - Rs.000 S1 S2 Rs. 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.The manufacturing division consists of two production departments P1and P2 and two services S1 and S2.50. Product B –Rs.000 .4.000 3.75.40/ - Question 45 A Ltd. 120 . Budgeted time required for production per unit: Department P1: Product A: 1.the predetermined rates are multiplied by actual hours.000 4. 6.50. B – 30.000.00.000 21. 75/- Rs.000. (A) (b) hours Direct Labour 4. In applying overheads. Budgeted raw material cost per unit: Product A – Rs.5 machine hours Product B: 1.70 Cost Accounting 0 00 00 ….. and (ii) Cost of Department S2 to Department P1 and P2 in the ratio 2:1 respectively.000 …. 25.0 machine hour Rs. Budgeted overhead rates are used in the production departments to absorb factory overheads to the products. the basis adopted is as follow: costs to production (i) Cost of Department S1 to Department P1 and P2 equally.(B) Overhead recovery rate per hour: [(A)/(B)] Rs. 150. For allocating the service department departments.

Rs.89. Rs.1993) Units actually produced: Product A: 4. 4. Actual data (for the month of July.200 hours. S1 6. Cost actually incurred: Raw materials: Wages: Overheads: Department P1 Product A Rs. All materials are used in Department P1 only. 60. 4.150 hours. 2.00.91.000 P2 Rs. (ii) Prepare a performance report for July.00 0 S2 4. 231.75. 1993 that will reflect the budgeted costs and actual costs.0 00 00 Service Deptts. Actual direct labour hours worked in Department P2 On product A – 8.400 hours.000 Rs. Product B-4. Answer (i) Computation of predetermined overhead rate for each production department from budgeted data Production Deptts.04.000 units Product B: 3.000 S1 S2 You are required to: (i) Compute the predetermined overhead rate for each production department. 5.5 Direct labour hours Average wage rates budgeted in Department P2 are: Product A – Rs72 per hour and Product B – Rs.50. P1 P2 25.00 0 Budgeted factory overheads for the year in . 75 per hour.000 Rs.Overheads 4.0 21.100 hours.50.71 Department P2: Product A: 2 Direct labour hours Product B: 2. Product B-7. 5.900 Rs.52.000 Rs.56.000 Rs.000 Product B Rs.000 units – – Actual direct machine hours worked in Department P1 On product A – 6. 48.

) 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 3.000/1.50.50.00. 120 A : 3. 30 Rs. 150 in 4.00.000 units ×Rs.000/1.00 0 4.50.00 0 .) Total (Rs. 26.80.) Allocation of service department S1’s costs to production departments P1 and P2 equally in (Rs.05.25.0 00 Nil Nil 1.00 0 3.72 Cost Accounting (Rs.56.25. Actual Rs.0 00 1.000 units ×Rs.000) Budgeted machine hour rate (Rs.00 0 Rs.00 0 – 26.89. 1993 (When 4.00 0 31.00 0 6. 31.00 0 1. 15 Performance report for July.50.00 0 _ _ 4.00 0 4.000) (ii) 3.00 0 Raw material used department P1 A : 4.05.) Allocation of service department S2’s costs to production department P1 and P2 in ratio of 2:1 in (Rs.50.000 units of products and B respectively were actually produced) Budgeted Rs.00.75.4.00.000 and 3. 4.75.

36 4** 1.) Product B 30.75 5.000 1.71.000 × 2.000 × 2 hrs.× Rs.00 0 1.73 Direct Labour Cost on the basis of labour hours worked in department P2 4.000 2.30 1.91.52.000 Total .90 0 5.0 00 1.5 hrs.000 ×1.80.62.5 hrs. Budgeted output (in units) Budgeted machine hours In department P1 Budgeted labour hours In department P2 Product A 50.05. 3.5 48 26.000 30.00 0 5.18.000 (30.75.00.× Rs.50 0 5.000 (50. ×Rs. Actual output Product A 4.) 1.5 hrs.5 hrs.5 hrs.31.40 0* 1.31.) 75.000 × 2 hrs.64 9 Overhead absorbed On machine hour basis in department P2 A: 4.000 × 1.72 3.000 ×1 hrs.18.50 0 25.00 0 90. × Rs. × Rs.12.000 × 1 hr.000 × 2 hrs.15 1.000 × 2.000 1.20.) Total 1.00 0 Overhead absorbed On machine hour basis in department P1 A: 4. × Rs.000 × 2.76.000 75.15 B: 3.30 B.000 Product B 3.74.8 61 * (Refer to working Note 4) **(Refer to Working Note 5) Working Notes: 1.Overheads 4.000 (30.000 (50.

250 15.600 .74 Cost Accounting (in units) Actual machine hours utilised in department P1 Actual labour hours utilised in department P2 6.100 8.4.150 7.400 10.200 4.

× Rs. 1.250 16.000/10.02 4. 16.× Rs. 1.18. Computation of actual overhead rate for each production department from actual data Production Deptts.400 (say) B: 4.000 48. 16. 2.000 Service Deptts.000 30. 1. 28.59 = Rs.600 — — Rs.× Rs.000 ___ Nil — — 15.50.000 — – ___ Nil — –48.) Allocation of service department S1’s costs in (Rs.04. 1993 in (Rs.000 _______ 2.000 Actual factory overheads for the month of July.000/15. 28.74.31.000 2.31. S1 S2 60.02 = Rs.000 – 32.02 = Rs.) 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 10. Allocation of service department S2’s costs in (Rs.18.200 hrs.150 hrs.649 (say) 5.548 Question 46 .600) 30.× Rs. Actual overheads absorbed (based on machine hours): A: 6. Actual overheads absorbed (based on labour hours): A: 8.93.364 B: 7. 1.) over production departments P1 and P2 in the ratio of 2:1 Total (Rs. 16.250) Labour hour/ rate (Rs. 28.100 hrs.59 Rs.75 3.) over production departments P1 and P2 equally.000 _______ 2.93.Overheads 4.50.400 hrs. 2. P1 P2 2.000 –60.59 = Rs.

50 lakhs and 1.000 were sold . 41. factory overhead was recovered at a pre.5 lakhs man-days respectively. Out of the 40.76 Cost Accounting In a manufacturing unit.000 units produced during a period. . The total factory overhead expenses incurred and the man-days actually worked were Rs. 30. 25 per man – day.4.determined rate of Rs.

(Refer to Working Note) Rs. 4/-p.Overheads 4.000 units at the supplementary overhead absorption rate i.000 4.e 60% of Rs 4.000 due to defective planning to be treated as abnormal and therefore be charged to Costing Profit and Loss Accounts.u.40.000 units @ Rs.000 Rs. 25 × 1.40. Rs.per unit .000) Balance of Unabsorbed Overheads 1.000) Unabsorbed Overheads Unabsorbed Overheads due to defective planning (i. 41.p. 40.000 _______ 1. (ii) The balance unabsorbed overheads of Rs. 4/.50.000 2. it was found that 60% of the unabsorbed overheads were due to defective planning and the rest were attributable to increase in overhead costs.77 On analysing the reasons.day (Rs.60. 25%/per man .u.e.000 units @ Rs.) Total Working Note: 1.000 be charged to production i.20.50.50. 2.50.00. Charge to Costing Profit and Loss Account as part of the cost of units sold (30.000 Treatment of Unabsorbed Overheads in Cost Accounts (i) The unabsorbed overheads of Rs.60.000 40. 4/.000 _______ 1.e. 1.00. How would unabsorbed overheads be treated in Cost Accounts? Answer Computation of Unabsorbed Overheads Man – days worked Overhead actually incurred Less: Overhead absorbed @ Rs.60.000 37.000 .) Add: To Closing stock of finished goods (10.

u. 16 .4 .78 Cost Accounting Supplementary Overhead Absorption Rate = Rs. 00 0 R .p. = R . 4/. 0 s 00 0 . 0 s .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 20.00 0 23.82 Cost Accounting Production Department Direct materials Direct wages Overheads Power requirement at normal capacity operations During Power Consumption during the period (Rs.000 10.00 0 35. 84.500 (Kwh) 10.500 SD2 20.00 0 13. which is not included above of Rs. 4 per hour respectively. the power service generation plant costs to to the four (Rs.00 0 Service Department SD1 10. given that the direct wage rates of PD1 and PD2 are Rs.00 0 50.) (Rs.875 out of which a sum of Rs.000 20. 1.21. the service department overheads are to be redistributed on the following bases: SD1 SD2 You are required to: (i) Apportion departments. (iii) department cost production Calculate the overhead rates per direct labour hour of production departments.) (Rs.00 0 50.) PD1 50% 60% PD2 40% 20% SD1 --20% SD2 10% --- (ii) Re-apportion departments.000 The power requirement of these departments are met by a power generation plant.00 0 80.00 0 PD2 40.) (Rs.250 10.000 17. 5 and Rs. Answer (i) Statement of apportionment of Power generation plant costs to the four departments Total Basis of Production Service . The said plant incurred an expenditure.000 20.) (Kwh) PD1 80.00 0 95. After apportionment of power generation plant costs to the four departments.4.000 12.375 was variable and the rest fixed.000 30.

0 00 _____ _ 22.4 41 Variable expenditure Total Overheads summary: Direct materials Direct wages Overheads Total (ii) 84.61.0 00 1.3 75 _____ _ 20. Service departments SD1 Rs.890 72.51 5 SD1 Rs.890 8.00 0 1.8 90 20.8 75 19.50 0 ______ 28.0 00 72. Rs.0 00 30.0 00 3. 8.32 4 34.00 0 30. SD2 Rs.25 : 10 } 1.0 00 99.445 99.941 80.80.089 .0 00 20.61.83 Costs Rs.356 80. 5.Overheads 4.7 20 Statement of Reapportionment of service department cost to production department by using repeated distribution method Total Production departments PD1 Rs.9 41 10.824 PD2 Rs.08.890 40.21.08.37 Actual power 5 consumption (kwh) ______ { 13:23 : _ 10. PD2 Rs.5 } PD1 Rs.5 00 _____ _ 49.720 32. 15.0 00 80. Total overheads Dept.72 0 Fixed expenditure 37.0 00 20.50 Normal capacity 0 (kwh) { 4:7 :2:3 :3.3 24 --50.87 1.7 20 30. SD1 apportioned overheads 3. 7.0 00 10.8 75 --80.8 90 15.9 41 15.324 5 80. apportionment of power generation cost departments department s SD1 Rs.

40 6.485 16.385.38 0.64 In the ratio [ 50: 40 : .20 6. SD2 apportioned overheads 0.64 0.13 0.465 -16162 1. SD1 apportioned overheads 6.13 .: 10] Dept.84 Cost Accounting In the ratio [ 50: 40 : .0 (iii) Computation of Overhead rates per direct labour hour of production departments Production departments .809 48. SD1 apportioned overheads 323 162 129 -323 32 In the ratio [ 50: 40 : .162 80.616 In the ratio [ 60: 20 : 20 : -] Dept.20 2.06.13 0.56 -6.64 In the ratio [ 60: 20 : 20 : -] Total 2.616 In the ratio [ 50: 40 : .78 09 0.: 10] Dept.616 970 323 323 -1.40 3.40 0. SD2 apportioned overheads 1.: 10] Dept.0.: 10] Dept. .55. SD2 apportioned overheads 32 19.162 16. SD2 apportioned overheads 80.081 6.162 8.809 In the ratio [ 60: 20 : 20 : -] Dept. SD1 apportioned overheads 16.489 1.4.40 -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.

2003. (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.89 (ii) Rank the support departments based on percentage of their services rendered to other support departments.Overheads 4. Use this ranking to allocate support costs based on the step-down allocation method. 2+2+1+5=10 marks) . (Nov.

706 37.36.38.21.2 11 1.077%  2×0 1 10   4 + 8+ 2 of its services to information systems support 1  2 2  department. Thus 23. 0 + 0 × 0  of its services to Administration .077% of Rs. 0 20 0 4 0   support department.66.4. . 12. 94.33% of Rs.13. 94.20. 8.97. • Information system support department provides 8. 25. 6.1 668 31 Ranking of support departments based on percentage of their services rendered to other support departments • Administration support department provides 23.510 = Rs.383.810. Rs.04.720 = Rs.804 Support department Administr ative Rs. 3.90 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.33%   40 0  1 0 24 0+ .72 0) _______ ________ _ 15.04. 3.510 (94. Thus 8.04.72 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) 1.50 9 (3.81 751 8 56.510) Informat ion systems Rs.

520 Rs.04.26.19.81 8 29. as first Allocated administrative overheads as second (Rs.810 3.48.53 0) _______ ________ _ 15.78. • • (iv) Allocation of information systems overheads (Rs. 21.91 Statement showing allocation of support costs (By using step-down allocation method) Sales department Corpor Consu ate mer sales sales Rs.080 Support department Administr ative Informat ion systems .1 07 1. 12. using the rupee figures obtained under requirement (ii) This approach would use the following sequence of ranking.72 0 21.3 478 21 (iii) An alternative ranking is based on the rupee amount of services rendered to other service departments. 751 43. Particulars Service departments Administr Informat Sale departments Corporat Consume .97.14.42 3 (3.25.810 provided to information systems). 94.383 provided to administrative).510) 1.26. Working notes: (1) Percentage of services provided by each service department to other service department and sales departments. 3.Overheads 4. 8.510 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 (94.53 0 Particulars Basis of allocati on Cost incurred Rs. 6. Rs.36.

2307 AD 94.922 .04.893 Rs.04.720 + 0.67% (By using (2) Total cost of the support simultaneous equation method). department: Let AD and IS be the total costs of support departments Administrative and Information systems respectively.2307 94.98078AD or AD and = = = = = = IS 94.510 + 0. 3.77% 41.01922 AD 1.720 + 0.22. These costs can be determined by using the following simultaneous equations: AD IS or AD AD} or AD or 0.4.32.510 + 25.0833 {3.16% 50% r Sales 30.92 Cost Accounting ative Administrative Information systems – 8.19.07% – e Sales 46.243 = Rs.383 + 0. 1.33% ion system 23.0833 IS 3.510 + 0.

13.639 8.729 _______ 15.67% of Rs. sales Rs. 2002. royalty.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 (46.818 56.000 Total number of purchase orders 160 Total number of set-ups 20 Sales department Corporate Consumer sales Rs. cost of making a specific pattern. (November. 1.614 1.16% and 30. These expenses in cost accounting are treated as part of prime cost.Overheads 4.243) Re-allocation of costs of information systems department (50% and 41. 3.161 A . 12.461 ________ 1.38.77% of Rs.Rental of a machine or plant hired for specific job.32.66. process or job are treated as chargeable or direct expenses.36. Question 52 A company manufacturing two products furnishes the following data for a year.427 37.22.97.571 6.000 Total Machine hours 20. other than direct materials and direct labour cost which are specifically and solely incurred on production. Product Annual output (Units) 5. drawing or making tools for a job. 3 marks) Answer Chargeable expenses: All expenses. Examples of chargeable expenses include . design.20.

94 Cost Accounting B 60.20.4.000 384 44 .000 1.

20.82 .18.136. 0 h u s . 14. 61 .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 . 1. Machine hour rate = = hour 2.) 3.000 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. 0 s . 3.000 8. 00 0 = 14 .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 . 9 marks) = Rs. 12. 00 0 o r (November. 0 h u s . 8 0 0 s 98 . 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 . 80 0 = Rs. 0 s . Volume costs related activity 5.Overheads 4.1 .812.000 6. 2002.95 The annual overheads are as under: Rs. Answer Working notes: 1.50. 00 0 o r Rs.03 5 4 od r 4 r es . Cost of a purchase order = = R .55 .20 per = (approx. Cost of one set-up = = 4. 00 0 = Rs. 0 s . 0 14 .

00 0 hrs × Rs.20) Overhead cost per unit Rs.76 4.63.0 00 1.80 (Rs.84.000 hrs.58 5.36. (f) = [(c) + (d) + (e)] 5.84.80 (160 orders × Rs.71. 3.80 Rs. Note 1) Rs.×Rs.17.614 .20.812. (e) Rs.20.000 units) 28.000 / 5.0 00 Overhead cost component (Refer to W.000 Total machi ne hours 20.0 00 14. (d) Rs.75 0 (44 set ups B 60.000/60.40 (Rs.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.5 3 .000 (1.00 0 1.00 0 units) A B 60. × Rs.20) 17. 32 A 5.71.93) 4.6 00 (1. (a) (b) (c) Cost related to purchas es Cost related to setups Total cost Cost per unit Rs.000 hrs. (g) = (f)/ (a) 103.00 0 78.04. 2.52 (384 2. 14.20. 2.56. 12. 14.25 0 (20 set ups × Rs.03 ) 4. 56.20.04.60 0 (20.4.81.96 Cost Accounting (i) Statement showing overhead cost per unit (based on traditional method of charging overheads) Produc ts Annua l output (units) 5.16.23 5.00 0 20.000 (20.52 24. 1. 1136. 50) 5.

03 ) × Rs. 50) Note: Refer to working notes 2.3 and 4 for computing costs related to volume activities.97 000 hrs × Rs. . 1136. set-ups and purchases respectively.93) orders × Rs.Overheads 4. 12.812. 3.

07. a company has undertaken two jobs.57. 64.. = Rs. 99.920 12% Rs. The company has received similar job. 50.9 0 s .98 Cost Accounting Question 53 In the current quarter. 1. 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 .325 8% Rs.000 2. 1.000 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. 7 2 × 100 12 1 a new order for manufacturing of a direct materials and direct wages are Rs. The data relating to these jobs are as under: Job 1102 Selling price Profit as percentage on cost Direct Materials Direct Wages Rs. 73 5 × 100 18 0 R . 9 marks) Answer Working notes 1.000 Job 1108 Rs.10 . Factory overheads = F% of direct wages = Selling & Administrative overheads A% of factory cost .000 Rs. 1. A profit of 20% on You are required to compute (i) The rates of Factory overheads and Selling and Administration overheads to be charged.375 = = Rs. 15 . The estimate of relating to the new order respectively. 2 s . 42.000 sales is required.000 and Rs. 30.41. 37.500 Rs. 54. (ii) The Selling price of the new order (November.4. 2002.

Overheads 4.99 (i) Computation of rates of factory overheads and selling and administration overheads to be charged. .

500 + 30.000 FA 42.000 + 42.500 + 30.4.500 + 30.000 67.41.000 F)(1+A) and (67.375 and Rs.000 F + 96.500 + 30.000 F) A (96.25 and F Hence A = 25% and F = 40% (ii) Selling price of the new order: Direct materials = = = Rs.000F (96.000 42.000 FA or 30.500 A + = 30.000 F) (1 + A) = = 99.000 F) A 37.375 1.000 96.000 + 42.500 30.375 1.000 respectively.500 30.000 F) (1 + A) (96.000 + 42.000 42.000 FA 96.41.000 F + 67.000 F) Job 1108 Rs. 64. 54.000 99.100 Cost Accounting Jobs Cost Sheet Job 1102 Rs.000 A + = 42.000 + 42.500 A + 30.000 F + 96.875 45.000 A + 42.000 F) Since the total cost of jobs 1102 and 1108 are equal to Rs.500 + 30.000 F + 67. 1. 99.000F (67.41.000 0.000 F) (1 + A) (96.000 + 42.40 (3) (4) (1) (2) or 67.000 31.000 . therefore we have the following equations (Refer to working note 1) (67. 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 (67.000 FA On solving (3) and (4) we get : A = 0.

using the dual -rate method in which fixed costs . top management decided that its practical capacity should be 1.000) Total cost 1. 0 s .000 33.000 60.000) 50.09.34.500 1. Annual budgeted practical capacity fixed costs are Rs.000 1.9.000 1. 1.000 60. 50. When the plans were prepared for the power plant.67. 20 and Cost is Rs.375 Question 54 PQR Ltd has its own power plant.000 Total R .000 machine hours.50. which has two users. Overheads (25% × Rs.000 and budgeted variable costs are Rs.000 20. 80 Hence selling price of the new order = 2.50.16 .00.4 per machine-hour. 100 then Profit is Rs. 8 0 1.000 Factory cost Selling & Admn.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. (ii) Allocate the power plant's cost to the cutting and welding departments.34. 75 0 × 100 = Rs.101 Direct wages Prime cost Factory overheads (40% × Rs.00.14.000 Welding Departmen t 40.500 If selling price of new order is Rs.Overheads 4. Cutting Department and Welding Department. The following data are available: Cutting Departmen t Actual Usage in 2002-03 Machine hours) Practical capacity for each department (machine hours) Required 90.

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

000 s .103 Answer Working notes: 1.000 9.000 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.40.90 . 0 0 R . 10.000 (40.000 hours) = = per 1.000 (50.000 3.00. Rs.00.0 0× R .90 .50.0 0×2  s    5 5    2.Overheads 4.50. Cutting Departmen t Rs. 6 per 2.00. 10) Welding Departmen t Rs.000 . 10) Total Rs. Budgeted rate per machine hour (using practical capacity): Fixed practical capacity cost per machine hour + Budgeted variable cost per machine hour Rs.000 hours : 60. Fixed practical capacity cost machine hour: Practical capacity (machine hours) Practical capacity fixed costs (Rs.00. 4.00.00. 6 + Rs. 4 = Rs.60.40.000 9.00.000 1. 6.000 hours) Variable cost Rs.000 Rs. 10 (i) Statement showing Power Plant's cost allocation to the Cutting & Welding departments by using single rate method on actual usage of machine hours. Cutting Department Welding Department Rs.000 / 1. Total Fixed Cost (Allocated on practical capacity for each department i.e. 0 0 3 .60.000 4.) Fixed practical capacity cost machine hour (Rs.): (90.000 hours × Rs. 9. 5.000 hours × Rs.

000 (40.000 hours × Rs.4.000 hours × Rs.00.000 13.20.000 .80.104 Cost Accounting (Based on actual usage of machine hours) Total cost (60.4) 5. 4) 7.

Overheads 4. 1995.00. The major advantage of this approach is that the user departments are allocated fixed capacity costs only for the capacity used.105 (iii) Statement showing Power Plant's cost allocation to the Cutting & Welding Departments using dual rate method Cutting Departmen t Rs.000 Under dual rate method. 9. 2.000 (40. 6. 6) 1. (if one travels in his own vehicle) will decline when he travels more kilometers.00. 4) 4. Question 55 "The more kilometers you travel with your own vehicle.00.000 (60. This highlights the cost of unused capacity.000 hours × Rs. 6.000 Welding Departmen t Rs.00 (Rs. Under (ii) fixed cost of capacity are allocated to operating departments on the basis of practical capacity.60.000) will not be allocated to the user departments. 6) 2. so all fixed costs are allocated and there is no unused capacity identified with the power plant.000 (60.00.00. the allocation of fixed cost of practical capacity of plant over each department are based on single rate. 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 . the cheaper it becomes.60.00.000 Total cost (iv) Comments: 10.2 marks) Answer The cost per kilometre.40.000 (40.40.000 Total Rs. (November.000 hours × Rs. 4) 6. 3. 3." Comment briefly on this statement. under (iii) and single rate method under (i).000 Fixed Cost Allocation of fixed cost on actual usage basis (Refer to working note 1) Variable cost (Based on actual usage) 4.00.000 hours × Rs. The unused capacity cost Rs.000 – Rs.00.000 hours × Rs.

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

marketing and sales of different products. 1.104.380.46. How would you proceed to close the books of accounts. Distribution expenses: Expenses relating despatch of goods/products to customers.Overheads 4. unabsorbed of indirect was due to the method (November.. 6 marks) Answer Actual factory overhead expenses incurred Less: Overhead recovered from production (2. 1.93.800 units produced of which 7. Taking into account the normal working of the factory.000 were sold. Percentage on cost of production / cost of goods sold. Also give the profit implication of suggested. assuming that besides 7.380 3.000 . 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. 3. 4.46. to purpose delivery of and Accounting treatment for selling and distribution expenses Selling and distribution expenses are usually collected under separate cost account numbers.104 hours × Rs. 4.66. 1.25) Unabsorbed overheads Reasons for unabsorbed overheads (i) 50% of the unabsorbed overhead was on account of increase in the cost of Rs. Question 57 The total overhead expenses of a factory are Rs. there were 200 equivalent units in work-inprogress? On investigation. These expenses may be recovered by using any one of following method of recovery. overhead was recovered in production at Rs. Percentage on selling price.25 per hour. 2000. Rate per unit sold.107 Answer Selling expenses: Expenses incurred for the promoting.000 40.380 ______ 80. The actual hours worked were 2.93. 2.

000 . 40.108 Cost Accounting indirect materials and indirect labour (ii) 50% of the unabsorbed overhead was due to factory inefficiency.4.

1.000 80.000 units × Rs.000 respectively.Overheads 4. of Rs.40.00 80.000 (unabsorbed overhead) should be distributed by using a supplementary rate among cost of sales. Budget Machining 6.00 20. as this is an abnormal loss. 5) Rs.000 ______ 40. The relevant data for a month are given below: Department Direct Material s Rs.000. 5) Finished goods (800 units × Rs. Unabsorbed overhead amount of Rs.109 Treatment of unabsorbed overheads in cost accounting 1.000 Direct Wages Rs.000 The use of cost of sales figures. finished goods and work-in-progress as below: Cost of sales (7.000 due to factory inefficiency should be charged to Costing Profit & Loss Account.000 and will increase the value of stock finished goods and work-in-progress by Rs.000 and Rs. Factory Overhea ds Rs. 0 0 ) n The sum of Rs.000 1. 5 per unit (78 0 + 2 0 u its .000 3.50.60. 5) Work-in-progress (200 units × Rs. The balance amount of unabsorbed overheads viz. 4. 40. 40. 35. 4 . Supplementary rate = R . 2.000 4. Director Labour Hour Machine Hours . 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. would reduce the profit for the period by Rs.0 0 s 0 0 = Rs. 35.

000 2. Required: (i) Calculate the overhead absorption rate as per the current policy of the company and determine the selling price of the Job No. 16 marks) .200 600 300 Direct Wages Rs.80.000 90. CW 7083 Department Direct Materials Rs.000 96.00 0 84. (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. 1.90.25.70.20.000 11.50.00 0 1.00 0 3.00 0 3.40. (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.4. CW 7083.36. 1994.000 The details of one of the representative jobs produced during the month are as under: Job No. (November.000 24.00 0 50.00 0 70.00 0 90.000 – 96.00 0 1.00 0 1. (iii) Determine the selling price of Job CW 7083 based on the overhead application rates calculated in (ii) above.000 0 1.70.00 0 1.000 60.00.000 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.00 0 1.00.110 Cost Accounting 0 Assembly Packing Actual Machining Assembly Packing 1.35.00 0 7.000 10.

111 Answer (i) Department Computation of overhead absorption rate (as per the current policy of the company) Budgeted Factory Overheads Rs. 80. 3. 2. Machining Department In the Machining department.660. Hence machine hour rate should be used to recover overheads in this department. 0 s .585.00 3. 50 0 (ii) Methods available for absorbing factory overheads and their overhead recovery rates in different departments.Overheads 4. 0 0 = 125% of Direct wages Selling price of the Job No.100.0 0 × 100 s . 240 + Rs.50 4.000 1.00 1.00.00 825.000 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 . CW – 7083 Direct Materials (Rs. 600 + Rs.000 5. 1.25.200 + Rs.40.25.50 .000 6.075. 1.00 660. 660) Total factory cost Add: Mark-up Selling price Rs.000 = Budged Direct Wages Rs. the use of machine time is the predominant factor of production. 60) Overheads (125% × Rs.50.50 R .000 1.000 3.62 . 360 + Rs.000 70. 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.

0 0 s .0 0 h us .112 Cost Accounting = R .50 per hour 2.0 0 h u s 0 0 or = Rs. Hence direct labour hour rate method should be used to recover overheads in this department.078.00 1.4. Packing Department Labour is the most important factor of production in this department.0 0 s .40 per hour 3. Assembly Department In this department direct labour hours is the main factor of production.100. 4.40 _______ 4. Hence direct labour hour rate method should be used to recover overheads in this department.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. 12 .40 .00 3. 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 . 3. 2. 0 0 8 .14 .00 1. 5 0 5 .838. 0 0 or = Rs.00 660. 1.989.36 .0 0 s .838) Selling Price Working Note Rs. 0 0 10 . 2.151.0 0 h u s 0 0 or = Rs. 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 .

113 Overhead Summary Statement Dept. Machining* Assembly Packing Basis Machine hour Direct labour hour Direct labour hour Hours 180 120 40 Rate Rs.40 2.07 8 .Overheads 4.50 1. 4. 810 168 100 1.50 Total Overheads Rs.

3 marks) (b) B & Co.500) 6.500 Total Rs.53.4.000 7.000 42.00 0) 84.000 42.90.000 1.20.70.) Overhead recovered (Rs.000) As per methods suggested Basis of overhead recovery Machine hours Direct Labour hours 90.09.09.00 90.000 15. has recorded the following data in the two most recent periods: Total cost of production Rs.000 1.000 1.500 1.): (B) (Under)/Over recovery: (A – B) Question 59 96.70.000 2.35.000 3. 1995. Direct Wages (Actual) Overheads recovered @ 125% of Direct wages: (A) Actual overheads: (B) (Under)/Over recovery of overheads: (A – B) (b) 5. 14.37.000 99.000 Total Rs.000 2.50.000 4.40 1.32.90. Hours worked Rate/hour (Rs.000 84. y Rs.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.000 3.70.600 Volume of production (Units) 800 .50 1. 96.08.12.000 6.50 4.500 1.000 (39. Rs.000 (22.000 3.35.000 (2.000 Direct labour hours 60.): (A) Actual overheads (Rs.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.26.000 2.

115 19. 3 marks) . 1995.400 1.Overheads 4.200 What is the best estimate of the firm's fixed costs per period? (November.

600 800 Period 2 19. it is advisable to use labour hour method for overhead absorption. Therefore. On analysing the reasons. The total factory overhead incurred and the labour-hours actually worked were Rs. 1995. a time base overhead absorption rate method is always preferred over any other method.000 units were held in stock while there was no opening stock of finished goods. Similarly. it was found that 60% of the unabsorbed over-heads were due to defective planning and rest were attributable to increase in overhead costs. the overhead charged varies from period to period due to changes in direct wages.) Volume of production (units) Variable cost per unit = Period I 14. At the end of the period 5.000 uncompleted units which may be reckoned at 50% complete. though there was no stock of uncompleted units at the beginning of the period.116 Cost Accounting (c) In a manufacturing unit overhead was recovered at a predetermined rate of Rs. at the end of the period there were 10.00. 0 . During this period 30. In the case of labour intensive operations. Direct wages percentage rate method do not possess the aforesaid features In other words. 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.45.200 Difference 4.800 400 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. In fact.000 units were sold.20 per labour-hour.000 and 2.48 0 s . overhead expenses are generally a function of time. (b) Total cost of production (Rs.4.000 labour-hours respectively. 12 0 ns R .400 1. How would unabsorbed overheads be treated in cost accounts? (November.00.

5. 12 = Rs.117 Fixed cost = Total cost of production (of a period) – Total variable cost = Rs.600 – 800 units × Rs.600 = Rs.Overheads 4.600 – Rs. 9. 14. 14.000 .

00.000 25. 2. 5) Add: To closing stock of finished goods: 5.000 units × Rs.000 due to defective planning may be treated as abnormal and should therefore be charged to Costing Profit and Loss Account. 5 per unit Add: To work in progress: 10.000 units.000 Overheads actually incurred : (A) Overheads absorbed at Rs.000 5.118 Cost Accounting (c) Computation of un-absorbed overheads Labour hours actually worked 2.00.50.per unit 4 .000 ______ 40.00.20 . 00 0 = Rs.00.4. 20/. 0 s .000) Balance of unabsorbed overheads due to increase in overhead costs. 5.000 hours × Rs. Disposition of unabsorbed overhead (i) The unabsorbed overheads of Rs.000 . 50% complete Rs.000 25. 20) Unabsorbed overheads: (A – B) Unabsorbed overheads due to Defective planning (i.000 units.000 Disposition of normal unabsorbed overhead of Rs.000 finished goods in stock @ Rs. 0 00 0 35.000 2.00.00 Rs. (ii) Balance of unabsorbed overheads of Rs. 2.00.000 3.000 5.00.000 40.e. 45.00.00. 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. 1. 5/.00. 50% complete Total (units) Supplementary overhead absorption rate is: = R . 60% of Rs.00.per labour hour (B) (2.000 Charge to Costing Profit Loss A/c (as part of cost of unit sold: 30.

5. 5/.Overheads 4.00.000 equivalent units @ Rs.e.119 i.000 .per unit Total _______ 2.

000 7.000 600 Rs.4. 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 . Required (i) Set-up a schedule showing the apportionment of the indirect selling and distribution costs between the two products. ) (uni ts) 10.000 1.000 800 2.000 4. 1996. (May. In addition to direct costs.500 8. ) (Rs.50.20.000 2.000 1. 78.120 Cost Accounting Question 60 A company is making a study of the relative profitability of the two products – A and B.000 8.40. 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 Selling price per unit Cost per unit (exclusive of indirect selling and distribution costs) Annual sales in units Average inventory Number of invoices (Rs.50.000 One unit of product A requires a storage space twice as much as product B. 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. The cost to packing and forwarding one unit is the same for both the products.

000 B Rs.00.0 00 _______ _ 14.00.88.50.00.0 00 2.50.0 00 2.0 00 _______ _ 28.0 00 4.50.25. 30.00 14.000 (10.121 costs between the two products Items Insurance charges Basis of apportionment Average inventory value (1000 × Rs.00.000 .000 (8. 500) Less: Cost of sales 30.25.0 00 4.888 units × Rs.0 00 7.000 (8.000 units × Rs.0 0 4.000 14. 000 40.33. 000 1.0 00 8.40. 80.50.000 units × Rs.33.00.00.100) 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.Overheads 4.0 00 2.000 Storage cost Packing & Forwarding charges Salesmen salaries Salesmen Commission Invoicing Costs 1. Rs.000 3.00. of invoices (2500 : 2000) Total Rs.00.20. 1000) 48.20.000 (10. 500) : (800 × Rs.0 00 4.55.50.000 Products A B Rs.50. 78.000 48. 600) 32. 000 (ii) Statement showing the relative profitability of the two products Products Annual sales value A Rs.0 00 _______ _ 14.55.0 00 6. 300) Gross Profit Less: Indirect selling and Distribution cost 20.0 00 2.000 units × Rs.00. 50.

08%  R .5 .000 10.1 . It included Rs.00. 0    Question 61 ABC Ltd.67. manufactures a single product and absorbs the production overheads at a pre-determined rate of Rs. 0 0 0 × 0  R .000 on account of 'written off' obsolete stores and Rs. it has been found that actual production overheads incurred were Rs. 10 per machine hour.45.8 .54 . 7 0 0  s 76 . 6. 0  s 00 .000 22. 50 0   1 0 0  R .000. .000 being the wages paid for the strike period under an award. 0 0 0 ×1 0  s 00 .4.9% ________ 17. 0  R . 30.122 Cost Accounting [Refer to (a)(i)] Profit Profitability as percentage of sales _______ 5. At the end of financial year 1998-99. 0  s . 45.

000 machines hours @ Rs.000 units The actual machine hours worked during the period were 48. 45. 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. 6.123 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 20.000 Wages paid for strike period Rs.80.000 75.000 5.00.000 45.000 4.000.000 units 18. and (ii) Show the accounting treatment of under – absorption of production overheads.000 (ii) Accounting treatment of under absorption of production overheads .Overheads 4. (November.000 units 8. You are required to: (i) Calculate the amount of under – absorption of production overheads during the year 1998-99. 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 Net production overheads actually incurred: (A) Production overheads absorbed by 48. 1999. 10 per hour: (B) Amount of under-absorption of production overheads: [(A)–(B)] Rs.25. 30.

500 30.000 30. Rs.500 22.000 over. 30. 1.000 units × Rs.000 2. (33-1/3% of Rs.124 Cost Accounting It is given in the statement of the question that 20.500 Rs. 15. 45.000) i.000 18. should be debited to the Profit and Loss A/c 2. finished goods and cost of sales by using supplementary rate Total under-absorbed overheads Rs.e. 1. Dr. 5. This being abnormal.000 . Dr.000 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.000 Rs.25) Cost of sales (18.25) Accounting treatment: Work-in-progress control A/c Finished goods control A/c Cost of Sales A/c Profit & Loss A/c Dr. 1. 45.000 2. 30. 22.000 24.4. 15. Rs.000 units were 50% complete.000 units were completely finished and 8. 2.25) (Refer to working note) Finished goods (2.000 units × Rs. Balance (66-2/3% of Rs. 1. work-in-progress. 5.000 ______ 45. Work-in-progress (4.000 of under – absorbed overheads should be distributed over work-in-progress.000 Apportionment of unabsorbed overheads of Rs.000 of under – absorbed overheads were due to lack of production planning. Equivalen t Complete d units 4. Dr.500 Rs.000 units × Rs. finished goods and cost of sales. 15.000 Rs.000) i.e.

0 u it 40 0 n s 45.000 for the period. a supplementary rate may be used to adjust the overhead cost of each cost unit.70.000 = = Rs. 0 s 00 0 2 .000 48. stock of finished goods and work-in-progress in this question. the total unabsorbed overhead amount of Rs.000 Using two methods of disposal of under-absorbed overheads show the implication on the profits of the company under each method. 20. According to second method.000 3.25 per unit Question 62 Sweat Dreams Ltd.36.125 To Overhead control A/c Working note: Supplementary overhead absorption rate R . Rs. 1.000 will be written off to Costing Profit & Loss Account. The use of this method will reduce the profits of the concern by Rs. uses a historical cost system and absorbs overheads on the basis of predetermined rate.50. stock of finished goods and work-in-progress.3 . 20. at the end of accounting period be apportioned on proportionate basis over cost of goods sold. The under-absorbed amount in total may. (Nov. Apportionment of under-absorbed overheads may be carried out on the basis of the value of cost of goods sold. 1997. Manufacturing overheads Amount actually spent Amount absorbed Cost of goods sold Stock of finished goods Works-in-progress 1.Overheads 4.. 1997. 8 marks) Answer Computation of unabsorbed overheads: According to first method. stock of finished goods and work-in-progress. The following data are available for the year ended 31st March. on the basis of values of the balances in each of these accounts are as follows: .000 1.000 96. Prorated figures of under-absorbed overhead over cost of goods sold.

000 20. 20. 14.000 = R .000 Rs.000 4.000 = Rs.000 48.36.48 . 00 0 × Rs.80. 0 s . 3.000 Rs. 0 ` s 80 0 × Rs.000 = R .000. 0 s 60 0 R .4 .000 1.4 8 .000 2.50. 00 0 2.0 0 R .126 Cost Accounting Appointment of overhead under absorbed (Refer to working note) Rs. 0 s .33 . 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 50.4. 20. Cost of goods sold Stock of finished goods Work-in-progress 3. 6 0 = R .9 . 0 s .000 4.48 .000 The use of the above method would reduce the profit of the concern by Rs.00. 4.000 = Rs.000 96. 14. 20.000 .000 5.000 = Rs.00. 00 0 × Rs. 14. R .

It includes maintenance time of 8 hours and set up time of 20 hours. though productive.000 6. Rs. does not require power.000 2.500 1.00. Estimated scrap value at the end of life is Rs.127 Question 63 In a factory. Standing charges per hour 200 180 . Repairs and maintenance and consumable stores vary with the running of the machine.000.520 72. (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. – – – – – – – 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.480 47. a machine is considered to work for 208 hours in a month.000 Power is required for productive purposes only. 5. The expense data relating to the machine are as under: – Cost of the machine is Rs. The Supervisor and Operator are permanent. Life 10 years. 2 per unit 60. and (b) running time (May.000. 2002. 20. Set up time.Overheads 4. 8 marks) Answer Working notes: 1.

000 / 200 hours 28 5. 2.000 _____ 4.000 – Rs.000 20 Depreciation (Rs.000) / (10 years × 12 months) Repairs & maintenance Rs.000 / 180 hours) 12. (Rs.480 / 12 months) Consumable stores (Rs. 3.500 ______ 24.00. 72.128 Cost Accounting Supervisor's salary (Rs. 9. Total machine expenses Computation of Two – tier machine hour rate Running time rate per machine hour Rs.040 / 180 hours) 22 3.000 1. 5.040 (Rs.50 2.000 / 3 machines) Per month Rs.50 5. 4. 2 × 180 hours) Wages Per month Rs. 20 (Rs.500 / 200 hours) 132. 6.000 (Rs.000 Per hour Rs. . Machine expenses per hour 1.960 (Rs. General Lighting Rent (Rs.500 Set up time rate per machine hour Rs.960 / 180 hours) 50 9. 4.4. 47.000 / 6 × 12) Total standing charges Standing charges per hour (Rs.000 Per hour Rs. 60.000 / 200 hours) 3. 20. 2. 4.520 / 12 months) Power (25 units × Rs.

Overheads 4.50 20.00 28.00 22.00 12.00 140.00 20.00 20.129 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 20.50 52.00 12.50 .50 152.00 50.00 – – – 40.

Rent per month of the department Rs. 800. The total cost of all machinery inclusive of the new machine was Rs.ft.616 / 4. (p.u.) (per hour) Depreciation (See Note 1) 49.000. The following further particulars are available: Expected life of the machine 10 years.904 Note: . Area occupied by the machine 100 sq. Machine hour rate 31.h.500 sq. 120 per month. Rs.75p p. Repairs and maintenance for the machine during the year Rs.75 p. 75 lakhs.000 hours) Machine Expenses: Electricity Consumption: 25 units 18. out of which three points are for the machine Rs. Lighting charges for 20 points for the whole department.000 hours Insurance premium annually for all the machines Rs. Answer (c) Standing charges Computation of Machine Hour Rate Rs.000 Expected number of working hours of the machine per year. Area occupied by other machine 1. 5.500 Insurance premium (See Note 2) 300 Repair and Maintenance 2.1990.ft. 52.000 Rent (See Note 3) 600 Light Charges (See Note 4) 216 Total Standing Charges 52.a.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. Scrap value at the end of ten years Rs. 4. Compute the machine hour rate for the new machine on the basis of the data given above.4. 2.154 (Rs. 4. ______ @ 0.616 Hours rate for Standing Charges 13. for 5 lakhs.

Distribution summary of overheads is as follows: Production Departments A Rs.00. 0 0 0 s 50 . 1 y as 0 er Rs.Overheads 4.14 0× p in s s . = Rs. 9. 216.000 49.50 . 1. Question 65 A company has three production departments and two service departments. 13. 00 0 R .7 .a. 0 q t = Rs.00 4.131 (1) Cost of new machine: Less: Scrap Value Net Cost of the machines Life of the machine 10 years: Depreciation = R . 0 s . 0 10 q t 16 0 s . 5.000 5. 0 R .45 0× s .Ft.000.000 4.96 0 × 0 s .800 Service Departments X Rs.500 = Rs. s .f . Rent for the area occupied by New machine (100 sq. 12.440.95. 600 (4) Total annual light charges of 20 Points for the whole department is Rs. 4 3 o t = 2 p in s 0 o t . Light charges for the machine p.700 C Rs.f .00.000 R .) = R .000 Y Rs.49 . 14. 0 75.ft. 50 0 = Rs. 0 s .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 . 3. . 9.600 Toal Area occupied = 1600 Sq. 300 (3) Rent paid per annum = Rs.600 B Rs.

(November. 30% 30% 20% 20% Y 10% – Apportion the cost of Service Departments by using the Repeated Distribution method. 1998.4.132 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) . 40% 30% 20% – Y Deptt.

Rs.170 1. Rs.800 9.60 summary 0 14.133 Answer Statement showing apportionment of the cost of Service Departments to Production Departments by using the Repeated Distribution Method. Rs.700 1.000 3.700 12.000 900 Department Y overheads apportioned in the ratio of (30:30:20:20:-) 1.800 -9. Total overheads as per distribution 13.170 780 780 -3. Production Departments Service Departments A B C X Y Rs.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 .600 2.000 Department X overheads apportioned in the ratio of (40:30:20:-:10) 3. Rs.Overheads 4.

Abnormal idle time is the time.71 2 18. Normal idle time is the time. in normal course of business. which cannot be avoided or reduced.833 15.In other words it represents the time for which wages are paid.This is the period during which workers remain idle . which arises on account of abnormal causes.4. but during which no output is given out by the workers . Causes leading to idle time: The major causes. which account for idle time may be grouped under the following two heads: .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 .134 Cost Accounting 18. Such idle time is uncontrollable. Idle time may be normal or abnormal .

which lead to the occurrence of normal idle time. 2. it result in the generation of abnormal idle time. This is done by inflating the labour rate. are: 1. 3.135 Normal causes: The main causes. non-availability of raw materials. Machine break. Abnormal causes: The main causes. 4. are as follow 1. power failure. by adopting a factory overhead absorption rate. . Time spent to meet their personal needs like taking lunch.down. Such a factor too. Treatment of Idle time in Cost Accounts: Normal idle time: The cost of normal idle time should be charged to the cost of production. 3. 2. Time taken by workers to travel the distance between the main gate of factory and the place pf their work. 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.Overheads 4. Machine hours. tea etc. which account for the occurrence of abnormal idle time. Conscious management policy decision to stop work for some time. Abnormal Idle time: The cost of abnormal idle time due to any reason should be charged to Costing Profit & Loss Account. Time lost between the finish of one job and starting of next job. tools or waiting for jobs due to defective planning. Answer Item (i) Supplies departments (ii) Repair Direct Bases of apportionment supplies made to different labour hours. It may be transferred to factory overheads for absorption. In the case of seasonal goods producing units may not be possible for them to produce evenly throughout the year. Plant value. Time spent to overcome fatigue. Actual Direct labour wages.

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

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. The following are the figure from the Trial Balance as at 30-9-83:Manufacturing overheads Rs. 60.544 Overhead recovered Rs.732 Dr.480 Dr. 2. 4. Manufacturing overheads applied Rs. 60.640 will be written off to Costing Profit & Loss Account. at the end of the accounting period.3. The use of this method will reduce the profits of the concern by Rs. Give two methods for the disposal of the unabsorbed overheads and show the profit implications of each method. Value Direct labour cost. space. 8.Overheads 4. 3.4. 1. According to second method. According to first method.640 for the period.904 Under absorbed Overhead Rs.904 Cr.41. Floor readings (light) Capital cost of plant and building. Cost of goods sold Rs. to recover the under-absorbed overhead.588 Dr. the total unabsorbed overhead amount of Rs.40.26. be .30.65. 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. 60.65.544 Dr. Work-in-progress Rs.26. (2) Use supplementary rate. The under-absorbed amount in total may. Finished goods stocks Rs. a supplementary rate may be used to adjust the overhead cost of each cost unit.137 (vi) Power and light K W hours or H P (power) Number of light points. Answer Actual overheads Rs.

617 12.732 11. 0 42.480 = Rs.48.4.73.480 7. 28 0 21 . 4 s 06 0 ***Overhead to be absorbed = × 8. 0 11.30.82. finished goods stock and cost of goods sold on the basis of their value in the respective account is as follows:R . the profit for the period will be reduced by Rs.6 .640 12. work-in-progress 1 . 42. then the salary paid to him should be charged to Board of Studies account.537 R . viz. of the balances in each of these accounts are as follows:Additional Overhead (Under-absorbed) Total Rs. This . Working Notes The apportionment of under-absorbed overhead over work-inprogress.440 By using this method. 4 s 06 0 **Overhead to be absorbed = × 2.029 and the value of stock will increase by Rs. 6 .554 Finished Goods Stock 2. For example.732 = Rs. workin-progress. 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.588 42.537** 2. Prorated figures of underabsorbed overhead over work-in-progress.42. Work-in-progress 1. if a typist works exclusively for Board of Studies.074* 1.029 Question 69 Distinguish between cost allocation and cost absorption.40.30. Rs. 18.800 60. finished goods stock and cost of goods sold account. Answer Cost allocation and Cost Absorption: Cost allocation is defined as the allotment of whole items of cost to cost centers.029*** 8.6 0 s 0 4 *Overhead to be absorbed by = × 1. 0 7.12.074 R . by cost of goods sold 1 . The latter will affect the profit of the subsequent period.138 Cost Accounting apportioned on ratio basis to the three control accounts.40.41. 28 0 21 . as the basis.269 Cost of Goods Sold 8.6 . finished goods stock and cost of goods sold in this question on the basis of values.41.588 = Rs.611. by finished goods 1 . Rs. 28 0 21 .

Question 70 A factory manufactures only one product in one quality and size. 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.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.Overheads 4. For example. 4 marks) . Cost absorption can take place only after cost allocation. 1996. (Nov. 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. In other words. 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.

Hence these overheads should be transferred to the costing profit and account.000 3. all expenses incurred on policy formulation.000 . direction. 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. (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. 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. office administration and business management are included in administration overheads. 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. (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.00.000 2. 6. In other words. These are not related directly to production activity or function.00.40.4.00. Therefore these overheads are recovered separately on some equitable basis which may be cost or sales basis. directing the organisation and controlling the operation of an undertaking. control.140 Cost Accounting Answer Definition of Administration overhead: These are costs of formulating the policy.000 17. Therefore these overheads should be divided on equitable basis between production and selling and distribution activity. of employees Rs.

500 employees Maintenance department: Snow mobile engine department Boat engine department Factory office department Required: No.Overheads 4. Snowmobile engine Boat engine Total Maintenance dept Number of employees 1. 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.080 270 1.350 Number of work orders Percent used 80% 20% 100% . (2+3= 5 marks) Answer 71 (i) Cost Driver Allocation percentage Factory office dept.080 employees 270 employees 150 employees 1.141 Snow mobile engine department Boat engine department Maintenance department 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.

4.00.000) 0 (2.40.00.00. 6.000 Snowmo bile engine Rs.40.000 18.00.142 Cost Accounting Snowmobile engine Boat engine 570 190 760 75% 25% 100 Service department allocation: Factory office dept.00 0 60.000 Rs.000 1.20.000 Maintenance Dept.000 Maintena nce dept.40.000 Boat engine Rs.20. 17.000 60. office (3. Total .00 0) 0 2.80. 2. Departmental Cost Allocated costs (Rs): Factory Dept. Rs. 3.000 10.

00. Rs.000) 0 30.500 18.000 as scrap at the end of its working life.592 based on 8 hours per day for 324 days.40. Departmental costs Rs. This includes 300 hours for plant maintenance and 92 hours for setting up of plant.70.2500 10.143 (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.000 Boat engine Rs.5 00 Maintenance dept Total cost Question 72 A manufacturing unit has purchased and installed a new machine of Rs.000 to its fleet of 7 existing machines. 25.000 (p.). 70. The new machine has an estimated life of 12 years and is expected to realise Rs. 6. (ii) Estimated cost of maintenance of the machine is Rs.70.000 ) 0 2. 12.000 Maintena nce Dept.Overheads 4.18. .080 270 150 1. 3. 2.500 Work order 570 190 760 Percent used 72% 18% 10% 100% Percent used 75% 25% 100% Allocated (Rs): Factory office costs (3.16.a.00. Other relevant data are as follows: (i) Budgeted working hours are 2.000 20.000 67.000 (2.000 Snowmo bile engine Rs. 17.21.50 0 54.00.0 00 Number of employees 1.00.

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

Overheads 4.72 0 13.328/8 Cost per Machine hour 19.59.60 8 1.916/2.145 (vi) Departmental and general works overhead allocated to the operation during last year was Rs. 50.00 0 1.59.91 6 9.000.000 + 5.000)/ 45.70.200 19.3 28 Departmental and general overhead (50.05 8.3 28 19. Calculate machine hour rate. if (a) setting up time is unproductive.200) (12. During the current year it is estimated to increase 10% of this amount.69 Per hour (unproduc tive) Per hour (product ive) . (2+3= 5 marks) Answer 72 Computation of Machine hour Rate Per year Standing charges Operators wages 4× 420 × 54 Add: Fringe Benefits 15% 90.916/2.45 55.592-300) = 2.292 Machine expenses Depreciation (12 × 2.292 Machine hours: Setting time unproductive (2.000) Total Std. Charging for 8 machines Cost per Machine 1. (b) setting up time is productive.04.592300-92) = 2200 Setting time productive (2.000 -70.

42 10.292 Maintenance (25.292) Special chemical solution (400 × 54)/2.000/2.146 Cost Accounting (12.36 48.000-70.70.4.72 .91 118.000/2.68 9.200)/2.07 9.292) Machine Hour Rate 123.200) (25.63 46.82 11.00 43./ 2.000)/(12 × 2.292) Electricity (16× 3) (16× 3× 2.200.

250 Rs.575 per month.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. 3. 1.500 Other general expense per annum The workers are paid a fixed Dearness allowance of Rs. 125 per day (of 8 hours) (machine Rs.500 Rs. 17.24.000 Rs.500 Consumable stores per month Insurance of (apportioned) for the year Plant & Building Rs.Overheads 4. 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. 27. 75 per day (of 8 hours) Rs. 15.000 Rs. 3.000 200 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.33% of basic wages and dearness allowance. Production bonus payable to workers in terms of an award is equal to 33. (14 Marks) Answer Computation of Comprehensive Machine Hour Rate . 16. 7.

150 4.875 Rs.267 Rs.86 Wages per machine hour Machine man Wages for 200 hours (Rs.567 6.400×1/12) Variable Cost Repairs and maintenance Power Wages of machine man Wages of Helper Machine Hour rate (Comprehensive) Effective machine working hour’s p.500 15. 1.m.354.000 7.91 32.250×1/12) Plant and building 3. 200 hrs.67 100.125 Rs.000 112.31 116.450 1.4. 3. 75× 25) D.97 Rs406.17 Other General Expenses (27.67 2. 2.575 Rs.845. 1. 4.A. Rs. 125× 25) (Rs.700 Production bonus (1/3 of above) 1.500×1/12) Depreciation (32. × 75% = 150 hrs.500 1.148 Cost Accounting Per Per month(Rs hour(Rs) ) Fixed cost Supervision charges Electricity and lighting Insurance of (16.84 17.700 16.575 Rs.00 44.291. 1. 3.600 Helper .

000 3.000 10.000 .500 1. 1. 1.500 5. has two production departments: Machining and Finishing.00. There are three service departments: Human Resource (HR).Overheads 4. (iii) Use the step-down method to reapportion the firm’s service department cost.00. Variable Fixed 1.000 Design Rs.500 6.’s service department cost to its production departments.00. 44.000 6.000 Design − − − 4.60.149 Leave wages (10%) Effective wage rate per machine hour (150 hrs in all) Question 74 470 6.00. Maintenance and Design.000 7. (ii) Determine the proper sequence to use in re-apportioning the firm’s service department cost by step-down method.000 4. Answer Providers of Service HR Maintenanc e − − 500 − 500 500 4.00.60.000 4.00.000 Maintenance Rs.91 345 4.945 Rs. 32.000 4.000 5. The budgeted costs in these service departments are as follows: HR Rs.000 8.97 RST Ltd.00.000 The usage of these Service Departments’ output during the year just completed is as follows: Provision of Service Output (in hours of service) Users of Service HR Maintenance Design Machining Finishing Total Required: (i) Use the direct method to re-apportion RST Ltd.000 3.737 Rs.

000 : 5.0 25. overheads step-down Production Department Machini Finishi ng ng Rs.000 7.150 Cost Accounting (i) Apportionment of Service Department Overheads amongst production departments using Direct Method: Production Deptts.00.00. Overhead as primary distribution Apportionment design 4.77.11 9 1 (ii) The proper sequence for apportionment department overheads is First Second Third (iii) Apportionment of amongst production method. Overhead as per primary distribution Apportionment HRD 4 : 5 : − : − Rs. 4. HR Maintenance Design Service Department departments using of service The sequence has been laid down based on service provided.22.000 25.25.77 8 Mainten ance Rs.000 Maintena nce Rs.00 2. HR Rs.88 6. 7. − Service Department HR Rs.60.00.000 9. 5. 4.000 Design Rs.66 7 2.22 2 1.00 0 2.75.500 1.500 : 4. Service Deptts.0 00 5.00 0 2.33 3 2.0 00 : Maintenance 3.61.00.4.00. Machin ing Rs. Design Rs.000 2.98.00.45.0 0 00 (− )5. 5.500 per Finishi ng Rs.14.60.000 HR 4.000 .50.

3 12 ABC Ltd.18 2.8 4 28 9.48 1.78. P2 and P3 and two service departments S1 and S2.000 30 4.5 Maintenance 7 : 8: − 1 : Design 3 : 1 2.Overheads 4.00.00 0 2.500 P2 25.) 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. ft) P1 37.00.500 7.42.5 : 0.) Floor space (Sq.000 500 Number of light points Production 10 15 20 10 5 .250 62.85.500 50 5.000 20.00 0 3.500 S1 18.750 25.67 6.00.500 18.000 P3 37.000 60 3.5 8 00 5. has three production departments P 1.55. 2007: Rs.312 (− )7.3 2 28 Question 75 − − 00 (− )4.88. Rent and rates General lighting Indirect Wages Power Depreciation on machinery Insurance of machinery Other Information: Direct wages (Rs.000 50.000 − 25.66.12.000 10 25.151 0.750 S2 6.00 0 2.81.00 0 − 30.000 2.

050 4.) 12.) 15. 5 937.) 12.) 62. 3 hours and 4 hours respectively.750 5.625 2812.875 P3 (Rs. 5 7.000 8.50 0 1.12 5 625 . 375.500 S1 (Rs.333 1.100 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. given that its direct material cost is Rs.) 18. 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 25.250 P2 (Rs.500 P1 (Rs.250 S2 (Rs. (ii) Determine the total cost of product X which is processed for manufacture in department P1.152 Cost Accounting hours worked 6.62 5 1.50 0 1.75 0 2.625 3.667 − 18. P2 and P3 for 5 hours.000 10.00 0 5.) 3.4. (No vember 2007.750 5.500 Total (Rs. 625 and direct labour cost is Rs.225 4.

517 6.17 5 _____ _ 48.10 (6. 48.630 + 608.20 8 _____ _ 19.58.99 S1 = 20.177 2. S1 = 19.000 1.630 + 0.153 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 50.000 12.00 0 16.626 56.630 + 0. = Rs.00 0 20. Secondary Distribution Summary Particulars Allocated and Apportioned overheads as per primary distribution S1 S2 Total Rs.650 P3 Rs.03 3 P1 Rs.10 S1 Substituting the value of S2 in S1 we get S1 = 19.208 20.00 0 1.133 1.10 × 20.825 . 8.409 8.175 P2 Rs.Overheads 4.83.400 8. 1.7 50 _____ _ 46.443.238.088 + 0.000 4.01 S1 0.088 + 0.089 3.10 S2 S2 = 6. 20. 63.443 8.088 + 0.08 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 S2.443.10 S1) S1 = 19.132 4.000 400 400 _______ 1.63 0 _____ 6.253 53.800 6. 46. = 6.8 + 0.132.00 0 20.440 73.8 ∴ S1 ∴ S2 = Rs.65 0 ______ 63.

000 Production on overheads P1 5 hours × Rs. 13. 18. 1.79. The budgeted production overheads of the factory are 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. 8.000 Rs. 375 Rs.93 P3 Rs. 56.60 = 43 P2 3 hours × Rs. 45. 8.000 Rs.79 P3 4 hours × Rs. 53.225 Rs. 42.01 = 72.825 4.000 and budgeted machine hours are 96. 625 Rs. 18. 10.83 Rs.000 . For a period of first six months of the financial year 2007 −2008. 6. 73.100 Rs. 10.60 P2 Rs.050 Rs.000. 18.08. 156.000 Rs.01 Cost of Product X Rs.154 Cost Accounting Overhead rate per hour P1 Total overheads cost Production hours worked Rate per hour (Rs.04 Factory cost Question 76 Rs.517 6. 13.157 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.) (ii) Direct material Direct labour Prime cost Rs.93 = 41. 1.4.409 4.000 Rs.

) 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 45.000 hours.0 00 6. 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. and (iii) to apportion the unabsorbed overheads over the items.0 00 16.000 1.15.000 42.000 18.000 10. You are required: (i) to determine the amount of under absorption of production overheads for the period.000 units . (ii) to show the accounting treatment of under-absorption of production overheads.Overheads 4. 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.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. (May 2008.000 units The actual machine hours worked during the period were 48.79.000 units 22.

000 units *50%*1. finished goods and cost of sales by applying supplementary rate*.50) Finished goods (4.5 e n 3 . Amount to be distributed = (60.000.000 * ¾) Rs.50) Cost of sales (18.156 Cost Accounting 5. 1 .0 00 60.0 00 Less: Production overheads absorbed as per machine hour rate* Amount of under absorbed production overheads Budgeted Machine hour rate (48.64.0 0 u its 0 0 n (iii) Apportionment of under absorbed production overheads over WIP. Balance of under absorbed production overheads should be distributed over Works in progress.000 units *1. this being abnormal. hence should be debited to Profit and Loss Account.5 p r h u s 0 0 e or 9 . finished goods and cost of sales: Equivalent completed units 8.000 6.000.000 4. 4 .50) 5. Amount to be debited to Profit and Loss Account = (60. 45.000 18.0 0 s 5 0 =R .000 * ¼) Rs.000 27.000 Work-in-Progress (16. 1 .000 Amount (in Rs.50) .04. Supplementary rate = R .0 .0 0 h u 6 0 o rs (ii) Accounting treatment of under absorbed production overheads: As.0 00 = R .000 units *1.) 12. one fourth of the under absorbed overheads were due to defective production policies. 10. 15.000 hours * Rs. 1 0p r u it s .4.0 0 s 0 8 0 =R .

000 Rs.5 x y Product B (Rs. the percentage of factory overheads on direct labour is ‘x’ and the percentage of office overheads on factory cost is ‘y’.000 40.Overheads 4. 25.000 15. 80.000 + 150 x 340 y + 1.000 + 250 x 400 y + 2.000 Profit 25% on cost You are required to find out: (ii) The Answer Let.000 + 250 x +400 y + 2.000 150 x 34.000 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.5 xy 40. 19. 2008 : Product A Direct Materials Rs. The following informations are available related to the year ending 31st March. 15.5 x y percentage of office Product B Rs. 60. 6 Marks) .000 + 150 x + 340 y + 1.000 25% on sales price (i) The percentage of factory overheads on direct labour.000 25.000 Rs. overheads on factory cost (November 2008.000 Direct Labour Rs.) 15.000 45.5 xy 34.000 Sales Rs. then the total cost of product A and product B will be as follows: Product A (Rs.000 250 x 40.) 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. 15.000 34.157 Total Question 77 30.

(i) ………(ii) 340y + 1.5 xy = 20.000………………………….000………….000…………… ..5 xy = 48.) Sales Less: Profit Product A – 25% on cost or 20% on Sales Product B – 25% on sales Total Cost Thus.….000 or 250x + 400y + 2.000 ______ 48.000 Product B (Rs.) 80.000 + 250x + 400y + 2.6 and after deducting from equation (i). Total Cost of A is 34.000 60.200 or x = 40.000 + 150x + 340y + 1..5xy = 150x + 340y + 1.5 xy = 60.5 xy = 12. 40 and (i)the percentage of factory overheads on direct labour = (ii) the percentage of office overheads on factory cost = 20. 100y = or y = 2.000 20..000 _150x ± 240y ±1.4..000 or 14.5x × 20 = 14.000………………. we get 150x + 340 × 20 + 1.000 60.000 or 150x + 30x = 14.(i) Total Cost of B is 40.158 Cost Accounting Total cost on the basis of sales is: Product A (Rs. we get 150x + 14.000 – 6.800 or 180x = 7.5xy = _12. Hence.(ii) Equation (ii) multiplied by 0. Question 78 ..000 20 Putting value of y in equation (i).

2.50. 52.000 3×60%5. 8 per unit.50.000 per annum.000 units per annum Particulars Capacity utilized Production First 3 months 60% 12 Next 9 months 90% 12 Total 5.50.000 39. 2.159 Maximum production capacity of JK Ltd.000 1. 15 per unit.29.60. You are required.20. 1. 5.20. 64.35.000 per annum for every 25 per cent increase in capacity or a part of it.000 4.00 0 .59. The selling price per unit was Rs.62. 15 per unit Direct wages @ 9 per unit or Rs.000 units Rs. (November 2008. 15.20.65.44. JK Ltd.03. 9.20. Variable overheads Rs.000 7.50.500 for the whole year.51. Details of estimated cost of production are as follows: − − − − − Direct material Rs.000 per annum up to 50 per cent capacity and additional Rs. is 5.000 9×90% × × = 78. but it is expected to work at 90 per cent capacity for the remaining nine months.24.000 84. Fixed overheads Rs.000 = 3.000 per month). 9 per unit (subject to a minimum of Rs.000 31. worked at 60 per cent capacity for the first three months during the year 2008. Semi-variable overheads are Rs.70.Overheads 4.000 19.20.60.000 units Rs. Direct wages Rs. 44 during the first three months.000 per month which ever is higher Prime cost (A) 11. what selling price per unit should be fixed for the remaining nine months to yield a total profit of Rs. Direct materials @ Rs. 8 Marks) Answer Statement of Cost and Sales for the year 2008 Maximum production capacity = 5.000 units per annum.000 units Rs.09.

14.000 6.20. 0 0 8 =Rs.500 10.50.62.000) × 3/12 = Rs.32.500 – Rs. 8 per unit Semi Variable Total overheads (B) Total Cost (C) [(A + B)] Profit during first 3 months Sales @ Rs.21. (5.500 1. 1.000 10.40.000 41.000 7.08. 15. 3 6 . 4.36. 9 eurn it .000 28.58.500.60.500) (D) Sales required for next 9 months (E) [(C + D)] Total profit Total Sales 2.00 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 . (b) For remaining 9 months at 90% capacity = Rs.160 Cost Accounting Overheads Fixed Variable @ Rs.92.000 34.000 9.1 0 .00.000 + Rs.000 8.62. = R s3.500 29.500 34.97. 8.55.70.71.60.60.89.500 4.22. 1. (5.000 6.25.50 0 __________ 1.000 1. 3.41.000) × 9/12 = Rs.10.000 + Rs.000 × 9/12 Question 79 Calculate machine hour rate for recovery of overheads for a machine from the following information: . 44 per unit Desired profit during next 9 months (Rs.000 × 3/12 = Rs. p 3 5 .500 52.0 9 .0 0 0 Workings: (1) Semi-variable overheads: (a) For first 3 months at 60% capacity = Rs.32.77.45.000 1.61. 7.500 1.4.77.60.24.73.70.000 15.

3.500 per month. 16. 6 marks) Answer Computation of Machine Hour Rate Running Hours (3. 6. 2.000 57. 25.161 Cost of machine is Rs.880 per annum.4 . Wages of an operator is Rs.000 in the factory.000 and estimated salvage value is Rs.000 78. Annual working hours are 3.000. 00.500 per month. 4 0 × 2 s .00. 1.Overheads 4. 6. 5 per unit. Cost of repairs and maintenance for whole working life of the machine is Rs. Power used 15 units per hour at a cost of Rs. (November 2008. devoted one-third of his time to the machine. Estimated working life of the machine is 10 years.1 9 0 s . 2 0 × 2× s . 25. 9. 4. Other indirect expenses are chargeable to the machine are Rs.31 Insurance: 2% of Rs. Setting-up time of the machine is 156 hours per annum to be treated as productive time.0 0 1 3 Rate per hour Rs. Annual insurance charges 2 per cent of cost of machine.000 – 400) = 2.5 0 1 8 4 8 Other indirect expenses: Rs.000 1.00. The operator. No power is consumed during maintenance and setting-up time. The machine is required 400 hours per annum for repairs and maintenance. Light charges for the department is Rs. Fixed Charges (Standing Charges): Operator’s wages: R. A chemical required for operating the machine is Rs.500 × 12 Total Standing charges Hourly rate for fixed charges : R.50.6 0 . having 48 points in all.000 50.000 Light charges : R .000.600 per annum Particulars Total Amount Rs.49.000 5.000 per month.0 0 2 0 . out of which only 8 points are used at this machine.

3 0 0 s .0 0 1 ×2 0 0 . 9 8 s .0 0 −R .5 .0 .4.50 3.80 237.0 . Chemical : Machine Hour Rate .38 = Rs.162 Cost Accounting Variable Expenses (Machine Expenses) per hour Depreciation : R . 2 .45. 1 0 0 s 5 0 0 s .000. 5× 5× .8 0 2 0 .4 4 s 1 2 4 2 0 .6 0 92.0 0 1 ×2 0 0 .6 0 70.6 0 R.46 Power: R .31 Repairs and Maintenance : R. 6.6 0 13.

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