Overhead Control Cost and Management accounting

ICAN CAP II

Overheads: Overheads represent expenses that have been incurred in providing certain ancillary
facilities or services which facilitate or make possible the carrying out of the production process; by
themselves these services are not of any use.

Types of the Overheads on the basis of function:

• Factory or Manufacturing Overheads

• Office and Administration Overheads

• Selling and Distribution Overheads

AN
• Research and Development Overheads

Departmentalization :- Before the allocation and apportionment process starts, the first step in
this direction is ‘Departmentalization’ of overhead expenses. Departmentalization means creating

C
departments in the firm so that the overhead expenses can be conveniently allocated or
apportioned to these departments. For efficient working and to facilitate the process of allocation,
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apportionment and reapportionment process, an organization is divided into number of
departments like, machining, personnel, fabrication, assembling, maintenance, power, tool room,
stores, accounts, costing etc and the overheads are collected, allocated or apportioned to these
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departments. This process is known as ‘departmentalization’ of overheads which will help in
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ascertainment of cost of each department and control of expenses. Thus departmentalization is the
first step in allocation and apportionment process.
ra

Cost allocation- The term ‘allocation’ refers to assignment or allotment of an entire item of cost to
a particular cost center or cost unit.
pi

Cost apportionment- Apportionment implies the allotment of proportions of items of cost to cost
As

centres or departments.

Re-apportionment- The process of assigning service department overheads to production

departments is called reassignment or re-apportionment.
A

Absorption- The process of recovering overheads of a department or any other cost center from its
C

output is called recovery or absorption.

OVERHEAD COST BASES OF APPORTIONMENT

1. (i) Rent and other building expenses

(ii) Lighting and heating
(iii) Fire precaution service
(iv) Air- conditioning
 Floor area, or volume of department
2. (i) Perquisites
(ii) Labour welfare expenses
(iii) Time keeping

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(iv) Personnel office

(v) Supervision
 Number of workers
3. (i) Compensation to workers
(ii) Holiday pay
(iii) ESI and PF contribution
(iv) Perquisites
 Direct wages
4. General overhead
 Direct labour hour, or Direct wages, orMachine hours.
5. (i) Depreciation of plant and machinery

AN
(ii) Repairs and maintenance of plant and machinery
(iii) insurance of stock
 Capital values

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6. (i) Power/steam consumption
(ii) Internal transport


(iii) Managerial salaries
Technical estimates
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7. Lighting expenses
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 No. of light points, or Area or Metered units
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8. Electric power
 Horse power of machines, or Number of machine hour, or value of machines or units
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consumed
9. (i) Material handling
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(ii) Stores overhead

 Weight of materials, or volume of materials, or value of materials or unit of materials
As

Methods used for re-apportionment of service department expenses over the production
departments:
A

• Direct re-distribution method- Under this method service department costs are apportioned over
C

the production departments only, ignoring the services rendered by one service department to the
other.

• Step Method or Non-reciprocal method- This method gives cognizance to the service rendered by
service department to another service department. The sequence here begins with the department
that renders service to the maximum number of other service departments.

• Reciprocal Service Method- These methods are used when different service departments render
services to each other, in addition to rendering services to production departments. In such cases
various service departments have to share overheads of each other. The methods available for
dealing with reciprocal services are

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(a) Simultaneous equation method;

(b) Repeated distribution method;

(c) Trial and error method

Question No.1 XL Ltd., has three production departments and four service departments. The
expenses for these departments as per Primary Distribution Summary are as follows :

Production Departments : (Rs.) (Rs.)

A 30,000
B 26,000

AN
C 24,000 80,000
Service Departments : (Rs.) (Rs.)
Stores 4,000
Time-keeping and Accounts 3,000

C
Power 1,600
Canteen
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1,000 9,600
The following information is also available in respect of the production departments:
Dept. A Dept. B Dept. C
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Horse power of Machine 300 300 200
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Number of workers 20 15 15
Value of stores requisition in (Rs ) 2,500 1,500 1,000
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Apportion the costs of service departments over the production departments.

Question No. 2 Suppose the expenses of two production departments A and B and two service
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departments X and Y are as under:

As

Amount (Rs.) Apportionment Basis

Y A B
A

X 2,000 25% 40% 35%

C

Y 1,500 — 40% 60%

A 3,000

B 3,200

Question No.3 Service departments’ expenses

(Rs.)

Boiler House 3,000

Pump Room 600
3,600

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The allocation is:

Production Departments Boiler House Pump Room

A B
Boiler House 60% 35% – 5%
Pump Room 10% 40% 50% –

(Using simultaneous equation method)

Question No.4 PH Ltd., is a manufacturing company having three production departments, ‘A’, ‘B’
and ‘C’ and two service departments ‘X’ and ‘Y’. The following is the budget for December 2011:

AN
Total A B C X Y
(Rs) (Rs) (Rs) (Rs) (Rs)
Direct material 1,000 2,000 4,000 2,000 1,000

C
Direct wages 5,000 2,000 8,000 1,000 2,000
Factory rent 4,000
Power
Depreciation
2,500
1,000
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Other overheads 9,000
s
Additional information:
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Area (Sq. ft.) 500 250 500 250 500

Capital value of assets (Rs. lacs) 20 40 20 10 10
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Machine hours 1,000 2,000 4,000 1,000 1,000

Horse power of machines 50 40 20 15 25
pi

A technical assessment of the apportionment of expenses of service departments is as under:

As

A B C X Y
Service Dept. ‘X’ (%) 45 15 30 – 10
Service Dept. ‘Y’ (%) 60 35 – 5 –
Required: (i) A statement showing distribution of overheads to various departments.
A

(ii) A statement showing re-distribution of service departments expenses to production

C

departments. (iii) Machine hour rates of the production departments ‘A’, ‘B’ and ‘C’.

Q .N.5 RST Ltd has two production departments: Machining and Finishing. There are three service
depts.: Human Resource, Maintenance and Design. The budgeted cost in the three service
departments are as follows:

HR Maintenance Design

Variable 100,000 160,000 100,000

Fixed 400,000 300,000 600,000

Total 50,0000 460,000 700,000

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The usage of these service departments output during the year just completed is as follows:

Provision of service output (in hours of service)

Provider of service

User of service HR Maintenance Design

HR

Maintenance 500 - -

Design 500 500 -

AN
Machining 4,000 3,500 4,500

Finishing 5,000 4000 1,500

C
Total 10,000 8000 6,000

Required:
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i) Use of direct method to re-apportion RST Ltd’s service department cost to it’s production
departments.
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ii) Determine the proper sequence to use in re-apportioning the firm’s service department cost
by step down method
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iii) Use the step down method to reapportion the firms service department cost.
pi

Q.N.6ABC Ltd has three production departments P1, P2 and P3 and two service departments S1
and S2. The following data are extracted from the records of the company for the month of October
As

2007:

Rent and rates 62,500

A

General Lighting 7,500

C

Indirect Wages 18,750

Power 25,000

Department on Machinery 50,000

Insurance of machinery 20,000

Other information:
P1 P2 P3 S1 S2

Direct Wages (Rs) 37500 25000 37500 18750 6250

Horse power of Machine Used 60 30 50 10 -

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Cost of Machinery (Rs) 300,000 400,000 500,000 25,000 25,000

Floor Space (Sq. Ft) 2,000 2,500 3,000 2,000 500

Number of Light Points 10 15 20 10 5

Production Hours Worked 6,225 4,050 4,100 - -

Expenses of the service departments S1 and S2 are re apportioned as below:

P1 P2 P3 S4 S2

AN
S1 20% 30% 40% - 10%

S2 40% 20% 30% 10% -

C
Required:
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1. Compute overhead absorption rate per production hours of each production department
2. Determine the total cost of product X which is processed for manufacture in department P1,
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P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that it’s direct material cost is
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Rs. 625 and direct labour cost is Rs. 375.

(Ans: Absorption RateDept: P1- 8.60 P2- 13.93 P3- 18.01)
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Treatment of over and under absorption of overheads are:-

(i) Writing off to costing P&L A/c:– Small difference between the actual and absorbed amount
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should simply be transferred to costing P&L A/c, if difference is large then investigate the causes
and after that abnormal loss shall be transferred to costing P&L A/c.
As

(ii) Use of supplementary Rate: Under this method the balance of under and over absorbed
overheads may be charged to cost of W.I.P. , finished stock and cost of sales proportionately with
the help of supplementary rate of overhead.
A

(iii) Carry Forward to Subsequent Year: Difference should be carried forward in the expectation
that next year the position will be automatically corrected. This would really mean that costing data
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of two years would be wrong.

Q.N.7 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. The budgeted production over heads of the factory are Rs. 1,008,000 and budgeted
machine hours are 96,000.

For the period of first six months of the financial year 2007-08, following information were
extracted from the books:

Actual production overhead Rs.679,000

Amount included in the production overhead

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Paid as per court order Rs.45,000

Expenses of previous year booked in the current year Rs.10,000

Paid to worked for strike period under an award Rs. 42,000

Obsolete stores written off Rs.18,000

Production and sales data of the concern for the first six months are as follows:

Production:

Finished Goods 22,000 units

AN
Works-in-progress

(50% complete in every respect) 16,000 units

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Sales:

Finished Goods 18,000 units

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The actual machine hours worked during the period were 48,000 hours. It is revealed from the
analysis of information that ¼ of the under absorption was dur to defective production policies and
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the balance was attributable to increase in costs:

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You are required:

1. To determine the amount of under absorption of production overhead for the period.
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2. To show the accounting treatment of under absorption of production overheads, and

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3. To apportion the unabsorbed overheads over the items.

(Ans: WIP 12000, FG 6,000 COS 27,000)
Question No.8 ABC Ltd. manufactures a single product and absorbs the production overheads at a
pre-determined rate of Rs.10 per machine hour.
A

At the end of financial year 1998-99, it has been found that actual production overheads incurred
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were Rs.6,00,000. It included Rs. 45,000 on account of 'written off' obsolete stores and Rs. 30,000
being the wages paid for the strike period under an award.

The production and sales data for the year 1998-99 is as under:

Production:

Finished goods 20,000 units

Work-in-progress 8,000 units

(50% complete in all respects)

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Sales:

Finished goods 18,000 units

The actual machine hours worked during the period were 48,000. 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.

You are required to:

(i) Calculate the amount of under – absorption of production overheads during the year 1998-99;
and

AN
(ii) Show the accounting treatment of under – absorption of production overheads.

Q.N.9. Calculate machine hour rate for recovery of overheads for a machine from the following

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information:

Cost of machine is Rs. 2,500,000 and estimated salvage value is Rs. 100,000. Estimated working life
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of the machine is 10 years. Annual working hours are 3,000 in the factory. The machine is required
400 hours per annum for repair and maintenance. Setting up time of the machine is 156 hours per
s
annum to be treated as productive time. Cost of repairs and maintenance for whole working life of
the machine is Rs. 350,000. Power used 15 units per hour at the cost of Rs.5 per unit. No power is
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consumed during maintenance and setting up time. A chemical required for operating the machine
is Rs. 9,880 per annum. Wages of an operator is Rs. 4,000 per month. The operator, devoted one-
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third of his time to the machine. Annual insurance charges 2 percent of the cost of machine.
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Light charges for the department is Rs. 2,500 per month, having 48 points in all, out of which only 8
points are used at this machine. Other indirect expenses are chargeable to the machine are Rs. 6,
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500 per month.

(Ans: Machine Hour Rate: 237.38)

A

Q.N.10. X Ltd having fifteen different types of automatic machines furnishes information as under
for 1996-97
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1. Overhead expenses: Factory rent Rs. 96,000 (Floor area 80,000 Sqft), Heat and gas Rs. 45,000
and supervision Rs.120,000.

2. Wages of the operator are Rs. 48 per day of 8 hours. He attended to one machine when it is under
set up and two machines when they are under operation.

In respect of machine B (one of the above machines) the following particulars are furnished:

1. Cost of the machine Rs. 45,000, life of machine – 10 years and scrap value at the end of it’s
life Rs. 5,000.
2. Annual expense on special equipment attached to the machine are estimated as Rs. 3,000.

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3. Estimated operation time of the machine is 3,600 hours while set up time is 400 hours per
annum.
4. The machine occupies 5,000 Sqft of floor area.
5. 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

Work order 31 Work order 32

Machine set up time (hours) 10 20

AN
Machine operation time (Hours) 90 180

(Ans: Total cost 1,110 and 2,220)

C
Q.N.11. A machine shop has 8 identical drilling machine manned by 6 operators. The machine
cannot be worked without an operator wholly engaged on it. The original cost of all these machines
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works out to Rs. 8 Lakhs. The particulars are furnished for a six month period.

Normal available hours per month per worker 208

s
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Absenteeism (without pay) hours per worker P.M 18

Leave (With Pay) hours per worker P.M 20

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Normal Idle time unavoidable hours per worker P.M 10

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Average rate of wages per worker for 8 hours a day Rs. 20

As

Average rate of production bonus estimated 15% on wages

Value of power consumed Rs.8,050

A

Supervision and indirect labour Rs.3,300

C

Lighting and electricity Rs.1200

These particulars are for a year:

Repair and maintenance including consumables 3% of value of machinery

Insurance Rs.40,000

Depreciation 10% of original cost

Other sundry works expenses Rs.12,000

General management expenses allocated Rs.54,530

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You are required to work out a comprehensive machine hour rate for the machine shop.

Q.N.12. Gemini Enterprises undertakes three different jobs A,B and C. All of them require, the use of
special machine and also the use of computer. The computer is hired and the hire charges worked
out to Rs. 420,000 per annum. The expenses regarding the machine hours are estimated as follows:

Rent for the quarter 17,500

Depreciation Per annum 200,000

Indirect charges per annum 150,000

AN
During the first month of operation the following details were taken from the job register:

Job A B C

C
Number of hours the machine was used

Without the use of computer 600 900 -

With the use of computer 400

-I 600 1000
s
You are required to compute the machine hour rate:
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a. For the firm as a whole for the month when computer was used and when computer was
not used
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b. For the individual jobs A, B and C

pi

Q.N.13Solo products Ltd manufactures and sells a single product and has estimated a sales revenue
As

of Rs. 126 lakhs this year on a 20% profit on selling price. Each unit of the product requires 3 Lbs of
material P and 1 and ½ units of material Q for manufacture as well as processing time of 7 hours in
the machine shop and 2 ½ hours in assembly section. Overhead are absorbed at a blanket rate of 33
1/3% on direct labour. The factory works 5 days of 8 hours a week in a normal 52 weeks year. On
A

an average statutory holidays, leave and absenteeism and the idle time amount to 96 hours, 80
C

hours and 64 hours respectively, in a year.

The other details are as under

Purchase price Material P Rs. 6 per LB
Material Q Rs. 4 Per LB
Comprehensive labour rate Machine shop Rs 4 per hour
Assembly Rs.3.20 per hour
No. of employees Machine shop 600
Assembly 180
Finished Goods Material P Material Q
Opening stock 20,000 units 54,000lbs 33,000 lbs
Closing stock 25,000 units 30,000lbs 66,000 lbs

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You are required to calculate:

a) The number of units of the product proposed to be sold
b) Purchased to be made of materials P and Q during the year in Rs.
c) Capacity utilization of machine shop and assembly section, along with your comments

Q.N.14. A ltd manufactures two products A and B. The manufacturing division consists of
two production departments P1 and P2 and two service departments S1 and S2.

Budgeted overhead rates are used in the production departments to absorb factory
overheads to the products. The rate of department P1 is based on direct machine hours,

AN
while the rate of department P2 is based on direct labour hours. In applying overheads, the
pre-determined rates are multiplied by actual hours.

For allocating the service department cost to production departments, the basis adopted is

C
as follows:
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1. Cost of department S1 to Departments P1 and P2 equally
2. Cost of department S2 to department P1 and P2 in the ratio of 2:1 respectively.
s
The following budgeted and actual data are available:
nt

Annual profit plan data:

ra

Factory overhead budgeted for the year:

pi

Departments P1 2,500,000 S1 600,000

As

P2 2,175,000 S2 450,000
A

Budgeted output in units:

C

Product A – 50,000 Product B- 30,000

Budgeted Raw Material Cost per unit:

Product A – Rs. 120; product B- Rs.150

Budgeted time required per unit :

Department P1: Product A: 1.5 Machine hours

Product B: 1.0 Machine hours

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Department P2: Product A: 2 Direct Labour Hours

Product B: 2.5 Direct Labour Hours

Average wage rates budgeted in department P2 are : Product A: Rs.72 per hour and
product B- 75 per hour

All the materials are used in department P1 only.

Actual data (for the month of July, 1993)

Units actually produced: Product A: 4000 units

AN
Product B : 3,000 units

Actual direct machine hours worked in department P1

C
On Product A- 6,100 hours, Product B- 4,150 hours

Actual direct labour hour worked in Department P2

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s
On product A- 8,200 hours, Product B- 7,400 hours
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Cost actually incurred:

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Product A Product B
pi

Raw Material 489,000 456,000

As

Wages 591,900 552,000

A

Overheads: Department
C

P1 231,000 S1 60,000

P2 204,000 S2 48,000

You are required to:

1. Compute the pre- determined overhead rate for each production department
2. Prepare a performance report for July 1993 that will reflect the budgeted costs and
actual costs

Q.N.15. A company is making a study of the relative profitability of the two product – A & B.
In addition to direct costs, indirect selling and distribution costs to be allocated between

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the two products are as under:

Insurance charges for inventory (finished) 78,000

Storage cost 140,000

Packing and forwarding charges 720,000

Salesman Salaries 850,000

Invoicing costs 450,000

AN
Other details are as follows:

Product A Product B

C
Selling price per unit Rs. 500 1,000

Costs per unit (exclusive of indirect

Selling and distribution costs) Rs. 300

-I 600
s
Annual sales in unit 10,000 8,000
nt

Average inventory 1,000 800

ra

Number of invoices 2,500 2,000

pi

One unit of product A requires a storage space twice as much as product B. The cost to
As

packing and forwarding one unit is same for both the products. Sales man are paid salary
plus commission @ 5% on sales and equal amount of efforts are put forth on the sales of
each of the product.
A

Required:
C

1. Set-up a schedule showing the apportionment of the indirect selling and distribution
costs between the two products.
2. Prepare a statement showing the relative profitability of the two products.

Q.N.16Your Company uses a historical cost system and applies overhead on the basis of “pre-
determined rates”. The following are the figure from the Trail Balance as at 30-9-83:
Manufacturing overheads Rs.426,544 Dr.
Manufacturing overheads applied Rs.365,904 Cr
Work in progress Rs.141,480 Dr.
Finished goods stocks Rs.230,732 Dr.

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Cost of goods sold Rs.840,588 Dr.

Give two methods for the disposal of the unabsorbed overheads and show the profit implications of
each method.
(Ans. WIP 7074, FG 11,537, COGS 42,029)
Q.N.17Sipradi has gensets and produces it’s own power. Data for power costs are as follows:
Horse power Hours Production Dept Service Depts
A B X Y
Needed capacity Production 10,000 20,000 12,000 8,000
Used during the month of May 8,000 13,000 7,000 6,000
During the month of May, cost for generating power amounted to Rs.9,300 of this Rs.2,500 was
considered to be fixed cost. Service Dept X renders service to A, B, and Y in the ratio of 13:6:1 while

AN
Y renders service to A and B in the ration 31:3. Given that the direct labour hours in Depts A and B
are 1,650 hours and 2,175 hours respectively. Find the power cost per direct labour hour in each of
these two departments.

C
Question No. 18 E-books is an online book retailer. The Company has four departments. The two
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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.
s
nt

The following data are available for October, 2003:

Departments Revenues Number of Employees Processing Time used

ra

(in minutes)
Corporate Sales Rs 16,67,750 42 2,400
pi

Consumer Sales Rs.8,33,875 28 2,000

Administrative -- 14 400
As

Information system -- 21 1,400

Cost incurred in each of four departments for October, 2003 are as follow:

Corporate Sales Rs. 12,97,751

A

Consumer Sales Rs. 6,36,818

C

Administrative Rs. 94,510

Information systems 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.

(ii) Rank the support departments based on percentage of their services rendered to other support
departments. Use this ranking to allocate support costs based on the step-down allocation method.

(iii) How could you have ranked the support departments differently?

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(iv) Allocate the support department costs to two sales departments using the reciprocal allocation
method.

Question No.19 In the current quarter, a company has undertaken two jobs. The data relating to
these jobs are as under:

Job 1102 Job 1108

Selling price Rs. 1,07,325 Rs. 1,57,920

Profit as percentage on cost 8% 12%

AN
Direct Materials Rs. 37,500 Rs. 54,000

Direct Wages Rs. 30,000 Rs. 42,000

C
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.

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The company has received a new order for manufacturing of a similar job. The estimate of direct
materials and direct wages relating to the new order are Rs.64,000 and Rs.50,000 respectively. A
s
profit of 20% on sales is required.
nt

You are required to compute

ra

(i) The rates of Factory overheads and Selling and Administration overheads to be charged.

(ii) The Selling price of the new order

pi

Question No.20 Your company uses a historical cost system and applies overheads on the basis of
As

“predetermined” rates. The following are the figure from the Trial Balance as at 30-9-83:-

Manufacturing overheads Rs. 4,26,544 Dr.

Manufacturing overheads applied Rs.3,65,904 Cr.
A

Work-in-progress Rs. 1,41,480 Dr.

C

Finished goods stocks Rs. 2,30,732 Dr.

Cost of goods sold Rs. 8,40,588 Dr.
Give two methods for the disposal of the unabsorbed overheads and show the profit implications of
each method.

Question No. 21
MNP suits is a ready-to-wear suit manufacturer. It has four customers: two wholesale channel
customers and two retail-channel customers.
MNP suits has developed the following activity-based costing system:
Activity Cost driver Rate in 2004
Order processing Number of purchase orders Rs.1,225 per order
Sales visits Number of customer visits Rs.7,150 per visit

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Delivery-regular Number of regular deliveries Rs.1,500 per delivery

Delivery-rushed Number of rushed deliveries Rs. 4,250 per delivery
List selling price per suit is Rs. 1,000 and average cost per suit is Rs. 550. The CEO of MNP
suits wants to evaluate the profitability of each of the four customers in 2003 to explore
opportunities for increasing profitability of his company in 2004. The following data are
available for 2003:
Item Wholesale customers Retail
customers
W H R T
Total number of orders 44 62 212 250
Total number of sales visits 8 12 22 20

AN
Regular deliveries 41 48 166 190
Rush deliveries 3 14 46 60
Average number of suits per order 400 200 30 25
Average selling price per suit Rs.700 Rs.800

C
Rs.850 Rs. 900
Required:
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(i) Calculate the customer-level operating income in 2003
(ii) What do you recommend to CEO of MNP suits to do to increase the company’s operating
income in 2004?
s
(iii) Assume MNP suits’ distribution channel costs are Rs.17,50,000 for its wholesale
nt

customers and Rs.10,50,000 for the retail customers. Also, assume that its corporate
sustaining costs are Rs. 12,50,000. Prepare Income statement of MNP suits for 2003.
ra

(Ans:24,54,650 28,06,750 10,46,500 11,98,250)

Question No. 22 An engine manufacturing company has two production departments: (i)
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Snow mobile engine and (ii) Boat engine and two service departments: (i) Maintenance and (
ii) Factory office.
As

Budgeted cost data and relevant cost drivers are as follows:

Departmental costs:
Snow mobile engine 6,00,000
A

Boat engine 17,00,000

Factory office 3,00,000
C

Maintenance 2,40,000
Cost drivers:
Factory office department: No. of employees
Snow mobile engine department 1,080 employees
Boat engine department 270 employees
Maintenance department 150 employees
1,500
Maintenance department: No. of work orders
Snow mobile engine department 570 orders
Boat engine department 190 orders
Factory office department 40 orders
800

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Required:
(i) Compute the cost driver allocation percentage and then use these percentages to allocate
the service department costs by using direct method.
(ii) Compute the cost driver allocation percentage and then use these percentages to allocate
the service department costs by using non-reciprocal method/step method.
(Ans(1).10,20,000 18,20,000 (2) 10,18,500 18,21,500)

Question No.23 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) Rs.3,24,000

AN
Normal working hours for the month 200 hours
(The machine works to only 75% of capacity)
Wages of Machine man Rs.125 per day (of 8 hours)
Wages for Helper (machine attendant) Rs.75 per day (of 8 hours)

C
Power cost for the month for the time worked Rs.15,000
Supervision charges apportioned for the machine centre for the month Rs. 3,000
Electricity & Lighting for the month
Repairs & maintenance (machine) including
-I Rs. 7,500

Consumable stores per month Rs. 17,500

s
Insurance of Plant & Building (apportioned) for the year Rs. 16,250
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Other general expense per annum Rs.27,500

The workers are paid a fixed Dearness allowance of Rs. 1,575 per month. Production bonus
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payable to workers in terms of an award is equal to 33.33% of basic wages and dearness
allowance. 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.
pi

(Ans: machine hour rate: 406.86)

As

Question No.24 A machinery was purchased from a manufacturer who claimed that his
machine could produce 36.5 tonnes in a year consisting of 365 days. Holidays, break-down,
etc., were normally allowed in the factory for 65 days. Sales were expected to be 25 tonnes
A

during the year and the plant actually produced 25.2 tonnes during the year. You are
required to state the following figures:
C

(a) rated capacity

(b) practical capacity
(c) normal capacity
(d) actual capacity

Question No. 25 You are given the following information of the three machines of a manufacturing
department of X Ltd.:
Preliminary estimates of expenses (per annum)
Total Machines

A B C
(Rs.) (Rs.) (Rs.) (Rs)
Depreciation 20,000 7,500 7,500 5,000

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Spare parts 10,000 4,000 4,000 2,000

Power 40,000
Consumable stores 8,000 3,000 2,500 2,500
Insurance of machinery 8,000
Indirect labour 20,000
Building maintenance expenses 20,000
Annual interest on capital outlay 50,000 20,000 20,000 10,000
Monthly charge for rent and rates 10,000
Salary of foreman (per month) 20,000
Salary of Attendant (per month) 5,000
(The foreman and the attendant control all the three machines and spend equal time on them
The following additional information is also available:

AN
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3

C
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The

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manufacturing department works 8 hours in a day but Saturdays are half days. All machines work at
90% capacity throughout the year and 2% is reasonable for breakdown.
You are required to :
Calculate predetermined machine hour rates for the above machines after taking into consideration
s
the following factors:
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• An increase of 15% in the price of spare parts.

• An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
ra

• 20% general increase in wages rates.

(Ans: 100.21 99.52 84.43)
pi

1. Discuss the treatment of research and development expenditures in cost accounting.

If research is conducted in the methods of production, the expenses should be charged to
As

production overhead. If the research relates to administration, the expenses are charged to
administration overheads. If it is related to market research, the expenses are charged to S
&D overheads. Development costs incurred in connection with a particular product should
A

be charged directly to that product. Such expenses are usually treated as deferred revenue
expenditure and recovered as cost per unit of the product when production is fully
C

established. Routine nature research expenses are charged to general overheads.

2. How do you deal with the following in cost account?

(i) Packing Expenses
(ii) Fringe benefits

Answer
Packing expenses: Cost of primary packing necessary for protecting the product or for
convenient handling, should become a part of the prime cost. The cost of packing to
facilitate the transportation of the product from the factory to the customer should become
a part of the

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distribution cost. If the cost of special packing is at the request of the customer, the same
should be charged to the specific work order or the job. The cost of fancy packing necessary
to attract customers is an advertising expenditure. Hence, it is to be treated as a selling
overhead.

Fringe benefits: These are the additional payments or facilities provided to the workers
apart from their salary and direct cost-allowances like house rent and city compensatory
allowances. If the amount of fringe benefit is considerably large, it may be recovered as
direct charge by means of a supplementary wage or labour rate; otherwise these may be
collected as part of production overheads.

AN
Calculation of effective machine Hour
A: Number of working days (less holidays)
B: No. of working hours available per day

C
C: Total Number of working hours
D: Less: Hours required for maintenance
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E: Productive Machine hours (if setup time is assumed productive)
F: Less unproductive setup time: (if assumed unproductive)
G: Productive Machine Hours (E – F)
s
nt

Question No.26 The following information relates to the production department for a
certain period in a factory:
ra

Direct Material Rs.75,000

Direct Wages Rs.50,000
pi

Production Overheads Rs. 150,000

As

Labour Hours 30,000 hours

Machine Hours 25,000 Hours
For one order No.101 carried out in dept during the period, the relevant data were:
Direct Material consumed Rs.14,000
A

Direct Wages Rs.11,000

C

Machine hours worked 5,000 Hours

Labour Hour worked 7,000 Hours
Required: Prepare a comparative statement of cost of this order by using the following
methods:
1. Direct Material cost percentage 2. Direct labour cost percentage 3. Prime cost
percentage 4. Labour hour rate 5. Machine hour rate

Question No.27In a machine shop, the machine hour rate is worked out at the beginning of
a year on the basis of 13 week period which is equal to 3 calender months. The following
estimates for operating a machine are relevant:
Total working hours available per week 48 hours

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Maintenance time included in above 2 hours

Setting up time included in above 2 hours
Cost details:
Operator wages (per month) Rs.650
Supervisor salary (per month) (common supervisor for 3 machines) Rs.1500
WDV for machine (depreciation @ 10% plus 2% on an average for extra shift allowance) Rs
.180,000
Repair and maintenance (per annum) Rs.16,000
Consumable stores (per annum) Rs.30,000
Rent rate and taxes (for the quarter apportioned) Rs.5,000

AN
Power consumed @ 15 unit per hour @ 40 paisa per unit. Power required for productive
hours only. Setting up time is a part of productive time but no powers required for setting.
Required:

C
a. Work out the machine hour rate.
b. Work out the rate for quoting to the outside party for utilizing the idle capacity in
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the machine shop assuming a profit of 20% above variable cost.
(Ans. M/C hour rate: 48.13 min quote 40.80)
s
nt

Question No. 28Bajra manufacturing company makes several product lines which are
processed through three production departments- X, Yand Z.
ra

The information concerning the relevant data for a year is as follows:

Factory overheads Direct labourHrs Direct Labor cost
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(including share of
servicedept)
As

Department X Rs.124,000 80,000 Rs.160,000

Department Y 230,000 115,000 Rs.241,500
Department Z 546,000 105,000 Rs.199,500
A

Production records at the end of the year indicated the following for the product line
C

“Krish”
Unit produced 20,000
Dept X Dept Y Dept Z
Prime Cost 45,000 10,500 59,500
Direct Labour Hours 10,000 5,000 30,000
You are required to:
1. Calculate the departmental and plant wise overhead rate based on direct labour
hour.
2. Compute the cost of ‘Krish’ line for the year by using (i) Plant wise rate and (ii)
departmental rate

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3. Comment on the results.

Question No.29A manufacturing unit has purchased and installed a new machine of Rs.12,
70,000 to its fleet of 7 existing machines. The new machine has an estimated life of 12 years
and is expected to realiseRs. 70,000 as scrap at the end of its working life. Other relevant
data are as follows:
(i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes
300 hours for plant maintenance and 92 hours for setting up of plant.

AN
(ii) Estimated cost of maintenance of the machine is Rs.25,000 (p.a.).
(iii) The machine requires a special chemical solution, which is replaced at the end of each
week (6 days in a week) at a cost of Rs.400 each time.

C
(iv) Four operators control operation of 8 machines and the average wages per person
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amounts to Rs.420 per week plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of
s
Rs.3 per unit. No current is taken during maintenance and setting up.
nt

(vi) Departmental and general works overhead allocated to the operation during last year
ra

was Rs.50,000. During the current year it is estimated to increase 10% of this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is
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productive.
As

(Ans: Machine hour Rate – Unproductive 123.68 Productive: 118.72)

Question No. 31In a factory, a machine is considered to work for 208 hours in a month. It
A

includes maintenance time of 8 hours and set up time of 20 hours.

The expense data relating to the machine are as under:
C

 Cost of the machine is Rs. 5,00,000. Life 10 years. Estimated scrap value at the end of
life is Rs.20,000.
(Rs.)
– Repairs and maintenance per annum 60,480
– Consumable stores per annum 47,520
– Rent of building per annum (The machine under reference
occupies 1/6 of the area) 72,000
– Supervisor's salary per month (Common to three machines) 6,000
– Wages of operator per month per machine 2,500
– General lighting charges per month allocated to the machine 1,000

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– Power 25 units per hour at Rs.2 per unit

Power is required for productive purposes only. Set up time, though productive, does not
require power. The Supervisor and Operator are permanent. Repairs and maintenance and
consumable stores vary with the running of the machine.
Required
Calculate a two-tier machine hour rate for (a) set up time, and (b) running time
(Ans: Set up time rate : 92.50 Running Time rate: 152.50)

Activity: An activity may be defines as a particular task or unit of work with a specific purpose. For

AN
example, placing of a purchase order, setting up of a machine, after sales service etc.

Cost Object: It is an item for which cost measurement is required. For example, a product, a service,
a job or a customer.

C
Cost Driver: It is a factor that influences the cost of an activity. It explains why resources are
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consumed by a particular activity and therefore why activity incurs cost. E.g. Machine set up (
Activity) the number of set ups is the cost driver.
s
Question No.33A company, manufactures two products, furnishes the following data for the year:
nt

Products Annual Output (units)Total Machine Hours Total No of Total No. of

Purchase Order set up
ra

A 5000 20000 160 20

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B 60,000 120,000 384 44

As

The annual overheads are as under:

Volume related activity cost 550,000

A

Set up related costs 820,000

C

Purchase related costs 618,000

You are required to calculate the cost per unit of each product A and B bases on:

1. Traditional method of charging overheads

2. Activity based costing method

Question No.34RST Ltd is specialized in the distribution of pharmaceutical products. It buys from
the pharmaceutical companies and results to each of the three different markets:

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I. General supermarket chains

II. Drugstore chains
III. Chemist shop

The following data for the month of April, 20X6 in respect f RST Ltd has been reported:

General Super Chains Drugstore chain

Chemist shops

Average revenue per delivery Rs.84,975 Rs.28,875 Rs.5,445

Average cost of goods sold per delivery Rs.82,500 Rs.27,500 Rs.4,950

AN
Number of deliveries 330 825 2,750

In the past, RST Ltd has used gross margin percentage to evaluate the relative profitability of it’s

C
distribution channel.

-I
The company plans to use activity based costing for analyzing the profitability of it’s distribution
channels.
s
The activity analysis of RST Ltd is as under:
nt

Activity area Cost Driver

ra

Customer purchase order processing Purchase orders by customer

Line item ordering Line items per purchase order
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Store delivery Stores Deliveries

Cartons dispatched to stores Cartons dispatched to store per delivery
As

Shelf stocking at customer store Hours of shelf stocking

The April 20X6 operating costs (other than the cost of goods sold) of RST Ltd are Rs. 827,970. These
operating costs are assigned to five activity areas. The cost in each area and the quantity of the cost
A

allocation basis used in that area for April, 20X6 are as follows:
C

Activity Area Total costs in April 20X6 Total units of

cost
allocation in April,
20X6
Customer purchase order processing Rs.220,000 5,500 order

Line item ordering Rs.175,560 58,520 line items

Store delivery Rs.195,250 3905 stores deliveries

Cartons dispatched to store Rs.209,000 209,000 stores

Shelf stocking at customer store Rs.28,160 1,760 hours

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Other data for the April, 20X6 includes the following:

General supermarket chains Drugs store Chemist

Total No. of orders 385 990 4,125

Avg. No. of line items per order 14 12 10
Total Number of store deliveries 330 825 2,750
Avg. No. of cartons shipped per
Store delivery 300 80 16
Avg. No. of hours of shelf stocking
Per store delivery 3 0.6 0.1

AN
Required:
1. Compute for April, 20X6 gross margin percentage for each of its three distribution channels
and compute RST Ltd. operating income
2. Compute the April, 20X6 rate per unit of the cost allocation base for each of the five activity

C
areas
3. Compute the operating income of each distribution channel in April, 20X6 using activity
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based costing information. Comment on the results. What new inshights are available with
the activity based cost information.
s
4. Describe four challenges one would face in assigning the total April, 20X6 operating costs Rs
. 827,970 to five activities.
nt
ra
pi
As
A
C

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