PRACTICE QUESTIONS 1

The financial accounting records are used to determine the overhead cost, and this is applied as a
percentage based on the direct labour cost. For direct labour cost, you have agreed that the labour
expended for a unit in work in progress is half that of a completed unit.

The draft accounts show the following materials and direct labor cost in inventory.

Raw material WIP Finished goods

Material 786,740 92,685 125,963
Direct labour 13,082 46,594

The cost incurred in April, as recorded in the financial accounting records were as follows:

Rs.
Direct labour 68,012
Selling cost 55,430
Depreciation 9,440
Distribution cost 7,560
Factory mangers cost 2,560
Other production overheads 34,920
Purchasing and accounting cost relating to production 4,550
Other accounting cost 7,260
Administration overheads 42,760

For calculations assume that all work-in-process and finished goods were produced in April 2006
and that the company was operating at a normal level of activity.
Required:
Calculate the value of overheads which should be added to work-in-process and
finished goods in accordance with lAS-2.

SOLUTION

Raw material Work in Progress Finished Goods

Material 786,740 92,685 125,963

Labour 13,082 46,594

9,900 35,261
Factory OH
13,082 X 75.677% 46,594 X 75.677%

786,740 115,667 207,818

Factory OverHeads Rs.

Depreciation 9,440
Factory mangers cost 2,560
Other production overheads 34,920
Purchasing and accounting cost relating to production 4,550
51,470

Calculation of Rate

From the statement "The financial accounting records are used to determine the overhead cost,and this
is applied as a percentage based on the direct labour cost" we can use the following formula to
calculate rate :

Factory OH
X 100
Direct labour

51,470
X 100 75.677%
68,012