Problem: 1

Preparation the overhead application rates

The following is the budget of Nafis Ltd. For the year 2017

Factory overheads Tk. 62,000

Direct labor cost Tk. 98,000

Direct materials cost Tk. 88,000

Direct labor hours 49,000

Direct machine hours 31,000

From the above figures prepare the overhead application rates using the following methods:

Prime cost b) Direct labor hour c) Direct labor cost d) Machine hour

Solution: 1

Calculation of overhead application rates under various method

Methods Formula Overhead application rates

I .Prime Cost
Factory overheads ÷ Prime Cost × 100 62,000 ÷ 1,86,000 ×
100=33.33%
II .Direct labour Factory overheads ÷ Direct labour hour 62,000 ÷ 49,000=Tk.1.2653
hour

III .Direct labour Factory overheads ÷ Direct labour cost 62,000 ÷ 98,000×100 =
cost ×100 63.27%
IV .Machine hour Factory overheads ÷ Machine hour 62,000 ÷ 31,000 = Tk. 2.00

Problem: 2

Solution:

Calculation of overhead application rates under various methods:

Methods Formula Overhead application rates

I .Prime Cost Factory overheads/Prime Cost × 100 62,000/1,86,000 × 100=33.33%

II .Direct labour hour Factory overheads/ Direct labour hour 62,000/49,000=Tk.1.2653

III .Direct labour cost Factory overheads/ Direct labour cost ×100 62,000/98,000×100 = 63.27%

IV .Machine hour Factory overheads/ Machine hour 62,000/31,000 = Tk. 2.00

 Problem: 3
The following information relates to the activities of a production department for the month of
January.
Particulars Taka Taka
Materials used 72,000
Direct wages 60,000
Machine hours 20,000
Labor hours 24,000
Overhead chargeable to the dept. 48,000
On one order to be carried out in the month of February, the relevant data were:
Particulars Taka Taka
Materials 4, 000
Direct wages 3,300
Machine hours 1,200
Labor hours 1,650
Prepare a comparative statement of cost of this order by using the following methods of
absorption of overheads:
(I) Direct labor hour rate
(II) Percentage of direct wages and
(III) Machine hour rate.

Solution 3
I. Direct Labour Hour Rate Method:
Direct Labour Hour Rate = Overhead chargeable to the department ÷ Labour hours
worked
= 48,000/24,000
= Tk. 2
II. Percentage of Direct Wages Rate Method:
Percentage of Direct Wages = (Overhead for the department ÷ Direct Wages) × 100
= ( Tk. 48,000 ÷ Tk. 60,000) × 100
= 80%

III. Machine Hour Rate Method:

Machine Hour Rate = Overhead for the department ÷ Hours of machine operation
= Tk. 48,000 ÷ Tk. 20,000
= Tk. 2.40

Particulars Direct labour Percentage Machine

hour rate of Direct Hour Rate
Wages
Material used 4,000 4,000 4,000
Direct wages 3,300 3,300 3,300
7,300 7,300 7,300
Prime Cost
Overhead
I .Tk. 2 per hour for 1,650 labour 3,300
hours
II.80% of Tk. 3,300(i.e Direct 2,640
wages)
III.Tk 2.40 per hour for 1,200 2,880
machine hours

10,600 9,940 10,180

Works Cost
Solution: 4
Fixed Overhead Rates on the basis of direct wages percent rate
= Fixed overhead/Direct wages×100
= 37,400/42,500×100
= 88%

Variable Overhead Rates on the basis of direct wages percent rate

= Variable overhead/Direct wages×100

= 64,600/42,500×100
= 152%

I .Fixed Overhead Rates on the basis of direct labour hours

= Fixed overhead/ direct labour hours
= 37,400/68,000
= Tk. .55
Variable Overhead Rates on the basis of direct labour hours
= Variable overhead/ direct labour hours
= 64,600/68,000
= Tk. .95
II.Absorbed overhead in actual result
Fixed Overhead = Actual labour hours × Fixed overhead rate
=Tk. 65,000 × Tk. .55
= Tk. 35,750

Variable Overhead = Actual labour hours × Variable overhead rate

= Tk. 65,000 × Tk. .95
= Tk. 61,750

III.Over/ under absorbed

Fixed overhead = Absorbed overhead – Actual overhead
=Tk. 35,750 – Tk. 38,700
= (Tk. 2,950) Under absorbed.
Variable overhead = Absorbed overhead – Actual overhead
= Tk. 61,750 – Tk. 65,800
= (Tk. 4,050) Under absorbed