Answers

CHAPTER 3 - ACCOUNTING FOR OVERHEADS

3.1 OVERHEAD COST PER UNIT

CC1 CC2
Total hours Total hours
Product X 12,000 × 1.5 18,000 12,000 × 2.0 24,000
Product Y 10,000 × 1.2 12,000 10,000 × 2.6 26,000
30,000 50,000

Total overheads Rs.126,000 Rs.180,000

Absorption rate per Rs.4.20 Rs.3.60
hour

Fixed overhead cost/unit Product Product

X Y
Rs. Rs.
CC1 1.5 × Rs.4.20 6.30 1.2 × Rs.4.20 5.04
CC2 2.0 × Rs.3.60 7.20 2.6 × Rs.3.60 9.36
Total 13.50 14.40

3.2 APPORTIONMENT
Tutorial note: The answers to all three parts of the question are shown here, but
are not labelled.
Basis of Total A B C
apportionment
Rs. Rs. Rs. Rs.
Indirect Allocation 23,000 7,000 6,600 9,400
materials
Indirect Allocation 87,000 40,000 27,000 20,000
labour
Rent Floor area 60,000 15,000 20,000 25,000
Depreciation Equipment cost 80,000 16,000 48,000 16,000
Insurance Employee 20,000 8,000 6,400 5,600
numbers
Heating, Volume 18,000 8,000 6,000 4,000
lighting
Total 288,000 94,000 114,000 80,000

Direct labour hours 8,000 6,000 4,000

Absorption (per direct labour hour) Rs. Rs.19 Rs.20
rate 11.75
If a single factory-wide absorption rate is used instead of separate absorption rates
for each department, the absorption rate would be Rs.16 per direct labour hour
(= Rs.288,000/18,000 hours).

© Emile Woolf International 93 The Institute of Chartered Accountants of Pakistan

Cost and management accounting

3.3 SERVICE DEPARTMENTS

(a) Repeated distribution method
C = Canteen
BH = Boiler house
Dept 1 Dept 2 Dept 3 C BH
Rs. Rs. Rs. Rs. Rs.
Initial overheads 700,000 300,000 400,000 78,000 100,000
Apportion:
BH (30:30:20:20) 30,000 30,000 20,000 20,000 (100,000)
98,000
C (40:20:30:10) 39,200 19,600 29,400 (98,000) 9,800
BH (30:30:20:20) 2,940 2,940 1,960 1,960 (9,800)
C (40:20:30:10) 784 392 588 (1,960) 196
BH (30:30:20:20) 59 59 39 39 (196)
C (40:20:30:10) 15 8 12 (39) 4
BH (30:30:20:20) 1 1 1 1 (4)
C (40:20:30:10) 1 0 0 (1) 0
Total overhead 773,000 353,000 452,000

(b) Simultaneous equations method

Let X = the total overheads apportioned from the Canteen
Let Y = the total overheads apportioned from the Boiler House
This gives us the simultaneous equations:
X = 78,000 + 0.2 Y … (1)
Y = 100,000 + 0.1 X … (2)
Re-arrange:
78,000 = X – 0.2 Y … (1)
100,000 = – 0.1 X + Y … (2)
Multiply (2) by 10
1,000,000 = – X + 10Y … (3)
Add (1) and (3)
1,078,000 = 9.8Y
Y = 110,000
Therefore, from (1) and substituting Y = 110,000:
X = 78,000 + 0.2 (110,000) = 100,000.
Dept 1 Dept 2 Dept 3
Rs. Rs. Rs.
Initial overheads 700,000 300,000 400,000
Apportion:
BH (30%, 30% and 20% of 110,000) 33,000 33,000 22,000
C (40%, 20% and 30% of 100,000) 40,000 20,000 30,000
Total overhead apportionment 773,000 353,000 452,000

© Emile Woolf International 94 The Institute of Chartered Accountants of Pakistan

 Answers

3.4 ZIA TEXTILE MILLS

(a) The under or over applied overhead may be:
 treated as period cost by closing it to Cost of Goods Sold Account or
directly to Income Statement.
 apportioned between inventories and cost of goods sold.

Reasons for Under/ Over applied Factory Overhead

(i) The actual hours worked may be more or less than the estimated
hours.
(ii) The estimates may not be accurate.
(iii) Actual overhead costs and actual activity levels are different from
budgeted costs and activity levels.
(iv) Changes in the methods of production.
(v) Abnormal changes in the component prices of factory overheads.
(vi) Extraordinary expenses might have been incurred during the
accounting period.
(vii) Major changes might have taken place. For example, replacement of
general purpose machine with automatic high speed machines.

(b) Calculation of Annual Charges of New Machine

Rupees
Total budgeted costs of existing five
machines (Rs. 390 x (12,500 - 900)) 4,524,000

Add: Costs of new machines

(i) Depreciation (1,300,000 – 100,000)/10 x 11/12 110,000
(ii) Electricity (2,600 x 10 x Rs. 8.5) 221,000
(iii) Cost of maintenance (Rs. 25,000 x 11) 275,000
(iv) Part replacement (Rs. 10,000 x 11) 110,000
(v) Operator Wages (Rs. 9,000 x 11) 99,000
(vi) Departmental expenses (Rs. 5,000 x 11) 55,000
5,394,000

Productive Budgeted hours (12,500 + 2,600 - 900 - 120 - 80) 14,000

Adjusted machine hours rate 385.29

Say 385.00

© Emile Woolf International 95 The Institute of Chartered Accountants of Pakistan

Cost and management accounting

3.5 TERNARY ENGINEERING LIMITED

(a) Rs. (000)
Production departments
Variable overhead 370
Fixed overhead 660
Service department
Inspection 210
Maintenance 300
1,540
Estimated direct labour hours (DLH)
Fabrication 24,000
Phosphate 9,600
Painting 12,000
Total estimated direct labour hours 45,600

Estimated Total Overheads

Single overhead absorption rate =
Estimated Direct Labour Hours

Rs.1,540,000 = Rs. 33.77 per

=
45,600 hours direct labour hour

(b) Production Service

Fabrication

Maintenance
Phosphate

Inspection
Painting

Rupees in thousand
Variable Overhead 200 70 100 60 90
Fixed Overhead 480 65 115 150 210

Allocation of Maintenance
Department Costs on the basis of
labour hours
630 ÷ 1,050 x 300 180 (180)
273 ÷ 1,050 x 300 78 (78)
147 ÷ 1,050 x 300 42 (42)
Allocation of Inspection Department
Costs on the basis of Inspection
hours
1,000 ÷ 3,000 x 210 70 (70)
500 ÷ 3,000 x 210 35 (35)
1,500 ÷ 3,000 x 210 105 (105)
930 248 362 - -

Base Machine hours Direct labour hours

number of hours 9,000 9,600 12,000
Departmental Overhead Rate (Rs.) 103.33 25.83 30.17

© Emile Woolf International 96 The Institute of Chartered Accountants of Pakistan

 Answers

3.6 PRODUCTION AND SERVICE

(a) Service department expenses allocation by repeated distribution
method:
Production Service
Department Department
A B X Y
Total expenses as given 500 400 100 60
Allocation of X department cost 50 30 (100) 20
Allocation of Y department cost 32 40 8 (80)
Allocation of X department cost 4 2 (8) 2
Allocation of Y department cost 1 1 - (2)
587 473 - -

(b) Service department expenses allocation by simultaneous equation

method:

Let total expenses of department X inclusive of expenses allocated from

department Y = x
Let total expenses of department Y inclusive of expenses allocated from
department X = y

Then according to question x = 100 + 0.1 y ------------ eq (1)

y = 60 + 0.2 x -------------- eq (2)

Putting the value of y from eq(1) in eq(2)

x = 100 + 0.1 (60 + 0.2x)

= 100 + 6 + 0.02 x
x – 0.02 x = 106
x = 108

y = 60 + 0.2x
= 60 + 22 = 82
ALLOCATIONS

Production
Description Department
A B
Product department costs 500 400
Distribution of X department cost
(108  50%) & (108  30% ) 54 32
Distribution of Y department cost
(82  40%) & (82  50% ) 33 41
587 473

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Cost and management accounting

3.7 RT LIMITED
RT LIMITED
Allocation of overheads

(a) Allocation of Service dept. cost to production dept. - Repeated

distribution method:
Production Dept. Service Dept.
P1 P2 P3 S1 S2
Rupees in thousand
S1 overheads allocation % 20% 30% 40% 10%
S2 overheads allocation % 30% 40% 20% 10%
Actual overheads as given 1,250 2,000 1,800 500 750
Allocation of S2 cost
30:40:20:10 225 300 150 75 (750)
Allocation of S1 cost
20:30:40:10 115 172 230 (575) 58
Allocation of S2 cost
30:40:20:10 17 23 11 6 (58)
Allocation of S1 cost
20:30:40:10 1 2 3 (6)
Allocation from service dept. 358 497 394
TOTAL 1,608 2,497 2,194  

(b) Over / under applied overheads:

P1 P2 P3
Actual overheads after allocation from service dept. 1,608 2,497 2,194
Application of overheads to production:
P1 Machine hours basis{(1,200/60,000)*60,500} 1,210
P2 Labour hours basis {(2,000/200,000*190,000} 1,900
P3 75% of material cost (3,200*75%) 2,400
Overheads applied 1,210 1,900 2,400
Overheads under / (over) applied 398 597 (206)

© Emile Woolf International 98 The Institute of Chartered Accountants of Pakistan

 Answers

3.8 AHSAN ENTERPRISES

(a) Factory overheads cost per unit based on direct labour hours used:
Alpha Beta Gamma Total
Production (no. of units) A 12,000 20,000 45,000 77,000
Direct labour hours per unit 20 5 4
Total direct labour hours B 240,000 100,000 180,000 520,000
Allocation of overheads
(9,488,000/520,000 ×B) Rs. C 4,379,077 1,824,615 3,284,308 9,488,000
(C /
Cost per unit Rs. A) 364.92 91.23 72.98

(b) Factory overheads cost per unit based on utilisation of facilities:

Allocation basis Alpha Beta Gamma Total

Production (no. of
units) A 12,000 20,000 45,000 77,000
Machine hours per
unit 6 8 10
Total machine hours *1 72,000 160,000 450,000 682,000
Units inspected 600 400 1,350 2,350
Per unit inspection
hours 2 3 4
Total no. of hrs for
units inspected *2 1,200 1,200 5,400 7,800
Overhead allocation:
Indirect wages:
Machine
maintenance Machine hours 63,343 140,763 395,894 600,000
Stores Store
consumption 144,000 54,000 162,000 360,000
Quality control Inspected hours 72,000 72,000 324,000 468,000
Cleaning and related Factory space
services utilisation 160,000 140,000 100,000 400,000
Fuel and power Machine hours 295,601 656,892 1,847,507 2,800,000
Depreciation on
plant and machinery Machinery cost 600,000 400,000 300,000 1,300,000
Depreciation on
building
(1,560,000- Factory space
1,300,000) utilisation 104,000 91,000 65,000 260,000
Insurance on plant
and machinery Cost of Machinery 110,769 73,846 55,385 240,000
Insurance on Factory space
building utilisation 24,000 21,000 15,000 60,000
Stores, spares and
supplies consumed Actual 720,000 270,000 810,000 1,800,000
Rent, rates and Factory space
taxes utilisation 480,000 420,000 300,000 1,200,000
Total overheads B Rs. 2,773,714 2,339,500 4,374,786 9,488,000
Cost per unit (B/A) Rs. 231.14 116.98 97.22

© Emile Woolf International 99 The Institute of Chartered Accountants of Pakistan

Cost and management accounting

3.9 AMBER LIMITED

(a) Budgeted overhead rate for department-A Rs. in million
Budgeted Overhead rate per machine hour
(OHD/MH Rs.5m/400,000) Rs. 12.5
Budgeted overhead rate for department-B
Budgeted labour cost (Rs. 120 × 500,000) 60
Budgeted overhead (Rs. 60 m × 15%) 9
Budgeted overhead rate per labour hour (Rs. 9 m/0.5 m) 18
Budgeted overhead rate for department-C
Budgeted overhead as a % of Prime Cost (Rs.7.5 m /150 m) 5%
(b) Computation of actual cost of producing one unit of product:
Departments
Rupees in million
A B C
Material cost 80.00 150.00 120.00
Labour cost
(0.22 m × Rs. 120) 26.40
(0.53 m × Rs. 120) 63.60
(0.24 m × Rs. 120) 28.80
Actual overhead cost 5.35 8.90 7.45
Total Cost 111.75 222.50 156.25

Unit cost (Cost/3.57 m. units) (Rs.) 31.30 62.32 43.77

Total Actual Cost per unit (Rs.) 137.39
(c) Applied Overhead Cost
(0.34 m × 12.5) 4.25
(0.53 m × Rs. 18) 9.54
(Rs. 148.8 m × 5%) 7.44
Actual Overhead Cost 5.35 8.90 7.45
Under applied / (over applied) 1.10 (0.64) 0.01

© Emile Woolf International 100 The Institute of Chartered Accountants of Pakistan

 Answers

3.10 SPARROW (PVT) LIMITED

Allocation of
Machine Machine
costs to cost Basis Inspection Packing Total
M1 M2
centres
Area 5,500 4,800 12,000 15,000
Occupied 37,300

Allocation of Area 330,000 288,000 720,000 900,000 2,238,000

Electricity
Allocation of Area 220,000 192,000 480,000 600,000 1,492,000
rent
Operational 5,500,000 3,200,000 - - 8,700,000
cost
6,050,000 3,680,000 1,200,000 1,500,000 12,430,000

ALLOCATION OF COST TO PRODUCTS

Basis of Cost Allocation A B TOTAL
Units produced 5,600 7,500
Inspection time (hrs.) 1,400 1,500 2,900
(5,600 x 15 min /60) &
(7,500 x 12 min /60)
Packing time (hrs.) 1,120 1,250 2,370
(5,600 x 12 min /60) &
(7,500 x 10 min /60)
Units produced on Machine M1 2,800 4,875 7,675
(50% A and 65% B)
Units produced on Machine M2 2,800 2,625 5,425
(50% A and 35% B)

Cost Allocated
Machine M1 cost 2,207,166 3,842,834 6,050,000
Machine M2 cost 1,899,355 1,780,645 3,680,000
Inspection department cost 579,310 620,690 1,200,000
Packing department cost 708,861 791,139 1,500,000

5,394,692 7,035,308 12,430,000

© Emile Woolf International 101 The Institute of Chartered Accountants of Pakistan