. Classification Allocation Apportionment Re-Apportionment Methods ‘* Direct Redistribution Step Ladder Reciprocal Services Repeated Redistribution & Simultaneous Eqns Recovery or Absorption Capacity Concepts - Rated, Practical, Normal, Actual and Idle Capacity Predetermined Rates Bases of Recovery % of Direct Material % of Direct Labour °% of Prime Cost Labour Hour Rate Machine Hour Rate Treatment of Differences (Overabsorption Underabsorpton Blanket vs Departmental Rates of Recovery | 4.1 Basics d-Meaning 4s comprise of Indirect Materials, , Indirect Labour and Indirect Expenses, Donation, Loss gn exchange fluctuations, will net form part of OH. Indirect Costs are called Overheads, since they are incu ss products, 1s Departments or Cost Centres, and heads of account. based on Functions ns, Overheads are classified into four types, Vi Indirect Employee Costs and ble or allocable to a cost object in an economically feasible way. So, c is collectively called as “Overheads” (or Oncost). ¥(@) Expenditure arising out of abnormal situation in / Profit on Sale of assets, etc, and Indirect Expenses, which are not the total of all Indirect Costs, business activity, (b) Items not related to business: (©) Borrowing Cost and other financial charges red generally (and not specifically) ~ ‘Sub-Classification (@) Stores Overheads (b) Labour Overheads (expenses connected with purchasing & handling of materials) (expenses connected with labour and amenities), and | (6) Factory Administration Overheads (a) Office Expenses (incurred on routine ‘expenses connected with administration of, office work ~ Telephone, Stationery, etc.), and (b) Administrative Expenses (incurred on Office Personnel, .e. thelr Salaries, Facilities, etc.) @ Selling Expenses (incurred to persuade customers to purchase the Fit Vs products and Stengeve hs serices that to manta & expand the marks), 2nd " / Scanned with CamScannerHandbook on Cost and ‘Accounting - For CA Inter 1.3 OH Classification based on Nature w 0 ‘are classified as under — These expenses are unaffected by any variation in the volume of ocetly 1 Hue of isp Examples: Managerial Remuneration, Rent, (b) They remain constant from one period to another except when they are deliberately changed, ‘on increments, % to staff or engagement of additional staf. vga fs related to level of activity. AS Output increas (©) Fixed Overheads per unit of output are inversely Fixed Overhead per unit declines and vice-versa. () These are expenses that change directly in proportion to the change in the volume. of acy Examples: Indirect Materials, Lubricants, Consumable Stores, etc. | (b) Variable Expenses per unt are regarded as constant. {@) These are expenses that exhibit features of Fixed and Variable Overheads. Examples: Elecnc Woter, Delvey Van Expenses, Telephone and Intermet Charges, Repairs and Maintenance ec. {b) They may behave in any of the following manner ~ «Expenses that do not change when there is a small change in the level of activity but change Faonever there is 2 sight big change ~ e.g. no change in expenses if output increases 10%, but increases by 5% for increase in output beyond 10% Expenses that change in the same direction as the change in level of activity but not in te ‘same proportion, e.g. an expense may change by 1% for every 2% change in activity. Expenses which remain fixed upto a particular level & thereafter become variable, or vice-versa. (first variable & then fixed) Semi-Variable Costs into Fixed & Variable usually have two parts ~ a fixed part and a variable ay pats part. By a systematic analysis, all Semi-Varabe as variable xed portions. The folowing methods can be applied for segregation of Sent Scanned with CamScannerfat any level of output = Total Costs less Variable Costs as estimated above. Only as a last resort, if all other methods of segregation fail, ts Method of segregating SV Costs _ Value and Total Costs at the highest volume and lowest volume. je Costs as a % of Sales Value = —Difference in Total Costs _ Difference in Sales Value Costs at either highest or lowest volume as Sales x Variable Cost % computed above. psts = Total Costs less Variable Costs as computed above. ty Method of segregating SV Costs Variable Expenses at two different quantity (i.e. Output) levels. Difference in Total Costs, Difference in Output Quantity Costs at either quantity level as Quantity x Variable Cost per unit. ts = Total Costs less Variable Costs as computed above. Costs per unit = Method of segregating SV Costs thod, Total Costs are expressed by the Linear Equation y = mx + ¢, where y = Total Costs, m = per unit, x = Output Quantity and c = Total Fixed Costs. values of y and x at different costs and levels of output, the equations are solved for m and c, to ble costs per unit and total Fixed Costs, of OH Classification into Fixed / Variable into Fixed and Variable on the basis of nature serves the following purposes ~ SRS erecta rey eso ree sate econ ee Bs eo ag, mes ee os a ‘decisions, This technique of decision-making Is called Marginal Costing or CVP Analysis. ‘cheaper it becomes", Comment briefly on this statement. N95 decrease, of activity increases. Hence, the component of Fbved Cost per kilometre goes an increase in kib travel, ‘per kilometre, (fone travels in his own vehicle) wil decline when he travels more Kilometres, 43 Scanned with CamScanner| Pedi’ sues Hanon ncn a Mangement Ao 4444 of of Overhead Costs: ‘The basic objectives of study of Overhead Costs are ~ not directly related to the product. Hence, an L Satay Crema tt Onn oe es gone by iking overhends fest oe (Department) and thereafter tothe output produced. (See Note below) oie 2. To control Overtveads: The total overhaads incurred must be kept within reasonable moony, ‘Savings in cost and increase in profits, of Overhead, as under ~ [amperage tts mening, depending on the typeof rectory OW | = Units produced ‘Units produced but not sold + Units party prod Stereo = + Cosing Stock of Finished Goods + Closing Stock of wis” ‘amin On sims “+ Units produced but not sold i = Units sold + Closing Stock of Finished Goods. | S&DON = Units produced & sold, Units sold, 41.12 Advantages of Departmentalisation The ‘collection of Overheads for each Cost Centre or Department offers the following advantages ~ ai Jot caaan: Expenses that relate toa particular department will be estimated on an exact bass Herc te : ‘@ccuracy of estimation of overheads is higher. 2 Controt: Avatblity of separate cost figures for each department faciitates control. For efficient contro , the manager ‘Sovetany" £2 2c activty, how much should have been spent and how much is actualy spent. If overl nme 'S evallable, proper control or responsibility fixation can be done. 3. Proper The processing Absorption: times of diferent products in different departments may vary. Hence, expenses ¢ ‘Sech department should be known for ascertaining the appropriate share of OH expenses. (Cost Ascertainment: A suitable method of costing can be followed differently for each department, e.g. Batch ‘when @ part is manufactured, but single or output casting when the product Is assembled, - 4 4.1.13 Codification of Overheads: | 1, Meaning 2. Objectives | Code is 2 system of symbols designed to be applied | (@) = * 122 dassied ot of hans to aves ie see | ©) 7 Be ene ilar ature that are anes) H ‘facilitating entry collation and analysis. cent of Overhead Expenses on the same bass. Scart fry min |© Sten nn prema to in umberfletters ren Seal Ge ony (©) To carry out an analysis of OH for control purposes. Saaen (2) To reduce the task of maintaining a large number of accounts ‘cost data generated, ©) To assist the computerized accounting system in large RMS: _| 4.1.44 Methods of Codification of Overheads ‘The major methods of Codification of overheads are ~ 1. Srsioht Numbering Bret: Ech typeof exper s sated fed ruber, Tis ruber smeties fee? a the Sang Order Number, 910 Inde Maer, 11 net ae TU ’ 2. Number Blocks eres La tMTbeTs le generaly set seide or earmuriad ts ncaa ye seen Sd fr eat Lan, 31-100 Matar, 1001 tr Pee oe aan ee xpanan re scovrind unde ts ub Hock 0, 108 - House Reng Medical Alowance, et. witin the Block 101 ~ 150 for Fringe Benen i a i 44 Scanned with CamScannerOverheads ‘of Symbols and Numbers: A code is developed using a combination of alphabets and numbers. The stands for the main head of expenditure and the number represents the concerned department. E.9- for repairs and (1) and (2) are codes for Factory and Office respectively, R-1 will indicate Factory Repairs will indicate Office Repairs, |or Numerical Code: A string of numbers is used for codification. The string of numbers, usually of nine | speaiic sub-elements, For example, the first two digits may indicate the nature of expenses viz. Variable Or pnext three digits may indicate head of expense, the next two digits may stand for the analysis of expenses two dilts may indicate the cost centre. E.g. Code No,306387438 may be interpreted as 30 ~ Variable ‘Sales Department M. = Sales Commission, 74 ~ Product X, 3 Under this method, English alphabets are used for coding, €.9. R.F.8 may be used as code for Factory Building. ‘A well-designed Coding System has the following advantages. yery number used in the Code should be unique and certain, Le. | i. The Code is generally briefer than the | should be easily identified from the structure of the Code. account description. Hence, Coding saves Tt should be| time and improves storage capacity, in ‘possible to identify a Code for every item of cost and the Coding | respect of manual and computerized 'be capable of expanding to accommodate new items. | __ systems. . Code facilitates easier data the Coding System should be centrally | 3. Code helps in reducing ambiguity. If two not be possible for individuals to| professionals understand the same item of ‘Rew cotées to the existing Coding System. ‘cost differently, a Code will help them in clarifying the doubts. » Manufacturing or Production or Factory Overheads are linked to output ina two-phase manner ~ * Phase One - Overheads related to the Department or Cost Centre, Phase Two ~ Overheads of each Cost Centre related / linked to the output of that department, means: Bre Cet ‘expenses from books of account and supportive/ corroborative el a entire nd purpose, coecten Ives accurlton of dts relting to ‘information and adjusted for known current trends and projected into the future. The ‘Tnvoices and Stores Requisitions (for Indirect Materials), (b) Wage Analysis Book (for Journal Entries (for Indirect Expenses). ng to nature, viz, Fixed, Variable and Semi-Variable expenses. This a of cost directly to a Cost Centre. All Specific Expenses are Cost Centre, on some equitable basis. tise. (Wefor Para 423 below) om tek. ‘Scanned with CamScannerPadhulka's Students’ Handbook on Cost and Management Accounting ~ For 5. between Service Departments, [Refer Para 4.2.5 below] ‘Recovery / Absorption: {@) Absorption: Absorption of OH is charging of OH from Cost Centres to products or services, ‘Absorption Rates for each Cost Centre. OH Absorption Rate = Total OH ofa Cost Centre + Total Quantum ogy, eee Cems Curioni) secant on the. besie of GP OF Co ae Products or services, e.g. machine hours, labour hours, quantity pr (© Absorbed OH: Overhead Absorbed = Overhead Absorption Rate Re-apportionment: This involves re-distribution of Service Department Expenses to Production ‘output is produced only in Production Departments, all Overheads should be identified thereto. So, Servieg. [Expenses are re-apportioned to Production Departments, based on three different assumptions as to 7 Cost of Sales A/c Analysed as due to ~ ‘Normal Reasons ‘e.g. genuine planning errors, 2.9. Strike Period Wages changes in assumptions, etc. Labour Court Ava Stores, Perate ane Treated as increase in COSTS (using Supplementary OH Recovery Rate), and apportioned to production, Treated as LOSS and debts Costing P&L Account (Also see Note below) Closing Stock of Finished Goods Closing Stock of WIP FG Control A/c WIP Control aye Note: When Underabsorption is small and immaterial, itis fully debited / transferred to Costing P & L A/c, imespectvedt whether it is due to normal or abnormal reasons, 2. Difference between Budgeted and Actual Output (Volume Variance), (2) Difference between planned and actual hours. (This is called as (b) Difference between planned and actual quantity of output per h (©) Difference between planned and actual days worked (This is cal Which may arise due to ~ Capacity Variance.), }our. (This is called as Efficiency Variance.) lled as Calendar Variance.) | 4.4 Treatment of Specific Items in Overheads / Cost AS 4.4.1 Methods of Accounting for Administrative OH Of the following ways ~ ‘Treatment @ [OH are to be collected in different cost pools such as = @) General Office, (li) Personnel tment, (li) Accounts: Department (W) Legal Deparment (v) Secretarial Rep nasa 4.2 Scanned with CamScannerrelating to production activities are apportioned to different Departments based on Conversion Costs of Production Such apportioned OH are absorbed to products on the ‘of the Normal Capacity or Actual Capacty, whichever is higher. der-absorption or over~absorption of AOH relating to production shall be adjusted with Costing Profit & Loss Account. this method, itis considered that AOH isa period coat, and snot | (a) Costs of products are | d to production or sales, since ~ understated, as AOH is ‘AOH is incurred for formulation of broad policies and not directly | not charged to costs. ‘concemed with production or sales, (©) Exclusion of AOH from b) AOH cannot be equitably apportioned to production and sales| cost of products is functions. | against sound | ¢)_AOH is mostly Fixed Costs and relate only to the period. | __ accounting principles. method recognises Administration as a separate function like | Some AOH may relate to fuction and Sales. So, AOH is added separately in the Cost Sheet, to | production activities, and Total Cost of Sales. Some basis for apportionment of AOH over | excluded from inventory ‘products are - (a) Works Cost, (b) Sales Value or Quantity Sold (c) Gross | valuation, which is against ‘on Sales, (4) Production Quantity, or (e) Conversion Costs. proper a/cing principles. Administrative OH fixed in nature, and arise as a result of management policies. The following measures are adopted for reasonable limits — s: Under this technique, expenses incurred by each department are collected and compared with figures. Such a comparison will reveal efficiency or inefficiency of the concerned department. This es that the level of activity will remain the same for all time periods, and hence has limited utility: gh Budgets: Administration Cost Budgets (monthly or annually) are prepared for each department. The es are compared with actual ones to determine variances. The variances are analysed and responsibility concemed department for controlling the variances. gh Standards: Here, standards of performance are fixed for each administrative activity, and the actual Js compared with the standards set. In this way, standards serve not only as yardstick of performance but ‘control of costs. | Controls: Procedural Controls may involve checks like proper sanction and authorisation of expenditure, re bill by internal audit team, etc. ‘of Accounting for Selling and Distribution OH OH are collected under different cost pools like ~ Sales Employees Cost, Rent, Traveling Expenses, ‘Chaim, Brokerage & Commission, Advertisement relating to Sales and Sales Promotion, Sales Incentive, etc. tion OM are collected under different cost pools like = Secondary Packaging, Freight & Forwarding, 9 & Storage, Insurance, etc. ‘Some items Iectly identified and absorbed to products or services and remaining part 2 ae a eae ROH relating to Seling & Distrbuton activites are to be apportioned to cs oF jobs or services on the basis of net actual sales value (|.e. Gross Sales Value less Excise Duty, ‘and other Government levies), There are various bases in which S&D OH can be absorbed over units sold, tive bases are ~ a Scanned with CamScannerSeen Handbook on Cost and Harapeen = Sales Value of goods: I is considered a Parveen the amour of sles and the amount sed ‘Cost of Goods Sold: Not generally pets have Kerta Setg Prices and be (©) Gross Profit on Sales: This method fol ‘margins are charged with higher share that the Sale Value expenses method, this 335 Margins: “ability to pay of Selling ‘Overheads. basis, expenses are (@ Number of orders or units sold: Under this DESO TT hacis of benefits Ber unit is ascertained by apportioning fixed ci quantities sold, Some Fixed Selling Expenses sa Sales Department /Salesmen Salaries _ ‘Advertisement: ‘Specific Product Advertisement General Company Advertisement, ©.9) Exhibition Expenses, Show Room Expenses Rent of Finished Goods Godowns nd the basis of app — getimated time devoted to the sale of various p To be taken at actuals. Spedfic advertisement expenditure on each product ‘Average space occupied by each product Expenses on own Delivery Vans ‘Average quantities delivered during a period, (Other Sales Expenses ‘Wariable Selling expenses Ike Packaging, Freight Outwards, Transit Insurance, Salesmen Comi [ Sales Values of products (i suitable basis is not avalabay mission, Custone; Rebate, etc. can be estimated per unit for each product separately. Total Selling and Distribution Expenses pr ve is the sum of variable expenses and fixed expenses per unit. 4.4.4 Control over Selling and Distribution OH ‘The following methods may be adopted for controlling Selling and Distribution Overheads — L 2. Budgetary Control: Budgets are by classifying the expenses into 2 bbe set up for salesmen, terntories, ‘cual and standards, variances Note: Control of Seling and Distribution Expenses JL The incidence of S & D OH depends competion, terms of sles, etc wich ney tar Upon customers’ ‘Trend Analysis & Common Size Analysis: Under this technique, revious period. Altematively, the OH may be expressed as a pe ‘Compared with those of the past period. This method is suitable for Fe enquired into and suitable actions ‘S&D OH are compared with the figures of te rcentage of sales, and the percentages may ‘small concerns. Prepared for S&D OH. Flexible Budgets at different levels of sales can also be preps fez and variable. The actual expenses are compared with the budgeted gues" ‘Standard Costing: Under this technique, standa PrOdt, ee Oe gin rlation tothe standard sales volume, Standart the standards are set up, comparison is made bees! taken, '5 a dificult task because — external beyond the control factors, such nate pe as distance of market, extent and thelr tking and disiking, tastes et. Contra ‘amenable to control, roctha ME Scanned with CamScannerOverheads Differences: When processing times for jobs citer, ied Te inclusion of interest also allows come pent Jobs. Thus, if a job takes 3 months and “ ope eis Ts, 2 aes 2 arth and arte ake 6 or, cs of fos In inventory control, interest is an important item to be considered. Where lar stocks are kept, fone time purchase is offset by increase in interest charges. : - jSubmitting tenders for cost plus contracts, etc. interest must be taken into account. Settlement of Issue Jin Financing Pattern: A Firm having Proprietor’s "or Equity Capital only will have no interest liability, Sram working with Borowed Captal or Debentures wi | At amount of Notional In evens amy nena dailarge amount of interest. Inclusion of interest, | 0” the total capital whether itis Cage Interest: Practical difficulty arises in - (a) | Suitable assumptions may be made by the Cost 4 ‘of the amount of capital on which interest should | Accountant, using his judgement and experience. Pcalailated, (b) determination of Working Capital amounts at | Interest should be charged at a reasonable rate | ‘of time, (c) apportionment of interest to various | on the amount of capital used, and apportioned to {(d) determination of the appropriate rate of interest. | various departments equitably. gent: Inclusion of Interest on Proprietor’s Capital in | Interest is a payment on Capital while profit is for | aaa means overstating profits, since Closing | the Enterpreneurship skill of the Proprietor. at a higher figure. | Hence, they cannot be equated to one another. _| ge there are practical difficulties in including interest as part of normal cost, it is suggested that while from the regular cost sheet, cost calculations for other purposes or for decision making should nt of notional interest where the interest will be material. ‘In Cost Accounting, Depreciation is charged to the cost of production. Depreciation of assets used in the \(e9, Delivery Vans) are treated as Selling and Distribution Overheads. The reasons for including Depreciation charge in Cost Accounting are ~ |show a true and fair picture in the Balance Sheet gertain the true cost of production. “To keep the asset intact by distributing losses / diminution in its value over a number of years. “Tokeep capita intact & to make a provision out ofthe resources for replacement ofthe asset in future, Original Cost — Estimated Scrap Valve d, the formula for cakulating depreciation S “EStmareq Output during Useful Life should vary according to the volume of the outputs that cast ofan aset shouldbe evenly spread over the work done by wren the asset s employed in production and nat when it remains il, Scanned with CamScannerPeta suse tant ‘Students’ Handbook on Cost and Management Accounting ~ For CA Inter o* {@) Tetoes not recognize tne factor, but ony Usage Factor. 5, ro deren roe iy (©) THis metho is suitable when the units of production are Metical or uniform, 44.8 Notional Rent of Factory Bunding Sa aL National Ret a reasonable charge forthe use of owned premises, Included in Cost Account for 2 The inclusion for such Notion Rental Charge is to enable comparison between the cost of goods ch re cued ahr ar, Not: I case One FAO Cte te ‘means of Depreciation.) 449 Carriage and Cartage Expenses Tee Rate on the wanepritn (wars and award) of materi and gods sweated as dans : L Taenate Trwards: Carioge Expenses related to Orect Mater! shoud be incuded in the eo ‘ended Cost, those relating to Indirect Material (Stores) shoud be treated as Production Ge, 2% Carriage Outwards: Expenses related to the a OHS Ht | transportation of Finished Goods shall be treated as Distribution oy $440 Pecking Expenses a Packing Purpose i 1 Primary Packing necessary to Protect the product or for 20809 _ | convenient handling, a To faciitate the transportation of the product from the 2089 | factory tothe customer 3__Fency Packing __ | To attract customers (as an advertising expenditure) % Special Packing | Special packing at the request of a customer teen eee 4.4.11 Expenses on Removal and Re-Erection of Machines as ‘Meaning: Expenses on removal and re-erection of machinery may be incurred due to factors like change in metat ‘roduction, an addition or alteration in factory build ‘change in flow of production, etc. Production Ovetheads, if it is in the nature of revenue expense 9® Oris a capital expenciture, it may be spread over a period of tine | Small Tools with short effective life tas Plant and Machinery are Fixed Assets em, s ‘ Purposes e.g, hammer, ployed in production, there are also quashed ast 4195, des, etc. However, unlike Fixed Assets, such tos M2 ess they are treated as expense of that period and inched APOE i ine Year, the cost may be amortised over the well cote Tada ton Scanned with CamScanneruy (a) For specific existing products: Directly charged / allocated to the product. (b) For all existing products / methods: Treated a5 | Manufacturing OH and absorbed over all products. (©) For new products: Charged to the product the Venture is successful. Otherwise written off to Casting P&LA/C either in lumpsum or by amortisation. B Tt begins with the implementation of the decision to produce 2 new oF improved ‘Rew oF improved method. Treatment of Development Expenses Is the same as that of If Research is unsuccessful, that expenditure is charged off to Costing P&L. Account. Expenses be treated in the following manner in Cost Accounts. (Product Advertisement): When advertising is a routine matter and is done for a specific ‘should be charged to that product. {Company Advertisement): When advertising is a routine matter and is done for a number of ‘Company, the total expenses should be apportioned to various products based either on sales er of advertisements for each product etc. \(New Product Advertisement): Where advertising is done to Jaunch a new product to be sold Hexpenses should be carried forward and charged to the product when it is actually Sold in the market. ‘Expenditure: When substantially heavy advertisement expenditure is incurred and the benefits ‘to accrue over a business cyde of 4 to 5 years, the expenses should be treated as Deferred ‘and written off over the expected period of benefit. ‘View Is that ‘Bad Debts’ should be excluded from cost, According to this view, Bad Debts are [therefore, should not be included in the cost of a particular job or product. According to another view, Bad Debts should form part of SAD OH, especially when they arise in the ‘S0, Bad Debts should be treated in cost accounting in the same way as any other Selling and Scanned with CamScannerPach on Cost and Management Accounting ~ For CA Inter ILLUSTRATIONS by Low Maintenance Costs into Fixed 8 Variable elements by High anc Month Jan Feb fer a “Maintenance v2 pve zmo_| 220 | 1700 2400 | 4,800 Solution: ‘Note: High Point (maximum) isin April month and Low Point (minimum) is in 1. Variable Cost per hour = Diflerence in Costs _ _% 34,000 - & 27,000 (ting High and Low Points Method) ~Diference in Hours (2,400 = 1,700) hours 2 Fixed Cost = Tota! Costs less Variable Costs (estimated using January month data) = ¥ 30,000 — (2,000 hours x % 10) = % 10,000 “Of Costs into Fixed and Variable Portions: Honth Jan | Feb Mar ‘Apr (2) Machine Hours 2,000 2,200 1,700 2,400 ® ‘Total Maintenance Costs (given) Note: Any other month can alo be tay £30,000 | 32,000 27,000] 34,000 (© Fixed Costs (wn 2) £10,000 | 10,000 10,000 10,000 A@) Variable Costs (b - c) £20,000 | 222,000] 17,000} _ 24,000 Tee ewig formation, cael hans Vara OF pe un &smcun Particulars = Aprto30%Jun | ant = Comparison by Pood ot Level at Act ‘A.Company had or eam Nariale Expenses © 3.000 during he, i ‘Activity doen, MM Ana ney a et Ed ‘Solution: Pine ae ae aN = 70% 0630002100 . + Tooele eat = £2100 + Stern unt ees S200 =< 2 aa * iri erleetin terres “bey Scanned with CamScannerUsing nea Reltonship the equation fr Cost sy = m+ e where m = Variable Cot er Rou, = Fined Costs, x = Labour Hours and y = Total Semi Variable Expenses, walues of x’ and 'Y'in the equation, y = mi + cat both the levels of activity, we get, 12,000 = 150m + ¢ 12,780 = 200m + ¢ equations, we have, Variable Cost orm’ = € 15 per Labour Hour, and Fixed Cost or'c’= € 9,750. Activity Indices Repairs & Month ‘Activity indices Repairs & fisthine Hows) Cost (Machine Hours) | Maintenance Cost 400 T3125 October 70) 74,000 600 ©3750 November 800 74200 ra 84200 December 4,000 14378 eae 4375 January 900 14250 1200 24750 February 800 T4125 a 23,440 March 400 23,150 and Fixed Elements are segregated using Least Squares Method as under — Machine Hours (x) | R&M Costin & (y) * < 400 3,125 12,50,000 1,60,000 600 3,750 22,50,000 3,60,000 800 4,200 33,60,000 6,40,000, 1,000. 4,375 43,75,000 10,00,000 1,200 4,750 '57,00,000 14,40,000 500 3,440 17,20,000 2,50,000 720 4,000 28,80,000 5,18,400, 800. 4,200 33,60,000, 6,40,000 1,000 4,375, 43,75,000 900 4,250 38,25,000 800 4,125 33,00,000 400 3,150 12,60,000_ Ex = 9,120 Ey = 47,740 | _Exy = 3,76,55,000 ) a= = 760| B= ¥-3,97833| c= -31,37,917 C-(Ax6) _ 31,37,917 -(760«3,978.33) D-A 6,34,866.70 - 760° ‘= Average Monthly Total Costs (less) (Average Hours x Variable OH per hour) = B - (A x V) = 13,978.33 ~ (760 « € 2) = € 2,458.33, 2, CapacityConcepts iposheand ee 9 '# Manufacturer who claimed that his Machine could produce 36.5 tonnes in a year Holidays, breakdown, otc. were normally alowed in the factory for 65 days. Sales were expected a pep eprops tote peebp ana -aterd 10 state - (a) Rated Capacity, (b) Practical Capacity, (c) Normal Capacity, and (4) Actual Capacity, per hour = V = = 1.997 = €2 per hour (approx.) 4A9 Scanned with CamScanner300 « 30,0 tonnes: 2. Practical Capacity (for 365 ~ 65 = 300 days) = 36.5 * 365 Capacity Concepts ‘The Company has been producing and cere! ee eyo te Company was able to produce 36 ‘The Company's Overheads fr this year amounted to €6,75,000 Company has 15 machines ingle shit only, i. 8 hours per day. During aye, iegereention Bee iscaste ate’ preventive maintenance and repairs work =n at 250 hours. Calculate - 4. Maximum Capety, Practical Capacity, Normal Capac, Actual Capacty and Idle Capacity in terms of hours an un 2. Hourly Rate of Recovery of Overhead for Maximum, Practical, Normal and Actual Capacities. 3. Cost of ile Capacity. ‘Solution: Capacity Computation M/c Hrs: Units OH Rate 3. Maximum Capacity | 365 days x 8 hours x 15 machines 43,800 | 43,800x10= 4,38,000 rae 2 Practical Capacty | = M&X Capacity less Unavoidabe Ide Time |” 35 499 | 35,000x10= 3,50,000 = 43,800 ~ (65 x 8 x 15) + (250 x 4 atrs)] 3,30,000 3.tormal Capscty | Based on Sales Expectancy = soe 33,000 Gren = 330000 tas | = —316,000 = 4. Actual Copacty | Based on Actual Producten = <24800 | 34.609 Gen = 316000] tax 5. Idle Capacity menor oes Ca] Capek, 1,400] 1,400x10= 14,000 = 33,000 - 31,600 ‘Note: Rate per hour is determined by dividing ® 6,75,000 by the Machine Hours denoted in Column 3. ‘Rate based on Normal Capacity is generally used for Overhead Absorption. ‘Cost of Idle Capacity = 1,400 hours x & 20.45 ph (OH Rate based on Normal Capacity) = € 28,630. "3. Reapportionment of Service Dept Exps under 3 Methods 16 Apportionnent and Direct Re-dsribution — forte Doo eri be a Thar Chap ut 10 Machine hours. Ma 4 Machine hours At 14 Direct Labour hours tho yoar are Particulars Mi wa ui z taisad_| 16.220 z 16200 |e 4200 The. re (continued) pee 30,600 “Insurance of Machinery © 7,200 {Bee Notes) 30 Scanned with CamScannerds to be absorbed by two products, X and Y, [Building = 1/3" of 8 3,240 = 1,080 is charged to M1. Balance 2/3%, je. € 2,160 is apportioned to the: gents, in the ratio of Floor Area, as under ~ M2 AL ‘Stores Engg. | General | Total 6,000 8,000 2,000 2,500 1,500 | 20,000 648 2864 2216 270 zie] 22.160) {0 all Departments (except General Services Department) as. ML M2 AL ‘Stores Engg. | Total | 5,000 6,000 8,000 2,000 2,500 3500 | 2607] 23236[ _t4ais[ 1,079] tua] tizers | ‘Services Department (Direct Charge) = 8% of € 6,000 = € 480. 3. of ML under — 2,860 Scanned with CamScanner9's Students’ Handbook on Cost and ecounting ~ For CA Inter Basis Mi M2 ‘ai | Stores | Engg. | General ‘of Serv. Dept. Exps Stores (in Consumables) (126:182:42)|__§286| 7591 | 1,752 | (04.598) Ni Ni 7 ‘Engg Serv.(on m/c hrs) (ML, M2 4:5)_ 7,983, 9,979 wil ‘wil | (17,962) | Nil = Gen. Services (on DLH) (20:15:30) 4A72 3,129 | _ 6,257. Nil il | (13,558) i Total GH ot Producten Depermens | 103,248 | 01,727 | 40,200 | i Ni Nil) 2455 Recovery Base (i.e. Cost Driver) m/chours |_m/c hours DL Quantity of Recovery: 40,000 '50,000 | 3,00,000 a michous | mychous | _DU# ‘2.58 per | 2.03 per 0.13 per oe? mchr mc he DLH | 4. Computation of OH Cost ‘the Products Product X Product) ML Jo Machine hours x € 2.58 = & 25.80 $ Machine hours x © 2.58 = 15.4¢ w “A Machine hours x € 2.03 = © 8.12 14 Machine hours * % 2.03 = € 28.42 AL 14 Direct Labour hours x €0.13= € 1.82 118 Direct Labour hours x € 0.13 = % 24 Total OH 135.74 1.46.24 8, -Apportionment and) ani vector wy ng Se Erne, ocig angina Seven Depart inne PA Fa ae es rch works forthe Production Departments inthe ratio of 3:21 rotting nfmatn, wih preset om airy le vee bla tthe Yu oS Costs(in®) Extrusion | __ Machi Finishing | Production Services | _ Tota 58,000 72,000 90,000 - | 2anon 40,000 29,000 15,000 -| ut 15,000 24,000 8,000 58,000 | 1,020 oot nme 1,80,000 60,00 500 | -| ma 2,900 | 40s 1,400 400 es 70,000 | 4,000 as at sa cae Asp = # 2) Rates Departments. following data are availabe forthe actual results ofthe Extrusion Department forthe period. | Overheads =& 2,11,820, Actual Labour Hours = 7,380, Actual Machine Hours = 16,250. the under | over recovery of overheads forthe Extrusion Department Prodn Serv.| TH! 5,000 | 10208 14,700| 9400 7000 | 2200 9,000) 1 12,500 8,400 1,09,600 Scanned with CamScannerExtrusion $4,800! 36,533| 18,267 | __(1,09,600) = |_2,06,380 | 2,13,733 | 75,917 e Machine | Machine | — Labour Hour Rate | Hour Rate | Hour Rate 15,500 |" 20,000 | 15,000 13.31) 10.69) 75.06 ‘are dominant (greater thay these yn) Labour Hours in Extrusion and Machining Departments. Hence, ts. However, Labour Hours are greater in Finishing Department, lepartment,. Absorbed OH = 16,250 Machine Hours x 13.31 = € 2,16,288 Less: Actual Overheads - N06, RTP departments: Machining and Finishing. There are three service departments: Human resource Design. The budgeted cost in these service departments ae a follows ~ {HR (in 8) Design (in ®) ] 4,00,000 4,00,000 6,00,000 4,60,000 700,000 ‘output during the year just completed is as follows — Output (in hours of service) Providers of Service HR Maintenance Design 500 = _ 500 500 2 4,000 3500 4.500 5,000 4,000 1,500 40,000 000 5,000 ‘Method to re-apportion RST Lid’s Service Department Costs to its Production Departments. Proper sequence to use in re-apportioning the Firm's Service Department Costs by Step-down Method. 'Method to re-apportion the Firm's Service Department Costs to Production Departments. 1. Apportionment of OH under Direct Method Basis Machining Finishing | Total 2,22,222 277778 | 5,00,000, 2,14,667 2,45,333 4,60,000 5,25,000 1,75,000 7,00,000 9,61,889 6,98,111 16,60,000 under Step Method: (1) HR, (2) Maintenance, (3) Design. (in order of hours of service) Scanned with CamScannerPedhla’s Students’ Handbook on Cost and Management Accounting - Fr CA Inter —_ operat ieleag op apeere er eee RTT mee Depart o) £0, and (i) Factory Office, Budgeted Cost and relevant cost drivers arw ‘Snow Mobile Engine Boat Engine | Factory Office © 6,00,000 |____©17,00,000 £3,00,000 Cost Drivers are as under ~ = Department Factory Office Department |___ Maintenance Departmen ‘Cost Driver ‘Number of Employees Number of Work Orders ‘Snow Mobile Engine Department 1,080 Employees 570 Orders: Boat Engine Department 270 Employees 190 Orders, ‘Factory Office Department - 40 Orders Maintenance Department 150 Employees Total 4,500 Employees £800 Orders 4. Compute the Cost Driver Allocation percentage and then use these percentages to allocate the Service Department Cag bby using Direct Method. 2 ‘Compute the Cost river Allocation percentage and then use these percentages to allocate the Service Department agg bby using Non-Reciprocal Method / Step Method. “Solution: _1. Apportionment of Service Department OH using Direct Method I Department ‘Snow Mobile Engine | Boat Engine ‘Overhead Cost as given 6,00,000 | 17,00,000 ‘Add: Factory Office Costs apportioned to Prodn Departments in ratio of no. of employees (1,080 : 270) i. (80%, 20%) 2,40,000 60,000} 3,909 ‘Maint. Dept. Costs apportioned to Prodn Departments in rato of no.of work orders (570:190) ie. (75%, 25%) 1,80,000 60,000 | 2.4000 Total OH 10,20,000 | 18,20,000 | 28,40,000 2. Apportionment of Service Department OH using Step Method (taking Factory Office Factory Maint— Snow Boat coainet Ofrice | enance | Mobile| Engine) | Cost as given 3,00,000 2,40,000 6,00,000 17,00,000 | 28,40,000 ‘Office Costs apportioned based on no. of (150:1080:270) Le. (10%,72%,18%) | (3,00,000) | 30,000 | _2,16,000 54,000 “Maintenance Dept. Costs apportioned based on no. ‘work orders (570 : 190) Le. (75%, 25%) —| (2,70,000) | ___2,02,500 67,500 Total OW Nil Nil | 10,18,500 | 18,21,500 ‘Step Ladder Method NAST Lid has Gensets and produces its own power. Data for Power Costs are as follows — Production Department Service Department A B x Y 4 =. 10,000 20,000 =| (12,000 000 13,000 7,000 sg the mont, cote fr generating power amounted to € 0,00 ofthis € 2,50 is Fixed Cost, Service Dept series Daas Banda ian servant A Labour Departments A and B are 1,680 h eee and are jours and 2,175 hours respectively, 1 In the question, It speciid that X serves Y, A and 8. But, Y ly A and B, There (athod (1. Step Ladder Method) is adopted for re-eppostionment. a 4.24 Scanned with CamScanner1,000 | 2,500 "3,600 9,300 600 | Ni 150 Nil “4350 | 9,300 2175 | = you the following information to compute the production hour rate of recovery of Overheads in three ‘A,BandC. Production Departments Service Departments | A B c Pp a} Total 2,400 4,800 2,000 2,000 800 | 12,000 | 800 2,000 500 400 300 | 4,000 1,200 2,000 1,000 800 1,000 6,000 2,500 1,600 200 500 200 5,000 910 2143 a7 300 300 4,500 7,810 12,543 4547 4,000 2,600 31,500 | P 30 40 2 - 10 the OH recovery rates ‘Note: Under 20 50 20 ‘of the three departments. (Use Repeated Redistribution Method). Re-Distribution Method, Service Department Costs are continuously re-apportioned ‘Departments in the given ratio, till the balance OH in each Service Dept. becomes NIL or a very negligible amount. Re-distribution Method) Particulars A 8 c Q| Total) 7,810 | 12,543] 4,547] 4,000] 2,600 | 31,500 1,200| 1,600} 800 (4,000)| 400 Nil 300) 600] 1,500 600 | (3,000) Nil 180 (600) Scanned with CamScanner‘Statement showing ‘of Service Departments 1h) acne Hour ats of te Prsucton Departments‘, and Special Points : and Direct Wages of Service Departments X and Y, are in effect, Indirect Costs. Th Deemed OM ino output in a Service Department and hence, no Direct Cost in 2 Service Deparent: Hee ty and are added to the Overheads of the respective Service Departments, «power Cost Apportionment: Power Cost may be apportioned inthe ratio of HP rating ont, # oring Hows eo oo argiven nthe queston. But f Machine Hours ae alven, is better to apportion the Power Cosine ‘combined ratio of HP rating x Machine Hours, derived as under. 80,000 80,000 15,000 25,000 [HP x Machine Hours 50,000 of OH A B c 1,000 500 1,000 500 800 800 200 400 200 1,000 | 2,000} 4,000 2,700 | 3,700 6,000 ‘e-apportionment "Re-epportionment of Serv.Dept. Exps (WN 2 below) X(45:15:30:-:10) 2,270 756| 1,513 ¥(60:35:~5:-) 3,512 | _2,049 Nil. ‘Total OH (after reapportionment) | 8,482 | 6,505| 7,513 ‘Machine Hours 1,000 | __2,000 | 4,000 OH Rate (int per Machine Hour) | 8.48 | 3.25 | 1.88 Equations are framed and solved as under ~ X= 4,750 + SY. $0, x=4750+ 5 | les Beeeegele Y=5,350+10%X. So, Ya 5250+ FX. Of X in Equation 2, we have, Scanned with CamScannertre Production Deprinent Sa so tervice Dope he following data are \ T tr Seer Drm an 8: z thre Company mat ams 7,500 18,750 aI peeeers Py Pi Ps y, Machines used S ban am e) 3,00,000 4,00,000 5,00,000 *) 2,000 2,500 3,000 Points 10 18 2 pect 6,225 4,050 4,100 be erie Devarinonts Sondre sportoned teow Ps & & Ss 5 & 40% - 10% 40% 20% 30% 10% - ampute Overhead Absorption Rate per production hour of each Production Department. the Total Cost of Product X which is processed for manufacture in Department P;, Pz and Ps for 5 hours, 3 hours respectively, given that its Direct Material Cost is € 625 and Direct Labour Cost is ® 375. Particulars and Basis a S: S;| Total [Rates (on Floor Space) (20 : 12,500 | 15,625| 18,750 12,500 3,125 62,500 [Lighting (on Light Points) (10 1,250} 1,875) 2,500| 1,250| 625 7,500 (on Dir. Wages) (3750:2500:3750:1875:625) | 5,625] 3,750| 5,625] 2,813 937) 18,750 10,000 | 5,000| 8,333| 1,667 -| 25,000 of M/c (on M/c Cost ) (300:400:500:25:25) 12,000 | 16,000 | 20,000 1,000 1,000 50,000 -of Mic (on M/c Cost) (300: 400; 50:25:25) 4,800 6,400 8,000 400 400 20,000 | Wages of Service Depts (at Actuals) 2 = -|_ 18,750| _6,250| _25,000 | Total OH before re-apportionment 46,175 | 48,650 | 63,208 | 38,380 12,337 | 2,08,750 of Serv.Dept. Exps (WN 2 below) a S: 8,003 | 12,004 | 16,006 | (40,014) | 4,001 Nil S 6535 | 3,268| 4,901| _ 1,634 | (16,338) Nil [OH (after re-apportionment) (60,713 | 63,922 | 84,115 | Nil] Nil | 2,08,750 Hours 6225 | 4,050 4,100 Production Hour 9.75 | 15.78 | 20.52 ous Equations are framed and solved as under ~ = 36,380 + 10% S, $0, Sy = 38,380 + 55 Sr noo Baquation 2 +10% S) 50,5, 12,387 + Fy Stow oo Equation 2 5,= 38,30 + (12397 + 758) 99 * 50) Si- yen 1207 amr 40,014, _substuting n Ean 2, we have S 9:1.23,374 + et RS = 16,338. ET 000,85 | 000.04 tex “= “aa Scanned with CamScanner_Padthuka’s Students’ Handbook on Cost and Management Accounting ~ For CA Inter 23 3. Computation of Total Cost of Product X Particulars Direct Material (given) oii Direct Labour (given) ate - hours «£9.75 48.75 hours x €15.78 = 47.34 hhours x €20.52__ = 82.08 ws i 16. OH Reapportionment - Simultaneous Equations ‘The following account balances and distribution of Indirect Charges are taken from the accounts of a Manufacturing Con, forthe year ending on 31% March : (in) Production Departments Service = soph aks z —— Indirect Mater 725,000 20,000 30,000 45,000 25,000 Indirect Labour 2;60,000 45,000 50,000} 70,000 60,000 ‘Superintendent's Salary 96,000 - =| 96,000 ° 3,000 1,500 120 30 the Service Departments are to be distributed to other Departments by the following percentages: x Y Zz A F x 20 ~ 40 25 10 2 Fp 7.20000 + 2. on spincaton, 8 = 950,000 + 721000 og ® Be iiss 80, 192 g = 10,22,000. Hence, 8 = 12,000 795 = 102 200 ‘the Value of B in Equation 1, Ka! 7,20,000 + (5 x 10,27,136) = 7,71,357. 3. Apportionment of Variable Expenses Let Varate Expenses of Legal and Person Deportments be €® 8 €Yrespectvey. Hence, he simultaneous es — : ‘X=4,00,000+ sey. So, X= 400,000 + J. Equation 1 Y= 1200000 20%. So, Y= 12,00,000+ 2x = Equationt 2 ‘Sulbstituting the value of X in Equation 2, we have, : = + J (4na000+ Fy. On simpication, ¥ = 120,000 + 80,000 + a5 ¥ 1 y- 1 y= 1280000 00" 99 100 23. y = 12,80,000 Hence, Y=12,80,000 x = = 12,9; So, Sip Y= 12,80 % 12,929, Sttostiuting the value of¥ in Equation 1, x = 4,00,000 + (4. x 12,92,929) = 4, 64,646. 4. Secondary Distribution Summary McD PED Legal _ Personnel 11,20,000 | 21,50,000 Fined Expenses (60%, 30%, 10%) 462,814 | 2,31,407 | _(7,71,357) 77,136 iWariable Expenses (20%, 60%, 20%) 92,929 | 2,78,788 | (4,64,646) 92,929) Fined Expenses (45%, 50%, 5%) 462,211 | 5,13,568 51,357 | (10,27,136) Variable Exps (66.5%, 26.5%, 5%) 859,798 | _3,68,485 64,646 {128289} Total OH 18,77,752 | 13,92,248 Nil ised Sipmrons tes eportcned bases or icetes Copacty Hat, tnd VaraDc Epes be eat ‘on Actual Usage Ratio, departments. Two sales departments are Corpor — having 4 are rate Sales & Consumer Support Deparment we Aaninisav (WR. & Accounting) Infomation syste. Each Sales Department conde following data relate to October. weston Processing time used _| Cost incurred for Oct 1667,750 © 633475 ni 2,400 minutes 2,000 minutes 400 minutes » “ aa Sa oa naa acta 1,400 minutes £ Scanned with CamScanner= 23.08% to Information Systems. a (2528571) “Rkeretive assumptions in ranking exist. For 3 time, hence, it may be ranked first. 3. Alternative Ranking Priority for Step Allocation Method ‘Allocation Base | _% to other Dept (from WN 2) Cost Effect | No. of Employees 3.08% to Info Systems. 23.08% x 94,510 = 21,810 Systems Processing Time {8.33% to Administrative Support 8.33%x 3,04,720 = 25,383 | Tras a acrace rendered by Information Systems Department is higher, it could alternatively be ranked fst, for he of Step Allocation Method. ‘4, Reciprocal Allocation method Y be the Total Costs of Administrative Support and Information Systems 1 equations ae framed as under: X= 9510+ 8.39%. $0, X= 94,510 + 0,0833Y .. Y= 304,720 + 23,0890. 50, ¥ = 304,720 + 0.2308 X 9 the value of X in Equation 2, we have, Y= 304,720 + 0.2308 (94,510 + 0.08337) Y= 3,04,720 + 21,813 + 0.0192 ¥ ¥-00192Y= 3,26,533 So, 0,9808 Y » 3,26,533 So, we get, ¥ = 3,32,925 9 the value of Y in Equation 1, we have X = 94/510 + 0.0833 (332,925) = ,22,243 respectively. Based on the above, the Scanned with CamScanner¥ OH by jobs, showing the rates foreach Department under the cost results for Job 27 under each of the methods referred to. ‘Scanned with CamScannersos incurred = € 6,000, Direct Labour Costs = 2,500, = rg ncured on two typical jobs: ri Particulars ‘Job 847A so uaB e 035 135 ‘al 4 per hour 4.50 per hour He Shours an requested to compute the cost of each of these two Re vec ioen as lose cea ne i 1. Computation of Recovery Rates Percentage of Direct Labour 200% of Direct Labour. =e I. (OH Recovery Rate = 10 per DUH 2. Statement of Job Costs under the alternative methods Job 847 A Job 848 B | 1% of Labour [Labour Hr Rate % of Labour | __Labour Hr Rate 35.00 35.00 35.00 35.00 6x %45 = 27.00 | 6x %45 = 27.00 200%x27=54.00 | _6 x 10 = 60.00 116.00 122.00 | abour at € 4 & 4.5 per hour Bx t4= 32.00 (200% or @ 10 per hr) 200%x32=64.00 Total Cost 131.00 1 Since Wage Rates per hour and time requirement are different for these jobs, Percentage of Direct Labour le than Labour Hour Rate, since it considers the effect of both time and wage rates. Scanned with CamScanner‘Padhuika's Students’ Handbook on Cost and Management Accounting ~ For CA Inter = BS Machine HourRate hone en = TR Machine Is 10 years. At the end of fy ‘21. Simple Machine HourRate ‘A Machine costing © 10 Lakhs \" was purchased on 1* April. The expected Iife of the oe ote period its scrap value is likely to be € 10,000. The Total Cost ofall Machines Including new information is given as follows ~ @ Working Hours ofthe Machine for the year was 4200 including 200 nonproductive hours i) Repairs and Maintenance fr the new Machine during the year was € 5,000, «i, Insurance Premium was paid forall the Machine € 9,000. ™ Now Maching consumes ® unt of lecrcy per hou the rate per unit being € 2.75 w) Mew Machin concrete are he caper Rant fe deparnert ie € 2400 Mn {vi) Depreciation is charged on Straight Line Basis. ‘Compute the Machine Hour Rate for the new Machine, ‘Solution: 4. statement of OH Costs relating to the New Machine Particulars Computation 7 70,00,000 = 10,000 Depreciation ia 90m Repairs and Maintenance Given S000 «,000 x 30,00,000 al Insurance 3,000 * 550,000 009 4,000 hrs x 8 units x © 3.75 P.u. sxaaal (assumed no Electricity during nonproductive tine) % 2,400 pm. x 12 months x 2 Total OH 27 Total OH 7227800 _¢56.97 ph. eee ei ee aos Rate = recive Machine Hours (4,200 ~200) hrs Machine used (Purchased in ‘June 2008) was € 10000 ts estimated if is 10 years, te etn in a gwen inept ea (0 woes of hous 2200RS is estimated to take up 200 hours. atimated at 100 hours is regarded as productive tine okt ‘unit, No current ise ‘to be ignored). ‘Electricity used by the machine during production is 16 units per hour at cost of a 9 paisa per ‘during maintenance or setting up. _Thatchine requires chemical olin which le roplaced athe ed of wack ata cost of 20 ech ime Their combined We? ‘The estimated cost of maintenance per year is @ 1,200. “Two Atendants contol the operation of the Machine together with fve other identical Machines. ‘Wages, Insurance and the Employers Contribution to Holiday Pay amount € 120. “Depaera and General Works Od allocated otis Machine forthe crn yer amount 1 20% to calculate the Machine Hour Rate of operating the machine, (¥ 10,000 - & 1,000) + 10 years (2200 ~ 300 ~ 100) x 16 units x % 0.09 per unit 50 weeks x % 20 (Given) Scanned with CamScanner= (€120 2 50 weeks) - 1,000 i" 6 machines tal & General Works OH allocated Given) sees BD = = Total Machine A 720,000 7,500 : 10,000 4,000 40,000 sumable Stores. 8,000 3,000 a 8,000 indirect L 20,000 vi Expenses 20,000 An ‘on Capital Outlay 50,000 20,000 20,000 ‘10,000 | “Monthly Charge for Rent and Rates 10,000 | dry of Foreman (per month) 2,000 | ary of Attendant (per month) 5,000 ‘Note:The Foreman and the Attendant control all the three machines and spend equal time on them. following additional information is also available: Particulars ‘Machine A Machine B | Machine C | ‘Hours 400,000 4,50,000 450,000 3 2 3 40,000 40,000 20,000 12 holidays besides Sundays in the year, of which two were on Saturdays. The Manufacturing Department works 8 ‘but Saturdays are half days. All Machines work at 90% capacity throughout the year and 2% is reasonable for pre-determined Machine Hour Rates for the above Machines, after taking into consideration the following factors ~ increase of 15% in the Price of Spare Parts, Anvincrease of 25% in the Consumption of Spare Parts for Machine 'B’ & ‘C’ only. increase in Wage Rates. Result t (365 ~ 52 = 12) days = 301 days (52 ~ 2) days = 50 Saturdays and 251 week days (50 days x 4 hs) + (251 days x 8 hs) = 2,208 hrs (2208 hrs x 90%) = 1,987.2 hrs (1,987.2 x 2%) = (40 hrs) 1947.2 hrs Scanned with CamScanner3:2:3) ‘Consumable Stores (given) Insurance of Machinery (In ratio of Depreciation) Indirect Labour (20% increase in wage rates) (20,000 + 20% = % 24,000 in ratio of DLH 2 : 3 3) Maintenance Expenses (in 4 : 4 : 2) : Annual Interest on Capital Outlay (Note) 20/000 Rent & Rates (¥ 10,000 x 12 mths = € 1,20,000 in 4: 4: 2) 48,000 48,000 ‘Salary of Foreman (¥ 20,000x 12) + 20% increase in Wage Rates = ‘96,000 96,000 % 2,88,000 (in 1: 1:1) ee ‘Salary of Attendant (® 5,000 x 12) + 20% increase in Wage Rates 24,000 24,000 = % 72,000 (in 1: 1: 1) Total _2,35,100 | 233,750 Machine Hours im _| 1947.2 hrs 1947.2 hrs Rate per Machine Hour (12 = 13) | 120.74 % 120.04 Note: It is assumed that interest is an attributable OH, for the machines 998 given above. Alternatively, it may be gnasiy computation of Machine Hour Rate. 24. Comprehensive Machine Hour Rate " ae Calculate Machine Hour Rate for recovery of Overheads for a machine from the following information: Cost of Machine is ¥ 25,00,000 and estimated Annual working hours are 3, ‘Setting — up time of the Machine is 156 ho Mahi, Caer erie Department is € 2.500 per month, having 48 points in all, out of which only & points are used B® Machine. Other Indirect Expenses are chargeable to the Machine are & 6.500 per ment "Pio" OMY = 1. Computation of Machine Hour Rate Particulars Computation: i ‘Depreciation | (@ 25,00,000 - 8 1,00,000) + 10 years zea Repairs and Maintenance %3,50,000 + 10 years 30 Power (3,000 ~ 400 ~ 156) % 15 units ph 8 5 per unit 1838 ‘Chemical Cost Given 38 Operator's Wages © 4,000 12 months x 1/3" 36a Insurance 2% on ® 25,00,000 a Lighting Charges % 2,500 * 12 months 8/48 5a Other Expenses _| £6,500 * 12 months ‘Total OH Effective Production Hours pa, = 3,000 ~ 400 | Machine Hour Rate = ——__ Total OH 26,17, 2 = Effective Machine Hours = oe = & 237.38 per machine hour: Note: It avn that Set-Up Tne i rented as par of the total time spent on each job, Le Setup Time + Soares Hees, OH wil be absorbed at 4.36 Scanned with CamScannerrequired for operating the Machine € 2,600 per month, to the Machine ® 18,000 per month. Premium (per annum) 2% of the cost of Machine |= 02 (looking after three other Machines also) d that Maintenance and Set up are included in the Total Working Hours of 3,000 Hours. ce Hours of 400 Hours is Per Annum. ce and Set up time is nonproductive, i.e. not absorbed for production purposes. “Cost is incurred only for Effective Hours, net of Maintenance and Set up. Hours p.a. (for absorption purposes) = 3,000 - 8% thereon ~ 400 = 2,360 hours. 8% Set Up Time can be taken on the hours net of maintenance, i.e. 3,000 less 400 = 2,600 $%.- 3,_ Statement of OH per annum ‘Computation 3,000 (€ 25,00,000 - 8 1,25,000) x 3595 2,85,000 | Given 26,000 2/360 hours * 25 units * 5 per unit 2,95,000 72,600 p.m. x 12 months 33.200 | 18,000 p.m x 12 months 216,000 50,000 25,00,000 x 2% (€ 38,500 pam » 12 montns ©? persons) « 3 1p value of 5% at the end of Its effective lite of 19 toa bts ett tat 89 Dour wtb st for nonsaraad cAldicass 8 cise Scanned with CamScanner“Padhuka’s Students’ Handbook on Cost and Management Accounting — For CA Inter ‘Quarterly insurance Premium forthe machine ~ | ©2000 Repairs and Maintenance - average - for a machine © 2,500 per month Shop Supervisor's Salary rae cra Powar = € 250 per power ni 2units a Power Consumption of machine per hour Leena pr son ——_ss ss | Other Factory Overheads attributable to the shop ‘Compute the Comprehensive Machine Hour Rate on the is of the ‘© There are 4 identical machines inthe Shop, * ‘The Supervisor is expected to devote 1/5" of his time towards this Shop. Total Hours Less Repairs and Maintenance and Shut down hours 400 ~ 150 ~ 750 = 1,500 hours per annum, {following additional information Solution: 1. Number of Productive Hrs 2. Statement of Overheads per annum Particulars I ‘Computation ‘Operators’ Wages % 90,000 p.a + 2 machines Rent & Rates % 30,000 + 4 machines General Lighting (© 2,500 per month x 12 months) + 4 machines Insurance Premium % 2,000 x 4 quarters Repairs & Maintenance % 2,500 x12 months 1 ‘Shop Supervisor's Salary 5000 12 months = (€ 60,000 x =) 4 machines, Power | [1,500 hours x 2 power units x % 2.50] Other Overheads 40,000 = 4 machines 3,00,000 « 95% ieee 19 years Total Overheads Total OH 3 Machine Hour Rate = ~FFactive Machine Hours 27. Comprehensive Machine Hour Rate ‘A Machine Shop Cost Centre contains three machines of equal capacities. Three operators are employed on each mach. ‘payable ® 20 per hour each. The Factory works for forty-eight hours in a week which includes 4 hours set-up time. The wats jointly done by Operators. The Operators are paid fully for the forty-eight hours. In additions they are paid a bonus of 105 productive time. Costs are reported for this Company on the basis of thirteen four-weekly period. ‘The Company for the purpose of computing machine hour rate includes the Direct Wages of the Operator and also recoups Factory Overheads allocated to the machines. The following details of Factory OH applicable to the Cost Centre are avalabt= ‘* Depreciation 10% per annum on original cost of the machine. Original Cost of each machine is & 52,000. * Maintenance and Repairs per week per machine is % 60. '* Consumable Stores per week per machine are & 75. ‘+ Power 20 units per hour per machine atthe rate of 80 paise per unit. ‘+ Apportionment to the Cost Centre: Rent p.a.€ §,400, Heat and Light p.a. & 9,720, and Foreman’s Salary p.a.¢ 12.960 _ Caleulate-(e) Cos of running one machine fora four-week period, an (b) Machine Hour Rate, ‘ 1. Effective Working Hours (excluding Set-Up Time) = (48 ~ 4) x 4 Weeks = 176 hours for 4-week PS = ; 2. Statement of OH for 4~weekly period Particulars | Computation ‘Operator's Wages 3 Operators x 48 hours per week x 4 weeks x © 20 per Hour | Operator's Bonus 10% of Prod.Time Wages = 1 Operators» 176 be.» % 20 fh) xo ‘Depreciation €'52,000 x 10% p.a. x 4/52 kk & Maintenance 60 per week x 4 weeks Cc 4.38 Scanned with CamScannerC75 par waek ¥ 4 weeks 5,400 x 4/52 x 1/3" (16. 3 machines) © 9,720 x 4/52 1/31 (Le. 3 machines) © 12,960 x 4/52 x 1/3 (i.e. 3 machines) a 0 units x 48 hours per week * 4 weeks » 0,80 per unit 2072 ‘Total OH for 4—week period all Total OH 217,307 eeurtatee ON SOT 90. 7 Effective Machine Hours 376 hous sane ‘Time IS not considered In calculation of Effective Machine Hours. However, It Is assumed that Power 's ‘during Set-up Time also, Alternative assumptions and treatments exist. 200 hours, © 125 per day (of 8 hours) 275 per day (of 8 hours) 215,000 3,000 ‘8 Lighting for the month = 7,500 ‘Maintenance (Machine) including Consumable Stores per month 717,500 | of Piant & Building (apportioned) for the year 216,250 Expenses per annum 227,500 ‘ate paid a fixed Deamess Allowance (DA) of & 1,575 per month. Production Bonus payable to workers in terms of [praward is equal to 33.33% of Basic Wages and DA. Add 10% of the Basic Wages and DA against Leave Wages and Holidays _withpay to arrive ata comprehensive labour-wage for debit to production. _ Seetion: 11. Effective Machine Operating Hours = 200 hours x 75% = 150 hours per month. 2. Statement of Machine Hour Rate Particulars (% 3,24,000 x 10%) + 12 months Given Given Given Given © 16,250 + 12 months 27,500 + 12. months _ 3,125 = 1,875 Scanned with CamScanner_Padhuika's Students’ Handbook on Cost and Management Accounting = For CA Inter 1. OH Expenses: Factory Rent € 96,000 (Floor Area = 80,000 sq, feet). Heat and Gas € 45,000 and Supervision ® 129,99, 2 ‘Wages ofthe Operator are © 48 per day of 8 hours. He attends fo one machine when its under Set-UP and ta mae ‘while under operation. 3% {In respect of machine C (one of the above machines) the following particulars are furnished ~ (2) Cost of Machine € 45,000, Life of Machine - 10 years and scrap value at the ond of its ite € 6,000 (o) “Annual Expenses on Special Equipment attached to the machine are estimated at € 3,000. {€)_ Estimated Operation Time of the Machine is 3,600 hours while set up time is 400 hours per annum, (6) The machine occupies 5,000 sq. of floor area. {e) Power Costs € 8 per hour while the machine is in operation. Find out the Comprehensive Machine Hour Rate. time. Power and Solution: Note: There are 2 time-components, viz. Set-up time and Operation Operator's wages diferent for these two components. So, OH are classified as ~ (a) General OH, i.e. those relatable to Total Time, ag Special OH, ie. those relatable to only a portion of time or those which differ for two different time components, ay per hour is found out frst for General OH. Thereafter, special items are considered on a per-hour basis. _4. Computation of General Overhead Rate per hour Particulars 5,000 i Rent (Based on Area) %:96,000% 5 o0g | 245,000 Heat and Gas(Based on Number of Machines) 15 Machines Sal 21,20,000 ‘Supervision (Based on Number of Machines) 15 Machines son | = 45,000 -% 5,000 | | Depreciation (Direct Allocation of Cost) 10 years ho rect Allocation of Cost) Given | 3000 Total General Overheads (all fixed in nature) | 24000 Since these expenses relate to the total time, i.e. whether or not the machine is under operation, the relevant hous ie which these are incurred are 3,600 + 400 = 4,000 machine hours. 2 24,000 * Hence General Overhead Rat = _=%6 r. He er UT = sus 7 6 Per hour 2. Computation of Comprehensive Machine Hour Rates per hour —Component of Time Set up _Operatioe ‘General Overhead per hour as above 6.00 a ‘add: Power Cost per hour (only during operation) . at (@6 + 1 machine) 6.00 | _(%.6 + 2 machines) 38 12.00 ait Note; In the above case, OH will be absorbed to various jobs at the specific rates, i.e, (Set-up Time x © 120N* (Operation Time x ? 17 ph). Prrarer ALE Lit, Machine Hour Raa vorea ot -week period, wie® EE ‘ut atthe beginning ofthe year on the basis of guiraon to 3 calendar months, The folowing estes or operating avoachine are proved te you, 41, Total available working hours per woek: 48 hours 2. Maintenance Time included in above: 2 hours 4, Setting-up Time included in above: 2 hours eee pe ponts stom : er month: © 15,000 (Common for 6 WDVof machine 1ptDal dence a eel = 16,000 = 30,000 uct se Scanned with CamScannerOverheads at the rate of 10 units per hou spat rotuctve tine, ws pons 2 a et erage or route Nour of are permanent, hour rate. Repairs & Maintenance and Consumable Stores are variable. You are required t0 1, Computation of Prodi e jon of Productive Machine Hou "Operating Hrs = (48~2~ 2) « 13 weeks 571 Operating Hours ours 2» 13 weeks 26 et Up How — Ip = Hours [598 Productive Machine Hours 2. Statement of Overheads for the 13-week period at ©15,000 x 3 months «1/3 machines 180,000 «10% 13/52 weeks ¥ 16,000 13/52 weeks % 30,000 x 13/52 weeks Given (excluding Power) «| S800) 55,500 + 598 Hrs = % 92.81 per hour. 3. Computation of Comprehensive Machine Hour Rates r ‘Component of Time ‘Set up | ‘Operation “General Overhead per hour as above 92.81 2.81 hour = 10 units x 2.50 per unit. = 25.00 Total Machine Hour Rate 92.81 117.81 JHonever, where Set-up Time cannot be separately charged to Jobs, the Machine Hour Rate should be based on ing Hours only. In such case, Machine Hour Rate will be as under — ~ Total OH as above: 755,500 Power Cost = 10 units x¥ 2.50 per unit x 572 hours £14,300 69,800 | 572 hours, | % 122.03 per operating hour Rent and Rates can be =m alternative calculation procedure, Operators’ Wages, Supervisors’ Salary, Depreciation, 1598 productive hours, while Consumables, Repairs ‘& Maintenance, and Power cost can be related to S72 hours. ‘considered Unproductive vs Productive c M05 Treas prcrosed and instaled a now machine of€ 1270000 Ks fleet ol? wiaioa Teekay The new ‘an estimate life of 12 years and Ie expected to realise € 70,000 as scrap at the end of Its working He, Other This includes 300 hours for Plant Maintenance hours are 2,592 based on 8 hours per day for 324 days; 000 p.a. ne ea oplaced a the end of every week (6 days ina wee) ata cost to € 2,420 per week plus 15% hour ata cost of € 3 par unit. No current is taken during During the current ‘machine during production Is 16 units per 7 cvetend allocated 10 he operation dr ast our as S200, potty 10% ofthis amount mes npn, 0) eng mime rosie t aad Scanned with CamScanner‘Computation (© 12,70,000 = ® 70,000) + 12 years Given (324 + 6) = 54 weeks « 400 ‘8 machines (2,592 = 392) * 16 units x © 3 per unit + 8 machines a of Machine Hour Rate Unproductive 2/592 - 392 = 2,200 ‘machine hours 2,592 — 300 = 2,292 machine hou; 334.216 _ 2 334,216 Frits SL SRPer neu) 277 Hous ~ MEAP ‘Note: Alternative assumptions and treatments for Computation of M/c Hour Rate exist nay 208 hours in a month. It includes Maintenance Time of 8 hours and ase 100 ts useful life is 10 years at the end of which the scrap value wa 32. Setup and Running Time Machine Rate In a Factory, @ Machine is considered to work for ‘Up Time of 20 hours. The cost of the Machine is € 5,00, be € 20,000. The expense data relating to the Machine are as under — Repairs and Maintenance per annum 60,480 ‘Consumable Stores per annum 247,520 ; Rent of Building per annum (The machine under reference occupies 1/6" ofthe area) 272,000 ‘Supervisor's Salary per month (Common to three Machines) % 6,000 ‘Wages of Operator per machine per month = 2500 General Lighting per month allocated to the Machine @ 1,000 Power (25 units per hour) 2 2perunit. ‘Power is required for productive purposes only. Set uptime, though productive, does not require power. The Supervise at Operator are ‘and Consumable Stores vary with the running of the machine. Calut® ‘permanent. Repairs and Maintenance | two-tier machine hour rate for ~ (a) Set Up time and (b) Running Time. 1. of Productive Machine Hours ‘Operating Hours per month = (208 ~ 8 ~ 20} 180 hours: Hours (given 25 but does not require Power) 20 hours, am 200 hours (F 5,00,000 ~ € 20,000) x 1/10" « 1/12 €.60,480 + 12 months £47,520 + 12 months [72,000 x 1/6") + 12 months Given of 200 hours. Hence, General OH Rate per hour = ® 19,500 + 200 Hrs = € 97.50 per Ro = wad Scanned with CamScanner‘penses allocated to these et machines are A: ® 63,900, 8: ® 60,700 and C: ion, tran Oven Crane bg materia maces mary. Te aes of this expenditure, the machines were used as follows — Machine A (in Hrs) Machine B (in Hrs) ‘Machine C (in Hrs) } 160 130 20 | 428 sTT = | 707 a0 } Ti 588 ae for ech acing, letnguing between the hours in which the crane is used and those in n of Machine Hour Rate M/cA M/cB Mic Crane | 63,500 % 60,700 795,100 357,000 | 588 707 480 | _160+130+480 = 770, 63,900 _ 760,700 _ 95:00 57,000 588Hrs 707 Hrs “480Hrs TORTS ~ = 108.67 ph £85.86 ph £198.13 ph £74.03 ph = 108.67 + 74.03| = 8586+74.03=| = 198.13 + 74.03 =% 182.70 ph 2159.89 ph =% 272.16 ph | d OH is divided by Machine Operating Hours, to derive Normal OH Rate per hour (\.e. without use of Crane). 1use of Crane) = OH Rate without use of Crane + Average Cost of Crane per hour ‘and out of these 400 hours were expected to be lost due En tg of aw rae! 2 our and? Rous n Weng Scanned with CamScanner' 1 Hour Rate for the two Departments. ‘2. Overhead Cost of 1,00,000 meters of completed Shirtings 4. Costot Abnormal de Tine be cared to Cog Prot and Loss Account of Machine Hour Rate __ jon of Machine ow Weaving | 1,80,000 30,000 15,000 3,97,800 1(7,200%80%)-400 = 5,360 hours: (@,000%80%)-400 = ri 3,97,800 _ 74,22 360 96.00 149200 “2000 * 8 170.22 2. Cost of 1,00,000 meter of completed Shirtings x (3:5 Hours x® 170.22 ph) . = ©5,95,770 J Dying cost = 100000 5 (2 Hours x £106.60) = 213,200 Total Cost =% 808,970 3. Cost of Abnormal Idle Time to be charged to Costing Profit and Loss Account Particulars Weaving Dept. (2) Dying Dept.) {@) Normal Production Hours (from WN 1) 5,360 hours: 2,000 bass S (1,000 + 500) mtr x 3.5 hours 7,000 mir x 2 aus Sie reser fo procuction = 5,250 hours | = 2,000 hos ‘Abnormal idle Time (a= b) 110 (G) Cost of Abnormal Idle Time 110 hrs x € 74.22 = 7 8,164.20 s Identifiable Power Costs ~ Idle Time Cost xual ‘An Engineering Company purchases castings from outside and produces 2 products out of them. The maja ome | involved are first Fishing and then Plating which constitute the major production. The following are the cost deal Finishing Shop @) Plating Shop (| 6,000 0,000 | 12,000 18,000 | 20,000 30,000 ! 40,000 0,000 j 20 units at ® 4 10 units at €4 7 ‘The Finishing Shop normally works for 2,000 hours andthe Plating Shop normal ove a0 ous nav te ie. esd te nat wor nh nag the normal process timings | Product A Set Product 8 Finishing 2Hrs, tHe. TH, Scanned with CamScanner‘of October the following are the details of a Ara comaed 1 ts Prt cond 1 ‘800 fully complete units: Finishing Cost = 800 units x 2 hours = © 140 2,24,000 | Plating Cost = 800 units x 1 hour x & 198 | 4,58,400 | 100 units WIP ~ Finishing only completed = 100 units x2 hours »% 140. | 28,000 | Total 410,400 {600 fully complete units: Plating Cost only = 600 unitsx1 hourx® 198 | 1,38,800 3. Computation of Overtime Costs Finishing Piating | (@00+100) x 2 hours = 1,800 hours ‘800 *1 hour = 800 hours Nil 600% hour = 600 hours | 1,800 hours 1,400 hours | (2,000 - 200) = 1,800 hours (4,200 - 200) = 1.000 hours Difference Nil 400 hours ‘time taken is extra for Plating Department, the excess is considered as Overtime. So, Cost of Abnormal = 400 hours x € 198 = € 79,200. Scanned with CamScannerPadhuika's Students’ Handbook on Cost and Management Accounting ~ For CA Inter ‘Computation of Overhead Rate per Machine-Hour = (404), Le. 36 hours per week x 48 weeks x 15 machines = 25,920 machine hay Solution: ry {@) Estimated Machine Hours p.a. (won = Estimated Total OH ___£1,55,520__ . ¢ 6 per machine hour. Esti, Machine Hours pa 25,920 ts 2. Computation of Absorption Differences for a 4-week period Wages. Overteag ‘Absorbed (G weeks x 40 hrs x 15 mcs x €3) (2,200 machine hours % 86) att is 5; on rate 37. Computation of Over/ Under Recovery op Pane Company uses a Job Costing System and applies overhead to products on the basis of Direct Labour Cost. Job Woy the only job in process on 1* January, had the following costs assigned as of that date: Direct Materials © 40,000, Daa Labour € 80,000, and Factory Overhead & 1,20,000. The following selected costs were incurred during the year. Traceable to Jobs: Direct Materials “ie Direct Labour = _ 345,000 | 520m "Not traceable to Jobs: Factory Materials and Supplies 46, ioe Indirect Labour 2,35,000 Plant Maintenance 73,000 j Depreciation on Factory Equipment 29,000 Other Factory Costs 76,000 245300 Pane’s Profit Pian for the year included Budgeted Direct Labour of € 3,20,000 and Factory Overhead of ® 4,48,000. There wat ‘no work-in- process on 31% December. What were Pane's Overhiead Absorption Difference for the year? 140% of Direct Labos: 2. Absorbed OH for the year = Actual Direct Labour x Absorption Rate 345,000 x 140% = €4,85.00 3. Aiual OH for the year, Le. OH not traceable to jobs Given & 453,000 4. Difference in Absorption, being Overabsorption = (2) - (2) © 24,000 N89, N 95, N99, N00, MO8.Ntt , & small scale enterprise, produces a single product and has adopted a policy to recover the producto of the factory by adopting a single blanket rate based on machine hours. The budgeted Production Overheads o ‘6 & 10,08,000 and budgeted Machine Hours are 96,000, of first six months ofthe financial year, Actual Production Overheads &6,79,000 ‘Amount included inthe Production Overheads: (8) Paid a8 per Court's order {b) Expenses of previous year booked in current year & 10,000 Pld to workers for strike period under an awed —(@) Obsolete Stores writen of ee and sles data ofthe concern forthe fst six months are as under: Finished Goods: (00%, 22,000 units Work-in-Progress (50% complete ‘every respect) following information were extracted from the books: 16,000 units: ee tie JE90) pr he period wore 48,000 hours tls nat Peer BEI ean Ee ene You are required | 4. Determine the amount of under-absortion ot Production g ri 4.46, Scanned with CamScanner