4
Overheads
BASIC CONCEPTS AND FORMULAE
Basic Concepts
1.
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.
2.
Types of the Overheads on the basis of function:
3.
•
Factory or Manufacturing Overheads
•
Office and Administration Overheads
•
Selling and Distribution Overheads
•
Research and Development Overheads
Types of the Overheads on the basis of nature:
•
Fixed Overhead- Expenses that are not affected by any variation in the volume
of activity.
•
Variable- Expenses that change in proportion to the change in the volume of
activity.
•
4.
Semi variable- The expenses that do not change when there is a small change
in the level of activity but change whenever there is a slightly big change or
change in the same direction as change in the level of activity but not in the
same proportion.
Cost allocation- The term ‘allocation’ refers to assignment or allotment of an entire
item of cost to a particular cost center or cost unit.
5.
Cost apportionment- Apportionment implies the allotment of proportions of items of
cost to cost centres or departments.
6.
Re-apportionment- The process of assigning service department overheads to
production departments is called reassignment or re-apportionment.
7.
Absorption- The process of recovering overheads of a department or any other cost
center from its output is called recovery or absorption.
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4.2
8.
Cost Accounting
Methods used for re-apportionment of service department expenses over the
production departments:
•
9.
Direct re-distribution method- Under this method service department costs are
apportioned over 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
(a) Simultaneous equation method;
(b) Repeated distribution method;
(c)
Trial and error method.
Methods for the Computation of the Overheads Rate :
a)
Percentage of direct materials method: Under this method, the cost of direct
material consumed is the base for calculating the amount of overhead
absorbed.
b)
Percentage of prime cost method This method is based on the fact that both
materials as well as labour contribute in raising factory overheads. Hence, the
total of the two i.e. Prime cost should be taken as base for absorbing the
factory overhead.
c)
Percentage of direct labour cost : This method also fails to give full
recognition to the element of the time which is of prime importance in the
accounting for and treatment of manufacturing overhead expenses except in so
far as the amount of wages is a product of the rate factor multiplied by the time
factor.
d)
Labour hour rate Method: This method is an improvement on the percentage
of direct wage basis, as it fully recognises the significance of the element of
time in the incurring and absorption of manufacturing overhead expenses.
e)
Machine hour rate method: By the machine hour rate method, manufacturing
overhead expenses are charged to production on the basis of number of hours
machines are used on jobs or work orders.
10. Types of Overhead Rates
a)
Normal rate: This rate is calculated by dividing the actual overheads by actual
© The Institute of Chartered Accountants of India
Overheads
4.3
base. It is also known as actual rate.
b)
Pre-determined overhead rate: This rate is determined in advance by
estimating the amount of the overhead for the period in which it is to be used.
c)
Blanket overhead rates- Blanket overhead rate refers to the computation of
one single overhead rate for the whole factory. It is to be distinguished from the
departmental overhead rate which refers to a separator
d)
Departmental overhead rate: Where the product lines are varied or machinery
is used to a varying degree in the different departments, that is, where
conditions throughout the factory are not uniform, the use of departmental rates
is to be preferred. ate for each individual cost centre or department.
11. Methods of accounting of administrative overheads
•
Apportioning Administrative Overheads between Production and Sales
Departments.
•
Charging to Costing Profit and Loss Account.
•
Treating Administrative Overheads as a separate addition to Cost of
Production/Sales
•
The basis which are generally used for apportionment are :
(i)
Works cost
(ii)
Sales value or quantity
(iii) Gross profit on sales
(iv) Quantity produced
(v) Conversion cost, etc.
Basic Formulas
1. Overhead
Absorption
Rate
Amount of overhead incurred
Basis for absorption
2. Predetermined Overhead Rate =
or
Overhead
Recovery
Budgeted overhead for the period
Budgeted basis for the period
3. Blanket Overhead Rate =
Overhead cos t for the entire factory for the period
Base for the period (Total labour hours, total machine hours, etc.
4. Multiple Overhead Rate =
Overhead allocated / apportioned to each Deptt.
Corresponding base
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Rate
=
4.4
Cost Accounting
5. Variable portion in Semi-variable Overhead =
6.
Change in amount of exp ense
Change in activity or quantity
Direct cost of service departments should be apportioned to production departments,
as it is also indirect cost for production departments.
Question 1
What is blanket overhead rate? In which situations, blanket rate is to be used and why?
Answer
Blanket overhead rate is one single overhead absorption rate for the whole factory. It may be
computed by using the following formulae:
Blanket overhead rate =
Overhead cos ts for the whole factory
* Total units of the selected base
* The selected base can be the total output; total labour hours; machine hours etc.
Situation for using blanket rate:
The use of blanket rate may be considered appropriate for factories which produce only one
major product on a continuous basis. It may also be used in those units in which all products
utilise same amount of time in each department. If such conditions do not exist, the use of
blanket rate will give misleading results in the determination of the production cost, specially
when such a cost ascertainment is carried out for giving quotations and tenders.
Question 2
Discuss the step method and reciprocal service method of secondary distribution of
overheads.
Answer
Step method and Reciprocal Service method of secondary distribution of overheads
Step method: This method gives cognisance to the service rendered by service department to
another service department, thus sequence of apportionments has to be selected. The
sequence here begins with the department that renders service to the max number of other
service department. After this, the cost of service dep't serving the next largest number of
department is apportioned.
Reciprocal service method: This method recognises the fact that where there are two or more
service department, they may render service to each other and, therefore, these inter
department services are to be given due weight while re-distributing the expense of service
department. The methods available for dealing with reciprocal servicing are:
© The Institute of Chartered Accountants of India
Overheads
¾
Simultaneous equation method
¾
Repeated distribution method
¾
Trial and error method
4.5
Question 3
Discuss the problems of controlling the selling and distribution overheads
Answer
Problems of controlling the selling & distribution overheads are
(i)
The incidence of selling & distribution overheads depends on external factors such as
distance of market, nature of competition etc. which are beyond the control of
management.
(ii)
They are dependent upon customers' behaviour, liking etc.
(iii) These expenses are of the nature of policy costs and hence not amenable to control.
The above problems of controlling selling & distribution overheads can be tackled by
adopting the following steps:
(a) Comparing the figures of selling & distribution overhead with the figures of previous
period.
(b) Selling & distribution overhead budgets may be used to control such overhead
expenses by making a comparison of budgetary figures with actual figures of
overhead expenses, ascertaining variances and finally taking suitable actions,
(c) Standards of selling & distribution expenses may be set up for salesmen, territories,
products etc. The laid down standards on comparison with actual overhead
expenses will reveal variances, which can be controlled by suitable action.
Question 4
Distinguish between cost allocation and cost absorption
Answer
Cost allocation and Cost absorption:
Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. In other
words, it is the process of identifying, assigning or allowing cost to a cost centre or a cost,
unit.
Cost absorption is the process of absorbing all indirect costs or overhead costs allocated to
apportioned over particular cost center or production department by the units produced.
© The Institute of Chartered Accountants of India
4.6
Cost Accounting
Question 5
Discuss in brief three main methods of allocating support departments costs to operating
departments. Out of these three, which method is conceptually preferable.
Answer
The three main methods of allocating support departments costs to operating departments
are:
(i)
Direct re-distribution method: Under this method, support department costs are directly
apportioned to various production departments only. This method does not consider the
service provided by one support department to another support department.
(ii)
Step method: Under this method the cost of the support departments that serves the
maximum numbers of departments is first apportioned to other support departments and
production departments. After this the cost of support department serving the next largest
number of departments is apportioned. In this manner we finally arrive on the cost of
production departments only.
(iii) Reciprocal service method: This method recognises the fact that where there are two or
more support departments they may render services to each other and, therefore, these
inter-departmental services are to be given due weight while re-distributing the expenses
of the support departments. The methods available for dealing with reciprocal services
are:
(a) Simultaneous equation method
(b) Repeated distribution method
(c) Trial and error method.
The reciprocal service method is conceptually preferable. This method is widely used
even if the number of service departments is more than two because due to the
availability of computer software it is not difficult to solve sets of simultaneous equations.
Question 6
Explain Single and Multiple Overhead Rates.
Answer
Single and Multiple Overhead Rates:
Single overhead rate: It is one single overhead absorption rate for the whole factory.
It may be computed as follows:
Single overhead rate =
Overhead costs for the entire factory
Total quantity of the base selected
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Overheads
4.7
The base can be total output, total labour hours, total machine hours, etc.
The single overhead rate may be applied in factories which produces only one major product
on a continuous basis. It may also be used in factories where the work performed in each
department is fairly uniform and standardized.
Multiple overhead rate: It involves computation of separate rates for each production
department, service department, cost center and each product for both fixed and variable
overheads. It may be computed as follows:
Multiple overhead rate
Overhead allocated/appportioned to each department/cost centre or product
=
Corresponding base
Under multiple overhead rates, jobs or products are charged with varying amount of factory
overheads depending on the type and number of departments through which they pass.
However, the number of overhead rates which a firm may compute would depend upon two
opposing factors viz. the degree of accuracy desired and the clerical cost involved.
Question 7
How do you deal with the following in cost accounts?
(i)
Fringe benefits
(ii)
Bad debts.
Answer
Treatment of Cost Accounts
(i)
Fringe benefits: the benefits paid to workers in every organisation in addition to their
normal wage or salary are known as fringe benefits. They include – Housing facility,
children education allowance, holiday pay, leave pay, leave travel concession to home
town or any place in India, etc.
Expenditure incurred on fringe benefits in respect of factory workers should be
apportioned among all the production and service departments on the basis of the
number of workers in each department.
(ii)
Bad debts: There is no unanimity among various authors about the treatment of bad
debts. Some authors believe that bad debts are financial losses and therefore should not
be included in the cost of a particular product or job. Another view is that, bad debts are
a part of selling and distribution overhead, especially where they arise in the normal
course of trading. Therefore they should be treated in cost accounts in the same way as
any other selling and distribution expense.
© The Institute of Chartered Accountants of India
4.8
Cost Accounting
Question 8
Distinguish between fixed and variable overheads.
Answer
Fixed and Variable Overheads: Fixed overhead expenses do not vary with the volume of
production within certain limits. In other words, the amount of fixed overhead tends to remain
constant for volumes of production within the installed capacity of plant. For example, rent of
office, salary of works manger, etc.
Variable overhead cost varies in direct proportion to the volume of production. It increases or
decreases in direct relation to any increase or decrease in output.
Question 9
How would you treat the idle capacity costs in Cost Accounts?
Answer
Treatment of idle capacity cost in Cost Accounts:
It is that part of the capacity of a plant, machine or equipment which cannot be effectively
utilised in production. The idle capacity may arise due to lack of product demand, no
availability of raw-material, shortage of skilled labour, shortage of power, etc. Costs
associated with idle capacity are mostly fixed in nature. These costs remain unabsorbed or
unrecovered due to under-utilisation of plant and service capacity. Idle capacity costs are
treated in the following ways in Cost Accounts.
(i)
If the idle capacity cost is due to unavoidable reasons - a supplementary overhead rate
may be used to recover the idle capacity cost. In this case, the costs are charged to the
production capacity utilised.
(ii)
If the idle capacity cost is due to avoidable reasons - such as faulty planning, etc. the
cost should be charged to Costing Profit and Loss Account.
(iii) If the idle capacity cost is due to trade depression, etc., - being abnormal in nature the
cost should also be charged to the Costing Profit and Loss Account.
Question 10
Discuss the treatment in cost accounts of the cost of small tools of short effective life.
Answer
Small tools are mechanical appliances used for various operations on a work place, specially
in engineering industries. Such tools include drill bits, chisels, screw cutter, files etc.
Treatment of cost of small tools of short effective life:
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Overheads
(i)
4.9
Small tools purchased may be capitalized and depreciated over life if their life is
ascertainable. Revaluation method of depreciation may be used in respect of very small
tools of short effective life. Depreciation of small tools may be charged to:
¾ Factory overheads
¾ Overheads of the department using the small tool.
(ii)
Cost of small tools should be charged fully to the departments to which they have been
issued, if their life is not ascertainable.
Question 11
E-books is an online book retailer. The Company has four departments. The two 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.
The following data are available for October, 2003:
Departments
Revenues
Number of
Processing
Employees
Time used
(in minutes)
Corporate Sales
Consumer Sales
R` 16,67,750
` 8,33,875
42
2,400
28
2,000
--
14
400
Administrative
Information system
-21
Cost incurred in each of four departments for October, 2003 are as follow:
Corporate Sales
Consumer Sales
Administrative
Information systems
1,400
` 12,97,751
` 6,36,818
` 94,510
` 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.
© The Institute of Chartered Accountants of India
4.10
Cost Accounting
(iii) How could you have ranked the support departments differently?
(iv) Allocate the support department costs to two sales departments using the reciprocal
allocation method.
Answer
(i)
Statement showing the allocation of support
department costs to the sales departments
(using the direct method)
Sales department
Particulars
Basis of
allocation
Cost incurred
Support department
Corporate
sales
Consumer
sales
Administrative
Information
systems
(`)
(`)
(`)
(`)
12,97,751
6,36,818
94,510
3,04,720
(94,510)
Re-allocation of cost
of
administrative
department
Number of
employees
(6:4:–:–)
56,706
37,804
Re-allocation
of
costs of information
systems department
Processing
time
(6:5:–:–)
1,66,211
1,38,509
________
________
15,20,668
8,13,131
Total
(ii)
(3,04,720)
Ranking of support departments based on
percentage of their services rendered to other
support departments
¾
¾
⎛ 21× 100 ⎞
⎟⎟ of its services
Administration support department provides 23.077% ⎜⎜
⎝ 42 + 28 + 21 ⎠
to information systems support department. Thus 23.077% of `94,510 =
`21,810.
⎛
⎞
400
× 100 ⎟⎟
Information system support department provides 8.33% ⎜⎜
⎝ 2,400 + 2,000 + 400
⎠
of its services to Administration support department. Thus 8.33% of `3,04,720 =
`25,383.
© The Institute of Chartered Accountants of India
Overheads
4.11
Statement showing allocation of support costs
(By using step-down allocation method)
Particulars
Basis of
allocation
Cost incurred
Re-allocation of cost
of
administrative
department
Re-allocation
of
costs of information
systems department
Total
Number of
employees
(6:4:–:–3)
Processing
time
(6:5:–:–:–)
Sales department
Corporate Consumer
sales
sales
Support department
Administrative Information
systems.
(`)
(`)
(`)
(`)
12,97,751
43,620
6,36,818
29,080
94,510
(94,510)
3,04,720
21,810
3,26,530
1,78,107
1,48,423
________
15,19,478
________
8,14,321
(3,26,530)
(iii) An alternative ranking is based on the rupee amount of services rendered to other
service departments, using the rupee figures obtained under requirement (ii) This
approach would use the following sequence of ranking.
¾ Allocation of information systems overheads as first (`25,383 provided to
administrative).
¾ Allocated administrative overheads as second (`21,810 provided to information
systems).
(iv) Working notes:
(1) Percentage of services provided by each service department to other service
department and sales departments.
Particulars
Administrative
Information systems
Service departments
Administrative
Information
system
–
23.07%
8.33%
–
Sale departments
Corporate
Consumer
Sales
Sales
46.16%
30.77%
50%
41.67%
(2) Total cost of the support department: (By using simultaneous equation method).
Let AD and IS be the total costs of support departments Administrative and
Information systems respectively. These costs can be determined by using the
following simultaneous equations:
or
AD
=
94,510 + 0.0833 IS
IS
=
3,04,720 + 0.2307 AD
AD
=
94,510 + 0.0833 {3,04,720 + 0.2307 AD}
© The Institute of Chartered Accountants of India
4.12
Cost Accounting
or
AD
=
94,510 + 25,383 + 0.01922 AD
or
0.98078AD
=
1,19,893
or
AD
=
`1,22,243
=
`3,32,922
and IS
Statement showing the allocation of support
department costs to the sales departments
(Using reciprocal allocation method)
Sales department
Particulars
Corporate sales Consumer sales
(`)
(`)
Costs incurred
12,97,571
6,36,818
56,427
37,614
Re-allocation of cost administrative
department
(46.16% and 30.77% of `1,22,243)
Re-allocation of costs of information systems
1,66,461
1,38,729
department
________
_______
(50% and 41.67% of `3,32,922)
Total
15,20,639
8,13,161
Question 12
Explain what do you mean by Chargeable Expenses and state its treatment in Cost Accounts.
Answer
Chargeable expenses: All expenses, other than direct materials and direct labour cost which
are specifically and solely incurred on production, process or job are treated as chargeable or
direct expenses. These expenses in cost accounting are treated as part of prime cost,
Examples of chargeable expenses include - Rental of a machine or plant hired for specific job,
royalty, cost of making a specific pattern, design, drawing or making tools for a job.
Question 13
A company manufacturing two products furnishes the following data for a year.
Product
Annual
output (Units)
A
5,000
B
60,000
The annual overheads are as under:
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Total
Machine
hours
20,000
1,20,000
Total number
of purchase
orders
160
384
Total number
of set-ups
20
44
Overheads
(`)
Volume related activity costs
Set up related costs
Purchase related costs
5,50,000
8,20,000
6,18,000
You are required to calculate the cost per unit of each Product A and B based on :
(i)
Traditional method of charging overheads
(ii)
Activity based costing method.
Answer
Working notes:
1.
Machine hour rate =
=
2.
3.
` 19,88,000
= `14.20 per hour
1,40,000 hours
Machine hour rate =
Total annual overhead cost
=
for volume related activities
Total machine hours
=
` 5,50,000
= `3.93 (approx.)
1,40,000 hours
Cost of one set-up =
=
4.
Total annual overheads
Total machine hours
Total cos ts related to set − ups
Total number of set − ups
` 8,20,000
= `12,812.50
64 set − ups
Cost of a purchase order =
=
Total cos ts related to purchases
Total number of purchase order
` 6,18,000
= `1,136.03
544 orders
© The Institute of Chartered Accountants of India
4.13
4.14
Cost Accounting
(i)
Statement showing overhead cost per unit
(based on traditional method of charging overheads)
Annual
Total
Overhead cost
Overhead cost
Products
output machine
component (Refer
per unit
(units)
hours
to W, Note 1)
(`)
(`)
A
B
5,000
60,000
20,000
1,20,000
2,84,000
56.80
(20,000 hrs. ×
`14.20)
(`2,84,000 / 5,000
units)
17,04,000
28.40
(1,20,000
(`17,04,000/60,000
units)
hrs.×`14.20)
Statement showing overhead cost per unit
(based on activity based costing method)
(ii)
Products
Annual
output
units
Total
Machine
Hours
Cost
related to
volume
activities
Cost
related to
purchases
Cost
related to
set-ups
(a)
(b)
A
5,000
B
60,000
Total cost
Cost
per
unit
(`)
(`)
(`)
(`)
(`)
(c)
(d)
(e)
(f) = [(c) +
(d) + (e)]
(g) =
(f)/(a)
20,000
78,600
(20,000
hrs ×
`3.93)
1,81,764.80
(160 orders
×
`1136.03)
2,56,250
(20 set ups
×
`12,812.50)
5,16,614.80
103.32
1,20,000
4,71,600
(1,20,000
hrs ×
`3.93)
4,36,235.52
(384 orders
×
`1136.03)
5,63,750
(44 set ups
×
`12,812.50)
14,71,585.52
24.53
Note:
Refer to working notes 2, 3 and 4 for computing costs related to volume
activities, set-ups and purchases respectively.
Question 14
In the current quarter, a company has undertaken two jobs. The data relating to these jobs are
as under:
Selling price
Profit as percentage on cost
Direct Materials
Direct Wages
© The Institute of Chartered Accountants of India
Job 1102
Job 1108
` 1,07,325
` 1,57,920
8%
12%
` 37,500
` 30,000
` 54,000
` 42,000
Overheads
4.15
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.
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 `64,000 and `50,000
respectively. A profit of 20% on sales is required.
You are required to compute
(i)
The rates of Factory overheads and Selling and Administration overheads to be charged.
(ii)
The Selling price of the new order
Answer
Working notes
1.
Computation of total cost of jobs
Total cost of Job 1102 when 8% is the profit on cost
=
` 1,07,325
× 100
108
= `99,375
Total cost of job 1108 when 12% is the profit on cost
2.
=
` 1,57,920
× 100
112
= `1,41,000
= F% of direct wages
Factory overheads
Selling & Administrative overheads = A% of factory cost
(i)
Computation of rates of factory overheads and selling and administration
overheads to be charged.
Jobs Cost Sheet
Job 1102
Job 1108
(`)
(`)
Direct materials
37,500
54,000
Direct wages
30,000
42,000
Prime cost
67,500
96,000
30,000F
42,000F
(67,500 + 30,000 F)
(96,000 + 42,000 F)
(67,500 + 30,000 F) A
(96,000 + 42,000 F) A
Add: Factory overheads
Factory cost
(Refer to Working note 2)
Add: Selling and Administration
Overheads
© The Institute of Chartered Accountants of India
4.16
Cost Accounting
(Refer to Working note 2)
(67,500 + 30,000 F)(1
(96,000 + 42,000
+ A)
F)(1+A)
Since the total cost of jobs 1102 and 1108 are equal to `99,375 and `1,41,000
respectively, therefore we have the following equations (Refer to working note 1)
Total cost
(67,500 + 30,000 F) (1 + A)
=
99,375
(1)
(96,000 + 42,000 F) (1 + A)
=
1,41,000
(2)
or
67,500 + 30,000 F + 67,500 A + 30,000 FA
=
99,375
96,000 + 42,000 F + 96,000 A + 42,000 FA
=
1,41,000
30,000 F + 67,500 A + 30,000 FA
=
31,875
(3)
42,000 F + 96,000 A + 42,000 FA
=
45,000
(4)
On solving (3) and (4) we get : A = 0.25 and F
=
0.40
or
(ii)
Hence A = 25% and F = 40%
Selling price of the new order:
(`)
Direct materials
64,000
Direct wages
50,000
Prime cost
1,14,000
Factory overheads
20,000
(40% × `50,000)
Factory cost
1,34,000
Selling & Admn. Overheads
33,500
(25% × `1,34,000)
Total cost
1,67,500
If selling price of new order is `100 then Profit is `20 and Cost is `80
Hence selling price of the new order =
`1,67,500
× 100 = ` 2,09,375
80
Question 15
PQR Ltd has its own power plant, which has two users, Cutting Department and Welding
Department. When the plans were prepared for the power plant, top management decided that
its practical capacity should be 1,50,000 machine hours. Annual budgeted practical capacity
fixed costs are ` 9,00,000 and budgeted variable costs are Rs.4 per machine-hour. The
following data are available:
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Overheads
Cutting
Welding
Department Department
Actual Usage in 2002-03 Machine hours)
Practical capacity for each department (machine
hours)
Required
4.17
Total
60,000
40,000 1,00,000
90,000
60,000 1,50,000
(i)
Allocate the power plant's cost to the cutting and the welding department using a single
rate method in which the budgeted rate is calculated using practical capacity and costs
are allocated based on actual usage.
(ii)
Allocate the power plant's cost to the cutting and welding departments, using the dual rate method in which fixed costs are allocated based on practical capacity and variable
costs are allocated based on actual usage,
(iii) Allocate the power plant's cost to the cutting and welding departments using the dual-rate
method in which the fixed-cost rate is calculated using practical capacity, but fixed costs
are allocated to the cutting and welding department based on actual usage. Variable
costs are allocated based on actual usage.
(iv) Comment on your results in requirements (i), (ii) and (iii).
Answer
Working notes:
1.
Fixed practical capacity cost per machine hour:
Practical capacity (machine hours)
1,50,000
Practical capacity fixed costs (Rs.)
9,00,000
Fixed practical capacity cost per machine hour
2.
`6
(` 9,00,000 / 1,50,000 hours)
Budgeted rate per machine hour (using practical capacity):
=
Fixed practical capacity cost per machine hour + Budgeted variable cost per
machine hour
=
` 6 + ` 4 = `10
(i)
Statement showing Power Plant's cost allocation to the Cutting & Welding
departments by using single rate method on actual usage of machine hours.
Power plants cost allocation by
using actual usage (machine hours)
(Refer to working note 2)
© The Institute of Chartered Accountants of India
Cutting
Department
Welding
Department
Total
(`)
(`)
(`)
6,00,000
4,00,000 10,00,000
(40,000
hours
(60,000 hours
`10)
×
× `10)
4.18
Cost Accounting
(ii)
Statement showing Power Plant's cost allocation to the Cutting & Welding
departments by using dual rate method.
Cutting
Department
Fixed Cost
(Allocated on practical capacity
for each department i.e.):
(90,000 hours : 60,000 hours)
Variable cost
(Based on actual usage of
machine hours)
Welding
Department
Total
(`)
(`)
(`)
5,40,000
⎛ ` 9,00,000 × 3 ⎞
⎜
⎟
5
⎝
⎠
3,60,000
⎛ ` 9,00,000 × 2 ⎞
⎜
⎟
5
⎝
⎠
9,00,000
2,40,000
1,60,000 4,00,000
(60,000 hours
(40,000 hours
× `4)
× `4)
Total cost
7,80,000
5,20,000 13,00,000
(iii) Statement showing Power Plant's cost allocation to the Cutting & Welding
Departments using dual rate method
Cutting
Department
Fixed Cost
Allocation of fixed cost on actual
usage basis (Refer to working
note 1)
Variable cost
(Based on actual usage)
Total cost
(iv) Comments:
Welding
Department
Total
(`)
(`)
(`)
3,60,000
(60,000 hours
× ` 6)
2,40,000
(40,000 hours
× ` 6)
6,00,000
2,40,000
(60,000 hours
× ` 4)
6,00,000
1,60,000 4,00,000
(40,000 hours
× ` 4)
4,00,000 10,00,000
Under dual rate method, under (iii) and single rate method under (i), the allocation
of fixed cost of practical capacity of plant over each department are based on single
rate. The major advantage of this approach is that the user departments are
allocated fixed capacity costs only for the capacity used. The unused capacity cost
` 3,00,000 (` 9,00,000 – ` 6,00,000) will not be allocated to the user departments.
This highlights the cost of unused capacity.
Under (ii) fixed cost of capacity are allocated to operating departments on the basis
of practical capacity, so all fixed costs are allocated and there is no unused capacity
identified with the power plant.
© The Institute of Chartered Accountants of India
Overheads
4.19
Question 16
Define Selling and Distribution Expenses. Discuss the accounting for selling and distribution
expenses.
Answer
Selling expenses: Expenses incurred for the purpose of promoting, marketing and sales of
different products.
Distribution expenses: Expenses relating to delivery and despatch of goods/products to
customers.
Accounting treatment for selling and distribution expenses
Selling and distribution expenses are usually collected under separate cost account numbers.
These expenses may be recovered by using any one of following method of recovery.
1.
Percentage on cost of production / cost of goods sold.
2.
Percentage on selling price.
3.
Rate per unit sold.
Question 17
ABC Ltd. manufactures a single product and absorbs the production overheads at a
pre-determined rate of `10 per machine hour.
At the end of financial year 1998-99, it has been found that actual production overheads
incurred were ` 6,00,000. It included ` 45,000 on account of 'written off' obsolete stores and `
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
Work-in-progress
20,000 units
8,000 units
(50% complete in all respects)
Sales:
Finished goods
18,000 units
The actual machine hours worked during the period were 48,000. It has been found that onethird 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
© The Institute of Chartered Accountants of India
4.20
(ii)
Cost Accounting
Show the accounting treatment of under – absorption of production overheads.
Answer
(i)
Amount of under-absorption of production overheads during the year 1998-99
(`)
Total production overheads actually incurred during the year 1998-99
6,00,000
Less: 'Written off' obsolete stores
` 45,000
Wages paid for strike period
` 30,000
75,000
Net production overheads actually incurred: (A)
5,25,000
Production overheads absorbed by 48,000 machines hours @ `10 per
hour: (B)
4,80,000
Amount of under-absorption of production overheads: [(A)–(B)]
(ii) Accounting treatment of under absorption of production overheads
45,000
It is given in the statement of the question that 20,000 units were completely finished and
8,000 units were 50% complete, one third of the under-absorbed overheads were due to
lack of production planning and the rest were attributable to normal increase in costs.
(`)
1.
(33-1/3% of `45,000) i.e. `15,000 of under – absorbed overheads
were due to lack of production planning. This being abnormal,
should be debited to the Profit and Loss A/c
15,000
2.
Balance (66-2/3% of `45,000) i.e. `30,000 of under – absorbed
overheads should be distributed over work-in-progress, finished
goods and cost of sales by using supplementary rate
30,000
______
Total under-absorbed overheads
45,000
Apportionment of unabsorbed overheads of `30,000 over, work-in-progress,
finished goods and cost of sales.
Equivalent Completed units
(`)
Work-in-progress (4,000 units × `1.25)
(Refer to working note)
4,000
5,000
Finished goods
(2,000 units × `1.25)
2,000
2,500
Cost of sales
(18,000 units × `1.25)
18,000
22,500
24,000
30,000
© The Institute of Chartered Accountants of India
Overheads
4.21
Accounting treatment:
Work-in-progress control A/c
Dr.
` 5,000
Finished goods control A/c
Dr.
` 2,500
Cost of Sales A/c
Dr.
`22,500
Profit & Loss A/c
Dr.
`15,000
To Overhead control A/c
45,000
Working note:
Supplementary overhead absorption rate
=
` 30,000
24,000 units
=
`1.25 per unit
Question 18
In a factory, a machine is considered to work for 208 hours in a month. It includes
maintenance time of 8 hours and set up time of 20 hours.
The expense data relating to the machine are as under:
¾
Cost of the machine is ` 5,00,000. Life 10 years. Estimated scrap value at the end of life
is `20,000.
(`)
–
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
–
Power 25 units per hour at `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
© The Institute of Chartered Accountants of India
4.22
Cost Accounting
Answer
Working notes:
1.
2.
3.
(i)
Effective hours for standing charges
(208 hours – 8 hours)
(ii) Effective hours for variable costs
(208 hours – 28 hours)
Standing charges per hour
Supervisor's salary (`6,000 / 3 machines)
General Lighting
1
Rent (`72,000 / 6 ×
)
12
Total standing charges
Standing charges per hour (`4,000 / 200 hours)
Machine expenses per hour
Depreciation
(5,00,000 − 20,000) 1
×
10
12
Repairs & maintenance `60,480 / 12 months)
Consumable stores (`47,520 / 12 months)
Power (25 units × `2 × 180 hours)
Wages
Total machine expenses
Computation of Two – tier machine hour rate
Standing Charges
(Refer to working note 2)
Machine expenses:
(Refer to working note 3)
Depreciation
Repair and maintenance
© The Institute of Chartered Accountants of India
200
180
Per month
Per hour
(`)
(`)
2,000
1,000
1,000
4,000
20
Per month
Per hour
(`)
(`)
4,000
20 (`4,000 / 200 hours
5,040
3,960
9,000
2,500
24,500
28 (`5,040 / 180 hours)
22 (`3,960 / 180 hours)
50 (`9,000 / 180 hours)
12.50 (`2,500 / 200 hours)
132.50
Set up time rate
per machine hour
Running time rate
per machine hour
(`)
(`)
20.00
20.00
20.00
–
20.00
28.00
Overheads
Consumable stores
Power
Machine hour rate of overheads
Wages
Comprehensive machine hour rate
–
–
40.00
12.50
92.50
4.23
22.00
50.00
140.00
12.50
152.50
Question 19
Indicate the base or bases that you would recommend to apportion overhead costs to
production department:
(i)
Supplies
(ii) Repairs
(iii) Maintenance of building
(iv) Executive salaries
(v) Rent
(vi) Power and light
(vii) Fire insurance
(vii) Indirect labour.
Answer
Item
Bases of apportionment
(i)
Supplies
Actual supplies made to different departments
(ii)
Repair
Direct labour hours; Machine hours; Direct
labour wages; Plant value.
(iii) Maintenance of building
Floor area occupied by each department
(iv) Executive salaries
Actual basis; Number of workers.
(v) Rent
Floor area
(vi) Power and light
K W hours or H P (power)
Number of light points; Floor space; Meter readings (light)
(vii) Fire insurance
Capital cost of plant and building; Value of stock
(viii) Indirect labour
Direct labour cost.
Question 20
Your company uses a historical cost system and applies overheads on the basis of “predetermined” rates. The following are the figure from the Trial Balance as at 30-9-83:Manufacturing overheads
`
4,26,544 Dr.
Manufacturing overheads applied
`
3,65,904 Cr.
Work-in-progress
`
1,41,480 Dr.
Finished goods stocks
`
2,30,732 Dr.
Cost of goods sold
`
8,40,588 Dr.
© The Institute of Chartered Accountants of India
4.24
Cost Accounting
Give two methods for the disposal of the unabsorbed overheads and show the profit
implications of each method.
Answer
Actual overheads
`
`
Overhead recovered
4,26,544
3,65,904
Under absorbed Overhead
`
60,640
The two methods for the disposal of the under-absorbed overheads in this problem may be:(1) Write off the under – absorbed overhead to Costing Profit & Loss Account.
(2) Use supplementary rate, to recover the under-absorbed overhead.
According to first method, the total unabsorbed overhead amount of `60,640 will be written off
to Costing Profit & Loss Account. The use of this method will reduce the profits of the concern
by `60,640 for the period.
According to second method, a supplementary rate may be used to adjust the overhead cost
of each cost unit. The under-absorbed amount in total may, at the end of the accounting
period, be apportioned on ratio basis to the three control accounts, viz, work-in-progress,
finished goods stock and cost of goods sold account. Apportioning of under-absorbed
overhead can be carried out by using direct labour hours/machine hours/the value of the
balances in each of these accounts, as the basis. Prorated figures of under-absorbed
overhead over work-in-progress, finished goods stock and cost of goods sold in this question
on the basis of values, of the balances in each of these accounts are as follows:Additional Overhead
(Under-absorbed) Total
Work-in-progress
Finished Goods Stock
Cost of Goods Sold
(`)
(`)
(`)
1,41,480
2,30,732
8,40,588
12,12,800
7,074*
11,537**
42,029***
60,640
1,48,554
2,42,269
8,82,617
12,73,440
By using this method, the profit for the period will be reduced by `42,029 and the value of
stock will increase by `18,611. The latter will affect the profit of the subsequent period.
Working Notes
The apportionment of under-absorbed overhead over work-in-progress, finished goods stock
and cost of goods sold on the basis of their value in the respective account is as follows:*Overhead to be absorbed by work-in-progress
© The Institute of Chartered Accountants of India
=
` 60,640
× 1,41,480 = `7,074
12,12,800
Overheads
**Overhead to be absorbed by finished goods
***Overhead to be absorbed by cost of goods sold
4.25
=
` 60,640
× 2,30,732 = `11,537
12,12,800
=
` 60,640
× 8,40,588 = `42,029
12,12,800
Question 21
A manufacturing unit has purchased and installed a new machine of ` 12,70,000 to its fleet of
7 existing machines. The new machine has an estimated life of 12 years and is expected to
realise ` 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.
(ii)
Estimated cost of maintenance of the machine is `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 `400 each time.
(iv) Four operators control operation of 8 machines and the average wages per person
amounts to `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 `3
per unit. No current is taken during maintenance and setting up.
(vi) Departmental and general works overhead allocated to the operation during last year
was `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
productive.
Answer
Computation of Machine hour Rate
Per year
Standing charges
Operators wages
4× 420 × 54
Add: Fringe Benefits 15%
Departmental and general overhead
(50,000 + 5,000)
Total Std. Charging for 8 machines
Cost per Machine 1,59,328/8
Cost per Machine hour 19,916/2,200
19,916/2,292
© The Institute of Chartered Accountants of India
Per hour
(unproductive)
Per hour
(productive)
90,720
13,608
1,04,328
55,000
1,59,328
19,916
9.05
8.69
4.26
Cost Accounting
Machine hours:
Setting time unproductive (2,592-300-92) =
2200
Setting time productive (2,592-300) = 2,292
Machine expenses
Depreciation (12,70,000 -70,000)/(12 × 2,200)
(12,70,000-70,000)/(12 × 2,292)
Electricity (16 × 3)
(16×3×2,200)/2,292)
Special chemical solution (400 × 54)/2,200,/
2,292
Maintenance (25,000/2,200)
(25,000/2,292)
Machine Hour Rate
45.45
43.63
48.00
9.82
46.07
9.42
11.36
123.68
10.91
118.72
Question 22
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)
`3,24,000
Normal working hours for the month
(The machine works to only 75% of capacity)
Wages of Machineman
200 hours
`125 per day (of
8 hours)
Wages for Helper (machine attendant)
Power cost for the month for the time worked
Supervision charges apportioned for the machine
centre for the month
Electricity & Lighting for the month
`75
per
(of 8 hours)
day
`15,000
`3,000
`7,500
Repairs & maintenance (machine) including
Consumable stores per month
Insurance of Plant & Building (apportioned)
for the year
`17,500
`16,250
`27,500
Other general expense per annum
The workers are paid a fixed Dearness allowance of `1,575 per month. Production bonus
payable to workers in terms of an award is equal to 33.33% of basic wages and dearness
© The Institute of Chartered Accountants of India
Overheads
4.27
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.
Answer
Computation of Comprehensive Machine Hour Rate
Per month(` )
Per hour(` )
Fixed cost
Supervision charges
3,000
Electricity and lighting
7,500
Insurance of Plant and building (16,250×1/12)
1,354.17
Other General Expenses (27,500×1/12)
2,291.67
Depreciation (32,400×1/12)
2,700
16,845.84
112.31
Repairs and maintenance
17,500
116.67
Power
15,000
100.00
Variable Cost
Wages of machine man
44.91
Wages of Helper
32.97
Machine Hour rate (Comprehensive)
Effective machine working hour’s p.m.
406.86
200 hrs. × 75% = 150 hrs.
Wages per machine hour
Machine man
Wages for 200 hours
(`125× 25)
(`75× 25)
D.A.
Production bonus (1/3 of above)
Leave wages (10%)
Effective wage rate per machine hour (150 hrs in all)
© The Institute of Chartered Accountants of India
Helper
`3,125
`1,575
`4,700
1,567
6,267
470
6,737
`44.91
`1,875
`1,575
`3,450
1,150
4,600
345
4,945
`32.97
4.28
Cost Accounting
Question 23
ABC 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, 2007:
`
Rent and rates
62,500
General lighting
7,500
Indirect Wages
18,750
Power
25,000
Depreciation on machinery
50,000
Insurance of machinery
Other Information:
20,000
P1
37,500
P2
25,000
P3
37,500
S1
18,750
Direct wages (Rs.)
Horse Power of
Machines used
60
30
50
10
3,00,000
4,00,000
5,00,000
25,000
Cost of machinery
(Rs.)
Floor space (Sq. ft)
2,000
2,500
3,000
2,000
10
15
20
10
Number of light
points
Production
hours
worked
6,225
4,050
4,100
−
Expenses of the service departments S1 and S2 are reapportioned as below:
S2
6,250
−
25,000
500
5
−
P1
P2
P3
S1
S2
S1
20%
30%
40%
−
10%
S2
40%
20%
30%
10%
−
Required:
(i)
Compute overhead absorption rate per production hour of each production department.
(ii)
Determine the total cost of product X which is processed for manufacture in department
P1, P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct material
cost is `625 and direct labour cost is `375.
© The Institute of Chartered Accountants of India
Overheads
4.29
Answer
Primary Distribution Summary
Item of cost
Rent
Rates
Basis of
apportionment
Total
P1
P2
P3
S1
S2
(`
(` )
(` )
(` )
(` )
(` )
62,500
12,500
15,625
18,750
12,500
3,125
7,500
1,250
1,875
2,500
1,250
625
18,750
5,625
3,750
5,625
2812.5
937.5
25,000
10,000
5,000
8,333
1,667
−
50,000
12,000
16,000
20,000
1,000
1,000
20,000
4,800
6,400
8,000
400
400
_______
______
______
______
______
_____
1,83,750
46,175
48,650
63,208
19,630
6,088
and Floor area
4:5:6:4:1
General
lighting
Light points
2:3:4:2:1
Indirect wages
Direct wages
6:4:6:3:1
Power
Horse Power of
machines used
6:3:5:1
Depreciation of Value of
machinery
machinery
12 : 16 : 20 : 1 :
1
Insurance
machinery
of Value of
machinery
12 : 16 : 20 : 1 :
1
Overheads of service cost centres Let S1 be the overhead of service cost centre S1 and S2 be
the overhead of service cost centre S2.
S1 = 19,630 + 0.10 S2
S2 = 6,088 + 0.10 S1
Substituting the value of S2 in S1 we get
S1 = 19,630 + 0.10 (6,088 + 0.10 S1)
S1 = 19,630 + 608.8 + 0.01 S1
0.99 S1 = 20,238.8
∴S1
= `20,443.
∴S2
= 6,088 + 0.10 × 20,443.
= `8,132.
© The Institute of Chartered Accountants of India
4.30
Cost Accounting
Secondary Distribution Summary
Particulars
Total
P1
P2
P3
(`)
1,58,033
(`)
46,175
(`)
48,650
(`)
63,208
S1
20,443
4,089
6,133
8,177
S2
8,132
3,253
1,626
2,440
53,517
56,409
73,825
Allocated and Apportioned overheads
as
per
primary
distribution
Overhead rate per hour
Total overheads cost
P1
P2
P3
`53,517
`56,409
`73,825
6,225
4,050
4,100
`13.93
`18.01
Production hours worked
Rate per hour (`)
`8.60
Cost of Product X
Direct material
` 625
Direct labour
` 375
`1,000
Prime cost
Production on overheads
P1
5 hours × `8.60 = 43
P2
3 hours × `13.93 = 41.79
P3
4 hours × `18.01 = 72.04
Factory cost
`156.83
` 1,157
Question 24
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 overheads of the factory are ` 10,08,000
and budgeted machine hours are 96,000.
For a period of first six months of the financial year 2007−2008, following information were
extracted from the books:
Actual production overheads
` 6,79,000
Amount included in the production overheads:
Paid as per court’s order
© The Institute of Chartered Accountants of India
` 45,000
Overheads
Expenses of previous year booked in current year
Paid to workers for strike period under an award
Obsolete stores written off
Production and sales data of the concern for the first six months are as under:
4.31
` 10,000
` 42,000
` 18,000
Production:
Finished goods
22,000 units
Works-in-progress
(50% complete in every respect)
16,000 units
Sale:
Finished goods
18,000 units
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 due to defective production policies
and the balance was attributable to increase in costs.
You are required:
(i)
to determine the amount of under absorption of production overheads for the period,
(ii)
to show the accounting treatment of under-absorption of production overheads, and
(iii) to apportion the unabsorbed overheads over the items.
Answer
(i)
Amount of under absorption of production overheads during the period of first six months
of the year 2007-2008:
Amount
(`)
Total production overheads actually incurred during the period
Less: Amount paid to worker as per
6,79,000
45,000
Expenses of previous year booked
10,000
Wages paid for the strike period
42,000
Obsolete material written off
18,000
1,15,000
5,64,000
Less: Production overheads absorbed
Amount of under absorbed production overheads
© The Institute of Chartered Accountants of India
(48,000
hours *
`10.50)
5,04,000
60,000
4.32
Cost Accounting
Budgeted Machine hour rate =
` 10,08,000
= ` 10.50 per hour
96,000 hours
(ii) Accounting treatment of under absorbed production overheads:
As, one fourth of the under absorbed overheads were due to defective production
policies, this being abnormal, hence should be debited to Profit and Loss Account.
Amount to be debited to Profit and Loss Account = (60,000 * ¼)
` 15,000.
Balance of under absorbed production overheads should be distributed over Works in
progress, finished goods and cost of sales by applying supplementary rate*.
Amount to be distributed = (60,000 * ¾) `45,000.
Supplementary rate =
` 45,000
= ` 1.50 per unit
30,000 units
(iii) Apportionment of under absorbed production overheads over WIP, finished goods and
cost of sales:
Equivalent
completed units
Work-in-Progress (16,000 units *50%*1.50)
Finished goods (4,000 units *1.50)
Cost of sales (18,000 units *1.50)
Total
8,000
4,000
18,000
30,000
Amount
(in `)
12,000
6,000
27,000
45,000
Question 25
In a manufacturing company factory overheads are charged as fixed percentage basis on
direct labour and office overheads are charged on the basis of percentage of factory cost.
The following informations are available related to the year ending 31st March, 2008 :
Direct Materials
Direct Labour
Sales
Profit
You are required to find out:
Product A
` 19,000
` 15,000
` 60,000
25% on cost
(i)
The percentage of factory overheads on direct labour.
(ii)
The percentage of office overheads on factory cost
Product B
` 15,000
` 25,000
` 80,000
25% on sales price
Answer
Let, the percentage of factory overheads on direct labour is ‘x’ and the percentage of office
© The Institute of Chartered Accountants of India
Overheads
4.33
overheads on factory cost is ‘y’, then the total cost of product A and product B will be as
follows:
Product A
Product B
(`)
(`)
Direct Materials
19,000
15,000
Direct labour
15,000
25,000
Prime Cost
34,000
40,000
150 x
250 x
Factory cost (i)
34,000 + 150 x
40,000 + 250 x
Office overheads (Factory cost × y) (ii)
340 y + 1.5 x y
400 y + 2.5 x y
Total Cost [(i) + (ii)]
34,000 + 150 x
40,000 + 250 x
+ 340 y + 1.5 x y
+400 y + 2.5 x y
Factory overheads (Direct labour × x)
Total cost on the basis of sales is:
Sales
Product A
Product B
(`)
(`)
60,000
80,000
Less: Profit
Product A – 25% on cost or 20% on Sales
12,000
Product B – 25% on sales
______
20,000
48,000
60,000
Total Cost
Thus,
Total Cost of A is 34,000 + 150x + 340y + 1.5 xy = 48,000
or 150x + 340y + 1.5 xy = 14,000…………………….(i)
Total Cost of B is 40,000 + 250x + 400y + 2.5 xy = 60,000
or 250x + 400y + 2.5 xy = 20,000…………………….(ii)
Equation (ii) multiplied by 0.6 and after deducting from equation (i), we get
150x + 340y + 1.5xy = 14,000………………………….(i)
_150x ± 240y ± 1.5xy = _12,000…………..….....………(ii)
100y = 2,000
or y =
20
Putting value of y in equation (i), we get
150x + 340 × 20 + 1.5x × 20 = 14,000
© The Institute of Chartered Accountants of India
4.34
Cost Accounting
or 150x + 30x = 14,000 – 6,800
or 180x = 7,200
or x = 40.
Hence,
(ii)
(i)
the percentage of factory overheads on direct labour = 40 and
the percentage of office overheads on factory cost = 20.
Question 26
Maximum production capacity of JK Ltd. is 5,20,000 units per annum. Details of estimated cost
of production are as follows:
¾
Direct material `15 per unit.
¾
Direct wages `9 per unit (subject to a minimum of `2,50,000 per month).
¾
Fixed overheads `9,60,000 per annum.
¾
Variable overheads `8 per unit.
Semi-variable overheads are `5,60,000 per annum up to 50 per cent capacity and
additional `1,50,000 per annum for every 25 per cent increase in capacity or a part of it.
JK Ltd. worked at 60 per cent capacity for the first three months during the year 2008, but it is
expected to work at 90 per cent capacity for the remaining nine months.
¾
The selling price per unit was `44 during the first three months.
You are required, what selling price per unit should be fixed for the remaining nine months to
yield a total profit of `15,62,500 for the whole year.
Answer
Statement of Cost and Sales for the year 2008
Maximum production capacity = 5,20,000 units per annum
Particulars
First 3 months
Next 9 months
60%
90%
Capacity utilized
Production
5,20,000 × 3 × 60%
5,20,000 × 9 × 90%
12
12
= 78,000 units
Direct materials @ `15 per unit
Direct wages @ 9 per unit or `2,50,000
per month which ever is higher
Prime cost (A)
= 3,51,000 units
Total
4,29,000 units
(`)
(`)
(`)
11,70,000
52,65,000
64,35,000
7,50,000
31,59,000
39,09,000
19,20,000
84,24,000
1,03,44,000
2,40,000
7,20,000
9,60,000
Overheads
Fixed
© The Institute of Chartered Accountants of India
Overheads
4.35
Variable @ `8 per unit
6,24,000
28,08,000
34,32,000
Semi Variable
1,77,500
6,45,000
8,22,500
Total overheads (B)
10,41,500
41,73,000
52,14,500
Total Cost (C) [(A + B)]
29,61,500
1,25,97,000
1,55,58,500
Profit during first 3 months (Bal. figure)
4,70,500
Sales @ `44 per unit (78,000 x ` 44)
34,32,000
Desired profit during next 9 months
(`15,62,500 – `4,70,500) (D)
10,92,000
Sales required for next 9 months (E) [(C + D)]
1,36,89,000
Total profit
15,62,500
Total Sales
1,71,21,000
Required selling price per unit for last 9 months =
Total sales required for last 9 months
Units produced during last 9 months
= `
1,36,89,000
= ` 39 per unit.
3,51,000
Workings:
(1) Semi-variable overheads:
(a) For first 3 months at 60% capacity = `(5,60,000 + `1,50,000) × 3/12
= `7,10,000 × 3/12
= `1,77,500.
(b) For remaining 9 months at 90% capacity = `(5,60,000 + `3,00,000) × 9/12
= `8,60,000 × 9/12
= ` 6,45,000
Question 27
Calculate machine hour rate for recovery of overheads for a machine from the following
information:
Cost of machine is `25, 00,000 and estimated salvage value is `1,00,000. Estimated working
life of the machine is 10 years. Annual working hours are 3,000 in the factory. The machine is
required 400 hours per annum for repairs and maintenance. Setting-up time of the machine is
156 hours per annum to be treated as productive time. Cost of repairs and maintenance for
whole working life of the machine is `3,50,000. Power used 15 units per hour at a cost of `5
per unit. No power is consumed during maintenance and setting-up time. A chemical
required for operating the machine is `9,880 per annum. Wages of an operator is `4,000 per
© The Institute of Chartered Accountants of India
4.36
Cost Accounting
month. The operator, devoted one-third of his time to the machine. Annual insurance charges
2 per cent of cost of machine.
Light charges for the department is `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 `6,500 per month.
Answers
Computation of Machine Hour Rate
Running Hours (3,000 – 400) = 2,600 per annum
Particulars
Fixed Charges (Standing Charges):
Rs` 4,000 × 12
Operator’s wages:
3
Insurance: 2% of `25,00,000
` 2,500 × 12 × 8
Light charges :
48
Other indirect expenses: `6,500 × 12
Total Standing charges
Rs` 1,49,000
Hourly rate for fixed charges :
2,600
Total Amount
Rate per hour
(`)
(`)
16,000
50,000
5,000
78,000
1,49,000
Variable Expenses (Machine Expenses) per hour
` 25,00,000 − ` 1,00,000
Depreciation :
10 × 2,600
Repairs and Maintenance :
Power:
` 3,50,000
10 × 2,600
Rs` 5 × 15 × 2,444
2,600
Chemical :
Rs` 9,880
2,600
Machine Hour Rate
Question 28
Explain briefly the conditions when supplementary rates are used.
© The Institute of Chartered Accountants of India
57.31
92.31
13.46
70.50
3.80
237.38
Overheads
4.37
Answer
When the amount of under absorbed and over absorbed overhead is significant or large, because
of differences due to wrong estimation, then the cost of product needs to be adjusted by using
supplementary rates (under and over absorption/actual overhead) to avoid misleading impression.
Question 29
A company has three production departments (M1, M2 and A1) and three service department,
one of which Engineering service department, servicing the M1 and M2 only. The relevant
information are as follows:
Product X
M1
10 Machine hours
M2
4 Machine hours
A1
14 Direct Labour hours
The annual budgeted overhead cost for the year are
M1
M2
A1
Stores
Engineering Service
General Service
Indirect Wages
(`)
46,520
41,340
16,220
8,200
5,340
7,520
Product Y
6 Machine hours
14 Machine hours
18 Direct Labour hours
Consumable Supplies
(`)
12,600
18,200
4,200
2,800
4,200
3,200
(`)
−
−
−
Depreciation on Machinery
Insurance of Machinery
Insurance of Building
39,600
7,200
3,240
−
−
−
Power
Light
Rent
6,480
5,400
12,675
(Total building insurance cost for M1
is one third of annual premium
(The general service deptt. is located
in a building owned by the company.
It is valued at `6,000 and is charged
into cost at notional value of 8% per
annum. This cost is additional to the
rent shown above)
− The value of issues of materials to the production departments are in the same
proportion as shown above for the Consumable supplies.
© The Institute of Chartered Accountants of India
4.38
Cost Accounting
The following data are also available:
Book value
Machinery
(`)
Area
(Sq. ft.)
Effective
H.P. hours %
Production
Direct
Labour
hour
Capacity
Machine
hour
M1
1,20,000
5,000
50
2,00,000
40,000
M2
90,000
6,000
35
1,50,000
50,000
A1
30,000
8,000
05
3,00,000
Stores
12,000
2,000
−
Engg. Service
36,000
2,500
10
General Service
Required:
12,000
1,500
−
Department
(i)
Prepare a overhead analysis sheet, showing the bases of apportionment of overhead to
departments.
(ii)
Allocate service department overheads to production department ignoring the
apportionment of service department costs among service departments.
(iii) Calculate suitable overhead absorption rate for the production departments.
(iv) Calculate the overheads to be absorbed by two products, X and Y.
Answer
(i)
Summary of Apportionment of Overheads
(`)
Basis of
Total
Amount
M1
M2
A1
Allocation
given
1,25,140
46,520
41,340
Consumable
stores
Allocation
given
45,200
12,600
Depreciation
Capital value
of machine
39,600
Insurance of
Machine
Capital value
of machine
Insurance
on Building
Power
Items
Apportionment
Indirect
wages
Production Deptt.
Service Deptt.
Store
Service
Engineering
Service
General
Service
16,220
8,200
5,340
7,520
18,200
4,200
2,800
4,200
3,200
15,840
11,880
3,960
1,584
4,752
1,584
7,200
2,880
2,160
720
288
864
288
1
to MI
3
Balance area
basis
3,240
1,080
648
864
216
270
162
HP Hr%
6,480
3,240
2,268
324
© The Institute of Chartered Accountants of India
−
648
−
Overheads
Light
Rent
Rent
general
service
of
Area
5,400
1,080
1,296
1,728
432
540
Area
12,675
2,535
3,042
4,056
1,014
(ii)
324
1,268
760
−
−
−
−
−
480
_______
______
______
______
______
______
______
2,45,415
85,775
80,834
32,072
14,534
17,882
14,318
Direct 8% of
6,000
480
Total
4.39
Allocation of service departments overheads
Basis of
Apportionment
Service
Deptt.
Store
Engineering
service
General
service
Ratio of
consumable value
(126 :182 : 42)
In Machine hours
Ratio of M1 and
M2 (4 : 5)
LHR Basis
(20 : 15 : 30)
Production
Department
allocated in
(i)
Total
M1
Production Deptt.
M2
A1
Service Deptt.
Engineering
Service
General
Service
(14,534)
−
−
5,232
7,558
7,948
9,934
−
−
(17,882)
−
4,406
3,304
6,608
−
−
(14,318)
_______
85,775
80,834
32,072
2,45,415
1,03,361
1,01,630
40,424
(iii)
1,744
Store
Service
Overhead Absorption rate
M1
1,03,361
40,000
−
2.584
−
Total overhead allocated
Machine hours
Labour hours
Rate per MHR
Rate per Direct labour
(iv)
M2
1,01,630
50,000
−
2.033
−
A1
40,424
−
3,00,000
0.135
Statement showing overhead absorption for Product X and Y
Machine Deptt.
Absorption Rate
M1
M2
A1
2.584
2.033
0.135
© The Institute of Chartered Accountants of India
Product X
Hours
10
25.84
4
8.13
14
1.89
35.86
Product Y
Hours
6
15.50
14
28.46
18
2.43
46.39
4.40
Cost Accounting
Question 30
A machine shop cost centre contains three machines of equal capacities. Three operators are
employed on each machine, payable `20 per hour each. The factory works for fortyeight hours in
a week which includes 4 hours set up time. The work is jointly done by operators. The operators
are paid fully for the forty eight hours. In additions they are paid a bonus of 10 per cent of
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 the factory overheads allocated to the machines. The following
details of factory overheads applicable to the cost centre are available:
¾
Depreciation 10% per annum on original cost of the machine. Original cost of the each
machine is `52,000.
¾
Maintenance and repairs per week per machine is `60.
¾
Consumable stores per week per machine are `75.
¾
Power : 20 units per hour per machine at the rate of 80 paise per unit.
Apportionment to the cost centre : Rent per annum `5,400, Heat and Light per annum
`9,720, and foreman’s salary per annum `12,960.
Required:
¾
(i)
Calculate the cost of running one machine for a four week period.
(ii)
Calculate machine hour rate.
Answer
Computation of cost of running one machine for a four week period
(`)
Standing charges
Rent
Heat and light
Forman’s salary
28,080 × 4
3 × 13
Wages: Hours per week = 48 and hours for 4 weeks = 48 × 4 = 192
Wages 192 × 20
Bonus (192 − 16) = 176 × 20 × .10
Total standing charges
Total expenses for one machine for four week period =
(i)
© The Institute of Chartered Accountants of India
Per
annum
5,400
9,720
12,960
28,080
(`)
2,880
3,840
352
7,072
Overheads
4.41
Machine Expenses:
4 ⎞
⎛
Depreciation = ⎜ 52,000 × 10% × ⎟
13 ⎠
⎝
Repairs and maintenance = (60 × 4)
Consumable stores (75 × 4)
Power (192 − 16) = 176 × 20 × .80
(ii) Total machine expenses
Total expenses (i) + (ii)
12,028
Machine hour rate =
= 68.34.
176
(`)
1,600
240
300
2,816
4,956
12,028
Question 31
Explain the cost accounting treatment of unsuccessful Research and Development cost.
Answer
Cost of unsuccessful research is treated as factory overhead, provided the expenditure is
normal and is provided in the budget. If it is not budgeted, it is written off to the profit and loss
account. If the research is extended for long time, some failure cost is spread over to
successful research.
Question 32
Discuss the difference between allocation and apportionment of overhead.
Answer
The following are the differences between allocation and apportionment.
1.
Allocation costs are directly allocated to cost centre. Overhead which cannot be directly
allocated are apportioned on some suitable basis.
2.
Allocation allots whole amount of cost to cost centre or cost unit where as apportionment
allots part of cost to cost centre or cost unit.
3.
No basis required for allocation. Apportionment is made on the basis of area, assets
value, number of workers etc.
Question 33
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 during the year and the plant actually
produced 25.2 tonnes during the year. You are required to state the following figures:
(a) rated capacity
© The Institute of Chartered Accountants of India
4.42
Cost Accounting
(b) practical capacity
(c) normal capacity
(d) actual capacity
Answer
(a) Rated capacity
36.5 tonnes
(Refers to the capacity of a machine
or a plant as indicated by its manufacturer)
(b) Practical capacity
30
tonnes
25
tonnes
[Defined as actually utilised capacity of a plant
i.e.
36.5
× (365 − 65) tonnes ]
365
(c) Normal capacity
(It is the capacity of a plant utilized based
on sales expectancy)
(d) Actual capacity
25.2 tonnes
(Refers to the capacity actually achieved)
Question 34
Following information is available for the first and second quarter of the year 2008-09 of ABC
Limited:
Production (in units)
Quarter I
Semi-variable cost
36,000
2,80,000
Quarter II
42,000
You are required to segregate the semi-variable cost and calculate :
3,10,000
(a) Variable cost per unit; and
(b) Total fixed cost.
Answer
Quarter I
Quarter II
Difference
Production (Units)
36,000
42,000
6,000
© The Institute of Chartered Accountants of India
Semi Variable Cost (`.)
2,80,000
3,10,000
30,000
(`)
Overheads
Variable Cost per Unit
=
4.43
Change in Semi Variable Cost ` 30,000
=
= ` 5 per units
Change in Pr oduction
6,000 units
Total Fixed Cost = Semi Veriable Cost – (Production x Variable Cost per Unit)
Total fixed cost in Quarter I :
= 2,80,000 – (36,000 × 5)
= 2,80,000 – 1,80,000 = 1,00,000
Total fixed cost in Quarter II :
= 3,10,000 – (42,000 × 5)
= 3,10,000 – 2,10,000 = 1,00,000
Question 35
Explain the treatment of over and under absorption of Overheads in Cost accounting.
Answer
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
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.
(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.
(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 of two years would be wrong.
Question 36
What are the methods of re-apportionment of service department expenses over the
production departments? Discuss.
Answer
Methods of re-apportionment of service department expenses over the production
departments
(i)
Direct re-distribution method.
(ii) Step method or non-reciprocal method.
(iii) Reciprocal Service method
© The Institute of Chartered Accountants of India
4.44
Cost Accounting
Direct re-distribution Method: Service department costs under this method are apportioned
over the production departments only, ignoring services rendered by one service department
to another. The basis of apportionment could be no. of workers. H.P of machines.
Step Method or Non-Reciprocal Method
This method gives cognizance to the service rendered by service department to another
service department. Therefore, as compared to previous method, this method is more
complicated because a sequence of apportionments has to be selected here. The sequence
here begins with the department that renders service to the maximum number of other service
departments.
Production Department
P1
P
Service Department
P3
S1
S2
S3
Reciprocal Service Method
This method recognises the fact that where there are two or more service departments they
may render service to each other and, there these inter-departmental services are to be given
due weight while re-distributing the expenses of service department.
The methods available for dealing with reciprocal services are:
•
Simultaneous equation method
•
Repeated distribution method
•
Trial & Error method.
Question 37
You are given the following information of the three machines of a manufacturing department
of X Ltd.:
Depreciation
Spare parts
Power
Consumable stores
© The Institute of Chartered Accountants of India
Preliminary estimates of expenses
(per annum)
Total
Machines
A
B
C
(`)
(`)
(`)
(`)
20,000
7,500
7,500
5,000
10,000
4,000
4,000
2,000
40,000
8,000
3,000
2,500
2,500
Overheads
4.45
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:
Machines
Estimated Direct Labour Hours
A
B
C
1,00,000
1,50,000
1,50,000
3
2
3
Ratio of K.W. Rating
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
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 the following factors:
•
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.
20% general increase in wages rates.
Answer
(a)
Computation of Machine Hour Rate
(A)
Standing
Charges
Insurance
Indirect Labour
Building
Maintenance
A
(`)
Machines
B
(`)
C
(`)
8,000
3,000
3,000
2,000
24,000
20,000
6,000
8,000
9,000
8,000
9,000
4,000
Basis
of
apportionment
Total
(`)
Depreciation
Basis
Direct Labour
Floor Space
© The Institute of Chartered Accountants of India
4.46
Cost Accounting
expenses
Rent and Rates Floor Space
Salary
of Equal
foreman
Salary
of Equal
attendant
Total standing
charges
Hourly rate for
standing
charges
(B) Machine
Expenses:
Depreciation
Direct
Spare parts
Final estimates
Power
K.W. rating
Direct
Consumable
Stores
Total Machine expenses
Hourly Rate for Machine expenses
Total (A + B)
Machine Hour rate
1,20,000
2,40,000
48,000
80,000
48,000
80,000
24,000
80,000
60,000
20,000
20,000
20,000
4,72,000
1,65,000
1,68,000
1,39,000
84.75
86.29
71.40
20,000
13,225
40,000
8,000
7,500
4,600
15,000
3,000
7,500
5,750
10,000
2,500
5,000
2,875
15,000
2,500
81,225
30,100
15.46
1,95,100
100.21
25,750
13.23
1,93,750
99.52
25,375
13.03
1,64,375
84.43
553,225
Working Notes:
(i)
Calculation of effective working hours:
No. of holidays 52 (Sundays) + 12 (other holidays) = 64
Saturday (52 – 2) = 50
No. of days (Work full time) = 365 – 64 – 50 = 251
Hours
Full days work 251 × 8 = 2,008
Half days work 50 × 4 =
200
2,208
Hours
Effective capacity 90% of 2,208
Less: Normal loss of time (Breakdown) 2%
Effective running hour
© The Institute of Chartered Accountants of India
1,987 (Rounded off)
40 (Rounded off)
1,947
Overheads
4.47
(ii) Amount of spare parts is calculated as under:
Preliminary estimates
Add: Increase in price @ 15%
Add: Increase in consumption @ 25%
Estimated cost
A
(`)
4,000
600
4,600
−
4,600
B
(`)
4,000
600
4,600
1,150
5,750
C
(`)
2,000
300
2,300
575
2,875
(iii) Amount of Indirect Labour is calculated as under:
(`)
Preliminary estimates
20,000
Add: Increase in wages @ 20%
4,000
24,000
(iv) Interest on capital outlay is a financial matter and, therefore it has been excluded
from the cost accounts.
Question 38
X Ltd. recovers overheads at a. pre-determined rate of ` 50 per man-day. The total factory
overheads incurred and the man-days actually worked were ` 79 lakhs and 1.5 lakhs days
respectively. During the period 30,000 units were sold. At the end of the period 5,000
completed units were held in stock but there was no opening stock of finished goods.
Similarly, there was no stock of uncompleted units at the beginning of the period but at the
end of the period there were 10,000 uncompleted units which may be treated as 50%
complete.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to
defective planning and the balance were attributable to increase in overhead cost.
How would unabsorbed overheads be treated in cost accounts?
Answer
(a) Absorbed overheads
= Actual Man days x Rate
= 1,50,000 x 50
= ` 75,00,000
Under absorption of overheads
=
Actual overheads – Absorbed overheads
=
79,00,000 – 75,00,000
=
` 4,00,000
© The Institute of Chartered Accountants of India
4.48
Cost Accounting
Reasons for under – absorption:
1.
Defective Planning
4,00,000 x 60% = `2,40,000
2.
Increase in overhead cost
4,00,000 x 40% = `1,60,000
Treatment in Cost Accounts:
(i). The unabsorbed overheads of ` 2,40,000 on account of defective planning to be
treated as abnormal and thus be charged to costing profit & loss account.
(ii) The balance of unabsorbed overheads i.e. ` 1,60,000 be charged as below on the
basis of supplementary overhead absorption rate
Supplementary Rate = ` 1,60,000/(30,000+5,000+50% of 10,000)= ` 4 per unit
(a) To cost of sales Account = 30,000 x4 = ` 1,20,000
(b) To finished stock account = 5,000 x 4 = ` 20,000
(c) To WIP account = 50% of 10,000 x 4 = ` 20,000
` 1,60,000
Question 39
A Machine costing `10 lacs was purchased on 1-4-2011. the expected life of the machine is
10 years. At the end of this period its scrap value is likely to be `10,000. the total cost of all
the machines including new one was `90 lacs.
The other information is given as follows:
(i)
Working hours of the machine for the year was 4,200 including 200 non-productive
hours.
(ii)
Repairs and maintenance for the new machine during the year was ` 5,000.
(iii)
Insurance Premium was paid for all the machine ` 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being ` 3.75
(v) The new machine occupies area of the department.
` 2,400 per month.
Rent of the department is
(vi) Depreciation is charged on straight line basis
Compute machine hour rate for the new machine.
Answer
Computation of machine hour rate of new Machine
A. Standing Charges
© The Institute of Chartered Accountants of India
Total
(`)
1,000
Per hour(`)
Overheads
I. Insurance Premium 9000 x
II. Rent
4.49
1
9
1
x2400x12
10
2,880
3,880
0.97*
B. Machine expenses
I. Repairs and Maintenance [5,000/4,000]
⎡ 10,00,000 − 10,000 ⎤
II. Depreciation ⎢
⎥
10 × 4,000
⎣
⎦
1.25
24.75
30.00
56.97
III. Electricity 8 units x ` 3.75
Machine hour rate
Working Note
1
Calculation of productive Machine hour rate
Total hours
4,200
Less: Non-Productive hours
200
4,000
* 3,880/ 4000 = 0.97
Question 40
The following account balances and distribution of indirect charges are taken from the accounts of
a manufacturing concern for the year ending on 31st March, 2012:
Item
Total
Amount
Production Departments
(`)
Service
Departments
X (`)
Y (`)
Z (`)
A (`)
B (`)
Indirect Material
1,25,000
20,000
30,000
45,000
25,000
5,000
Indirect Labour
2,60,000
45,000
50,000
70,000
60,000
35,000
-
-
96,000
-
-
Superintendent's Salary
96,000
Fuel & Heat
15,000
Power
1,80,000
Rent & Rates
1,50,000
Insurance
18,000
Meal Charges
60,000
Depreciation
2,70,000
© The Institute of Chartered Accountants of India
4.50
Cost Accounting
The following departmental data are also available:
Production Departments
X
Area (Sq. ft.)
Capital Value of
Assets (`)
Kilowatt Hours
Radiator Sections
Y
Service Departments
Z
A
B
4,400
4,000
3,000
2,400
1,200
4,00,000
3,500
20
6,00,000
4,000
40
5,00,000
3,000
60
1,00,000
1,500
50
2,00,000
30
No. of Employees
60
70
120
30
20
Expenses charged to the service departments are to be distributed to other departments by
the following percentages:
X
Y
Z
A
B
Department A
30
30
20
20
Department B
25
40
25
10
Prepare an overhead distribution statement to show the total overheads of production
departments after re-apportioning service departments' overhead by using simultaneous
equation method. Show all the calculations to the nearest rupee.
Answer
Primary Distribution of Overheads
Item
Basis
Total
Amount
(`)
Production Departments
Service
Departments
X (`)
Y (`)
Z (`)
A (`)
B (`)
Indirect Material
Actual
1,25,000
20,000
30,000
45,000
25,000
5,000
Indirect Labour
Actual
2,60,000
45,000
50,000
70,000
60,000
35,000
Superintendent’s
Salary
Actual
96,000
-
-
96,000
-
-
Fuel & Heat
Radiator
Sections
{2:4:6:5:3}
15,000
1,500
3,000
4,500
3,750
2,250
1,80,000
52,500
60,000
45,000
22,500
-
1,50,000
44,000
40,000
30,000
24,000
12,000
Power
Kilowatt Hours
{7:8:6:3:0}
Rent & Rates
Area (Sq. ft.)
{22:20:15:12:6}
© The Institute of Chartered Accountants of India
Overheads
Insurance
Capital Value of
Assets
4.51
18,000
4,000
6,000
5,000
1,000
2,000
of
60,000
12,000
14,000
24,000
6,000
4,000
Capital Value of
Assets
2,70,000
60,000
90,000
75,000
15,000
30,000
11,74,000 2,39,000 2,93,000 3,94,500 1,57,250
90,250
{4:6:5:1:2}
Meal Charges
No.
Employees
{6:7:12:3:2}
Depreciation
{4:6:5:1:2}
Total overheads
Re-distribution of Overheads of Service Department A and B
Total overheads of Service Departments may be distributed using simultaneous equation
method
Let, the total overheads of A = a and the total overheads of B= b
a = 1,57,250 + 0.10 b
(i)
or, 10a - b = 15,72,500
[(i) x10]
b = 90,250 + 0.20 a
or, -0.20a + b =
(ii)
90,250
10a - b = 15,72,500
-0.20a + b =
9.8a
a
90,250
= 16,62,750
= 1,69,668
Putting the value of a in equation (ii), we get
b = 90,250 + 0.20 x 1,69,668
b = 1,24,184
Secondary Distribution of Overheads
Production Departments
Total overhead as per primary distribution
Service Department A (80% of 1,69,668)
Service Department B (90% of 1,24,184)
Total
© The Institute of Chartered Accountants of India
X (`)
Y (`)
Z (`)
2,39,000
50,900
31,046
3,20,946
2,93,000
50,900
49,674
3,93,574
3,94,500
33,934
31,046
4,59,480
4.52
Cost Accounting
EXERCISE
1
(a)
Explain with illustrative examples the concept of fixed cost and variable cost.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
(b)
The following are the Maintenance costs incurred in a machine shop per six months with
corresponding machine hours:
Month
Machine Hours
January
February
March
April
May
June
Total
2,000
2,200
1,700
2,400
1,800
1,900
12,000
Maintenance Costs
`
300
320
270
340
280
290
1,800
Analyse the Maintenance cost which is semi-variable into fixed and variable element.
Answer Fixed cost (`) 100
2
(a)
Explain how departmental overhead rates are arrived at.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
(b)
Selfhelp Ltd. has gensets and produces its own power. Data for power costs are as follows:Horse power Hours
Needed capacity production
Used during the month of May
Production deptts.
Service deptts.
A
X
B
Y
10,000
20,000
12,000
8,000
8,000
13,000
7,000
6,000
During the month of May costs for generating power amounted to `9,300: of this
`2,500 was considered to be fixed cost. Service Deptt. X renders service to A, B and Y in the ratio
13:6:1, while Y renders service to A and B in the ratio 31:3. Given that the direct labour hours in
Deptts. A and B are 1650 hours and 2175 hours respectively, find the Power Cost per labour hour in
each of these two Deptts.
Answer A
B
Power Cost per labour labour (Rs.)
3
3.00 2.00
The level of production activity fluctuates widely in your company from month to month. Because of this, the
incidence of depreciation on unit cost varies considerably. The management decides that you should find
out a suitable method to correct this.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
4
What is an idle capacity? What are the costs associated with it? How are these treated in product costs?
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
© The Institute of Chartered Accountants of India
Overheads
5
4.53
Explain what is meant by Cost Apportionment and Cost Absorption. Illustrate each with two examples.
Discuss the methods of cost absorption and state which method do you consider to be the best and why
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
6
State the objectives of codification of overheads. Enumerate with examples the different methods of coding
and suggest a suitable method for a large organization.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
7
Explain what do you understand by the terms stores overheads. Cite three example of stores overheads.
Discuss the methods of treatment of stores overhead in cost accounts and state the method which you
consider to be good.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
8
In a manufacturing company where costing is done with a view to fix prices, state whether and, if so, to what
extent the following items are includible in cost .
(i)
Interest on borrowing
(ii)
Bonus and gratuity
(iii)
Depreciation on plant and machinery.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
9
(a)
What do you understand by codification of overheads?
(b)
What are the objectives of codification?
(c)
List down the various methods of codification (you need not elaborate).
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
10
How would you deal the following items in the cost accounts of a manufacturing concern?
(a)
Research and Development cost
(b)
Packing Expenses
(c)
Fringe Benefits
Expenses on Removal and Re-erection of Machinery.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
11
What do you understand by the term ‘pre-determined rate of recovery of overheads’? What are the bases
that are usually advocated for such pre-determination? How do over –absorption and under-absorption of
overheads arise and how are they disposed off in Cost Accounts?
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
12
(a)
What do you mean by the term under/over absorption of production overhead? How does it arise? How is it
treated in cost account?
© The Institute of Chartered Accountants of India
4.54
Cost Accounting
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
(b)
In a factory, overhead of a particular department are recovered on the basis of `5 per machine hour.
The total expenses incurred and the actual machine hours for the department for the month of August
were `80,000 and 10,000 hours respectively. Of the amount of `80,000, `15,000 became payable
due to an award of the Labour Court and `5,000 was in respect of expenses of the previous year
booked in the current month (August). Actual production was 40,000 units of which 30,000 units were
sold. On analysing the reasons, it was found that 60% of the under absorbed overhead was due to
defective planning and the rest was attributed to normal cost increase. How would you treat the under
absorbed overhead in the cost accounts?
Answer
1.
60 percent of under absorbed overhead is due to defective planning. This being abnormal, should be
debited to Profit and Loss A/c (60% of `10,000) (`) 6,000
2.
Balance 40 percent of under-absorbed overhead should be distributed over, Finished Goods and Cost of
Sales by supplementary rate (40% of `10,000) (`) 4,000
13
(a)
Distinguish between allocation, apportionment and absorption of overheads.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
(b)
A departmental store has several departments. What bases would you recommend for apportioning
the following items of expense to its departments
(1)
Fire insurance of Building.
(2)
Rent
(3)
Delivery Expenses.
(4)
Purchase Department Expenses.
(5)
Credit Department Expenses.
(6)
General Administration Expenses.
(7)
Advertisement.
(8)
Sales Assistants Salaries.
(9)
Personal Department expenses.
(10) Sales Commission
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
14
Define administration overheads and state briefly the treatment of such overheads in Cost Accounts.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
15
Enumerate the arguments for the inclusion of interest on capital in cost accounts.
© The Institute of Chartered Accountants of India
Overheads
4.55
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
16
What is ‘Idle Capacity ‘? How should this be treated in cost accounts?
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
17
Write short notes on Chargeable Expenses
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
18
What is notional rent of a factory building? Give one reason why it may be included in cost accounts.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
19
How would you treat the following in Cost Accounts?
(i)
Employee welfare costs
(ii)
Research and development costs
(iii)
Depreciation
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
20
Write a note on 'classification', 'allocation' and 'absorption' of overheads. How does it help in controlling
overheads?
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
21
Explain, how under absorption and over-absorption of overheads are treated in Cost Accounts.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
22
X Ltd. having fifteen different types of automatic machines furnishes information as under for 1996-97
(i)
Overhead expenses: Factory rent `96,000 (Floor area 80,000 sq.ft.), Heat and gas `45,000 and
supervision `1,20,000.
(ii)
Wages of the operator are `48 per day of 8 hours . He attends to one machine when it is under set up
and two machines while they are under operation.
In respect of machine B (one of the above machines) the following particulars are furnished:
(i)
Cost of machine Rs 45,000, Life of machine- 10 years and scrap value at the end of its life `5,000
(ii)
Annual expenses on special equipment attached to the machine are estimated as `3,000
(iii)
Estimated operation time of the machine is 3,600 hours while set up time is 400 hours per annum
(iv)
The machine occupies 5,000 sq.ft. of floor area.
(v)
Power costs `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
Machine operation time (Hours)
90
180
© The Institute of Chartered Accountants of India
4.56
Cost Accounting
Answer
Comprehensive machine
hour rate per hr. (Rs.)
Total cost (Rs.)
Set up rate Per hour
Operational rate Per hour
12
Work – order 31
1,110
11
Work order – 32
2,220
243 "The more kilometers you travel with your own vehicle, the cheaper it becomes." Comment briefly on this
statement.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
24
A factory has three production departments: The policy of the factory is to recover the production overheads
of the entire factory by adopting a single blanket rate based on the percentage of total factory overheads to
total factory wages. The relevant data for a month are given below:
Department
Direct
Materials
`
Direct Wages
`
Factory
Overheads `
Director
Labour
Hour
Machine
Hours
Budget
Machining
6,50,000
80,000
3,60,000
20,000
80,000
Assembly
1,70,000
3,50,000
1,40,000
1,00,000
10,000
Packing
1,00,000
70,000
1,25,000
50,000
–
Machining
7,80,000
96, 000
3,90,000
24,000
96,000
Assembly
1,36,000
2,70,000
84,000
90,000
11,000
Packing
1,20,000
90,000
1,35,000
60,000
Actual
The details of one of the representative jobs produced during the month are as under:
Job No. CW 7083
Department
Direct Materials
Direct Wages
Director Labour
Hour
Machine Hours
`
`
Machining
1,200
240
60
180
Assembly
600
360
120
30
Packing
300
60
40
–
The factory adds 30% on the factory cost to cover administration and selling overheads and profit.
Required:
(i)
Calculate the overhead absorption rate as per the current policy of the company and determine the
selling price of the Job No. CW 7083.
(ii)
Suggest any suitable alternative method(s) of absorption of the factory overheads and calculate the
overhead recovery rates based on the method(s) so recommended by you.
(iii)
Determine the selling price of Job CW 7083 based on the overhead application rates calculated in (ii)
above.
© The Institute of Chartered Accountants of India
Overheads
(iv)
4.57
Calculate the departmentwise and total under or over recovery of overheads based on the company's
current policy and the method(s) recommended by you.
Answer (i) Overhead absorption rate = 125% of Direct wages
(ii) Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
(iii) Selling Price(Rs.)
25
(a)
4,989.40
Why is the use of an overhead absorption rate based on direct labour hours generally preferable to a direct
wages percentage rate for a labour intensive operation?
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
(b)
B & Co. has recorded the following data in the two most recent periods:
Total cost of production
`
14,600
19,400
Volume of production
(Units)
800
1,200
What is the best estimate of the firm's fixed costs per period?
Answer Fixed cost = `5,000
(c)
In a manufacturing unit overhead was recovered at a pre-determined rate of Rs.20 per labour-hour.
The total factory overhead incurred and the labour-hours actually worked were Rs.45,00,000 and
2,00,000 labour-hours respectively. During this period 30,000 units were sold. At the end of the period
5,000 units were held in stock while there was no opening stock of finished goods. Similarly, though
there was no stock of uncompleted units at the beginning of the period, at the end of the period there
were 10,000 uncompleted units which may be reckoned at 50% complete.
On analysing the reasons, it was found that 60% of the unabsorbed over-heads were due to defective
planning and rest were attributable to increase in overhead costs.
How would unabsorbed overheads be treated in cost accounts?
Answer Balance
(Rs.) 2,00,000
of
unabsorbed
overheads
due
to
increase
in
overhead
costs.
Supplementary overhead absorption rate `5/- per unit
26
A company is making a study of the relative profitability of the two products – A and B. In addition to direct
costs, indirect selling and distribution costs to be allocated between the two products are as under:
`
Insurance charges for inventory (finished)
78,000
Storage costs
1,40,000
Packing and forwarding charges
7,20,000
Salesmen salaries
8,50,000
Invoicing costs
4,50,000
© The Institute of Chartered Accountants of India
4.58
Cost Accounting
Other details are
Product A
Product B
Selling price per unit
(`)
500
1,000
Cost per unit (exclusive of indirect selling and distribution costs)
(`)
300
600
10,000
8,000
1,000
800
2,500
2,000
Annual sales in units
Average inventory
(units)
Number of invoices
One unit of product A requires a storage space twice as much as product B. The cost to packing and
forwarding one unit is the same for both the products. Salesmen are paid salary plus commission @ 5% on
sales and equal amount of efforts are put forth on the sales of each of the product.
Required
(i)
Set-up a schedule showing the apportionment of the indirect selling and distribution costs between
the two products.
(ii)
Prepare a statement showing the relative profitability of the two products
Answer
Products
Profit
27
A.
B
`
`
5,45,000
17,67,000
SWEAT DREAMS Ltd. uses a historical cost system and absorbs overheads on the basis of predetermined
rate. The following data are available for the year ended 31st March, 1997.
`
Manufacturing overheads
Amount actually spent
Amount absorbed
Cost of goods sold
Stock of finished goods
Works-in-progress
1,70,000
1,50,000
3,36,000
96,000
48,000
Using two methods of disposal of under-absorbed overheads show the implication on the profits of the
company under each method.
Answer According to first method, the total unabsorbed overhead amount of `20,000 will be written off to
Costing Profit & Loss Account. The use of this method will reduce the profits of the concern by `20,000 for
the period.
According to second method, a supplementary rate may be used to adjust the overhead cost of each cost
unit. The use of this method would reduce the profit of the concern by `14,000.
28
A company has three production departments and two service departments. Distribution summary of
overheads is as follows:
© The Institute of Chartered Accountants of India
Overheads
4.59
Production Departments
A
`13,600
B
`14,700
C
`12,800
Service Departments
X
` 9,000
Y
` 3,000
The expenses of service departments are charged on a percentage basis which is as follows:
A
B
C
X
Y
X Deptt.
40%
30%
20%
–
10%
Y Deptt.
30%
30%
20%
20%
–
Apportion the cost of Service Departments by using the Repeated Distribution method.
Answer
Total of the apportionment Statement
29
Production Departments
A
B
C
`
`
`
18,712
18,833
15,555
A factory manufactures only one product in one quality and size. The owner of the factory states that he has
a sound system of financial accounting which can provide him with unit cost information and as such he
does not need a cost accounting system. State your arguments to convince him the need to introduce a cost
accounting system.
Answer Refer to ‘Chapter No. 4.i.e. Overheads’ of Study Material.
30
Ventilators Ltd. wants to stabilize its production throughout the year. The approaches recommended are:
(a)
Maintain production at an even pace throughout the year, and get the off-season production stored on
the premises.
(b)
Maintain production at an even pace but offer dealers a special discount for off-season purchases.
(c)
Extend special terms to dealers, but maintain prices at levels that will enable regular movement of
goods throughout the year.
Discuss the relative merits and disadvantages of above proposals.
Answer Refer to ‘Chapter No. 4.i.e. Overheads’ of Study Material.
31
Treatment of Interest paid in Cost Account.
Answer Refer to ‘Chapter No. 4.i.e. Overheads’ of Study Material.
32
Soloproducts Ltd. Manufactures and sells a single product and has estimated a sales revenue of `126 lakhs
this year based on a 20% profit on selling price. Each unit of the product requires 3 lbs of material P and 1½
lbs of material Q for manufacture as well as a processing time of 7 hours in the Machine Shop and 2½
hours in the Assembly Section. Overheads are absorbed at a blanket rate of 33-1/3% on Direct Labour. The
© The Institute of Chartered Accountants of India
4.60
Cost Accounting
factory works 5 days of 8 hours a week in a normal 52 weeks a year. On an average statutory holidays,
leave and absenteeism and idle time amount to 96 hours, 80 hours and 64 hours respectively, in a year.
The other details are as under
Purchase price
Comprehensive
Labour rate
No. of Employees
Opening stock
Closing stock (Estimated)
Material P
Material Q
`6 per lb
`4 per lb
Machine shop
Assembly
Machine shop
Assembly
Finished Goods
20,000 units
25,000 units
`4 per hour
`3.20 per hour
600
180
Material Q
33,000 lbs
66,000 lbs
Material P
54,000 lbs
30,000 lbs
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 Rupees.
(c)
Capacity utilization of machine shop and Assembly section, along with your comments.
Answer (a) Number of units of the product proposed to be sold
1,40,000 Units
(b) P (Rs.) 24,66,000
Q (Rs.) 10,02,000
(c)
Capacity utilization
33
Machine shop
Assembly Section
91.94%
109.45%
In a factory following the job costing Method, an abstract from the work in process as at 30 th September was
prepared as under:
Job No.
Material
Director Labour
Factory overheads Applied
`
`
`
115
1,325
400 hours
800
640
118
810
250 hours
500
400
120
765
300 hours
475
380
1,775
1,420
2,900
Material used in October were as follows :
Material requisition
Job
Cost
No.
No.
`
54
118
300
55
118
425
© The Institute of Chartered Accountants of India
Overheads
4.61
56
118
515
57
120
665
58
121
910
59
124
720
3,535
A summary of Labour Hours deployed during October is as under:
Job no
Number of Hours
Shop A
25
90
75
65
20
275
Shop B
25
30
10
—
10
75
Waiting for material
20
10
Machine Breakdown
10
5
5
6
115
118
120
121
124
Indirect Labour:
Indle time
Overtime Premium
6
5
316
101
A shop credit slip was issued in October that material issued under Requisition No. 54 was returned back to
stores as being not suitable. A material Transfer Note issued in October indicated that material issued under
requisition No.55 for job 118 was directed to job 124.
The hourly rate in shop A per labour hour is `3 per hour while at shop B, it is `2 per hour. The Factory
Overhead is applied at the same rate as in September. Jobs 115, 118 and 120 were completed in October.
You are asked to compute the factory cost of the completed jobs. It is the practice of the management to put
a 10% on the factory cost to cover administration and selling overheads and invoice the job to the customer
on a total cost plus 20% basis. What would be the invoice price of these three jobs?
34
Answer Job No.
115
118
120
Factory cost (`)
2,990
,819
2,726
Invoice price (`)
3,946.80
3,721.08
3.598.32
Modern manufacturers Ltd. Have three production department P1, P2 and P3 and two Service Departments
S1 and S2 the details pertaining to which are as under:Direct Wages (`)
Working Hours
Value of Machines (`)
P1
3,000
P2
2,000
P3
3,000
S1
1,500
S2
195
3,070
60,000
4,475
80,000
2,419
1,00,000
–
5,000
–
5,000
© The Institute of Chartered Accountants of India
4.62
Cost Accounting
HP of Machines
Light Points
Floor space (Sq.Ft.)
60
10
2,000
30
15
2,500
50
20
3,000
10
10
2,000
–
5
500
The following figures extracted from the Accounting records are relevant:
`
Rent and Rates
5,.000
General Lighting
600
Indirect Wages
1,939
Power
1,500
Depreciation on Machines
10,000
Sundries
9,695
The expenses of the service departments are allocated as under:P1
P2
P3
S1
S2
S1
20%
30%
40%
–
10%
S2
40%
20%
30%
10%
–
Find out the total cost of product X which is processed for manufacture in Departments P1, P2 and P3 for
4,5 and 3 hours respectively, given that its Direct Material cost in `50 Direct Labour cost Rs.30.
Answer
Total
(`)
P1
P2
P3
8,787.16
8,504.87
11,441.79
Cost of the product 'X' ` 115.13
35
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 1981:
Total
A
B
C
X
Y
`
`
`
`
`
`
1,000
2,000
4,000
2,000
1,000
5,000
2,000
8,000
1,000
2,000
500
250
500
250
500
Direct Material
Direct Wages
Factory rent
4,000
Power
2,500
Depreciation
1,000
Other overheads
9,000
Additional information
Area( Sq.ft.)
Capital Value (`Lacs) of assets
Machine hours
Horse power of machines
20
40
20
10
10
1,000
2,000
4,000
1,000
1,000
50
40
20
15
25
A technical assessment or the apportionment of expenses of service departments is as under:
© The Institute of Chartered Accountants of India
Overheads
4.63
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.
(ii)
A statement showing re-distribution of service departments expenses to production departments.
Machine hours rates of the production departments ‘A’, ‘B’ and ‘C’.
Answer
Machine hour rate (Rs.)
36
A
B
C
8.48
3.25
1.88
Explain how under and over absorption of overheads are treated in cost accounts.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material
37
A machine shop has 8 identical Drilling Machines manned by 6 operators. The machines cannot be worked
without an operator wholly engaged on it. The original cost of all these 8 machines works out to `8 lakhs.
These particulars are furnished for a 6 month period:Normal available hours per month
208
Absenteeism (without pay)- hours
18
Leave (with pay)-hours
20
Normal idle time unavoidable-hours
10
Average rate of wages per day of 8 hours
Production Bonus estimated
Value of Power consumed
Rs.20
15% on wages
Rs.8,050
Supervision and Indirect Labour
`3,300
Lighting and Electricity
`1,200
These particulars are for a year:
Repairs and maintenance including consumables 3% on the value of machines.
Insurance `40,000.
Depreciation 10% on original cost.
Other Sundry works expenses `12,000
General Management expenses allocated `54,530
You are required to work out a comprehensive machine hour rate for the Machine Shop.
Answer Machine Hour Rate = `23.87
© The Institute of Chartered Accountants of India
4.64
38
Cost Accounting
Gemini Enterprises undertakes three different jobs A,B and C.All of them require, the use of a special
machine and also the use of a computer. The computer is hired and the hire charges work out to
`4,20,000/- per annum. The expenses regarding the machine are estimated as follows.
`
Rent for the quarter
17,500
Depreciation per annum
2,00,000
Indirect charges per annum
1,50,000
During the first month of operation the following details were taken from the job register :
Job
A
B
C
Number of hours the machine was used :
(a)
Without the use of computer
600
900
–
(b)
With the use of the computer
400
600
1,000
You are required to compute the machine hour rate:(a)
For the firm as a whole for the month when the computer was used and when the computer was not
used.
(b) For the individual jobs A, B and C.
Answer (a) Machine Hour Rate of Gemini Enterprises for the firm as a whole, for a month
(b)
(1)
When the computer was used `27.50 per hour.
(2)
When the computer was not used Rs.10 per hour.
Machine hour rate for the individual jobs.
Job
Machine hour rate
39
A
B
C
`17
`17
`27.50
Deccan Manufacturing Ltd. have three departments which are regarded as production departments. Service
departments’ costs are distributed to these production departments using the “Step Ladder Method” of
distribution. Estimates of factory overhead costs to be incurred by each department in the forthcoming year
are as follows. Data required for distribution is also shown against each department:
Department
Productions
X
Y
Z
Services
P
Q
R
S
Factory overhead
Direct Labour
Hours
No.of Employees
`
1,93,000
64,000
83,000
4,000
3,000
4,000
100
125
85
3,000
1,500
1,500
45,000
75,000
1,05,000
30,000
1,000
5,000
6,000
3,000
10
50
40
50
500
1,500
1,000
1,000
© The Institute of Chartered Accountants of India
Area in sq. m.
Overheads
4.65
The overhead costs of the four service departments are distributed in the same order, viz., P,Q,R and S
respectively on the following basis:
Department
Basis
P
_
Number of Employees
Q
_
Direct Labour Hours
R
_
Area in square meters
S
_
Direct Labour Hours
You are required to:
(a)
prepare a schedule showing the distribution of overhead costs of the four service departments to the
three production departments; and
(b)
calculate the overhead recovery rate per direct labour hour for each of the three production
departments.
Answer
Overhead recovery rate per hour:
40
X
Y
Z
`75/-
Rs.45/-
Rs.40/-
A Ltd. manufactures two products A and B. The manufacturing division consists of two production
departments P1and P2 and two services 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, 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 costs to production departments, the basis adopted is as follow:
(i)
Cost of Department S1 to Department P1 and P2 equally, and
(ii)
Cost of Department S2 to Department P1 and P2 in the ratio 2:1 respectively.
The following budgeted and actual data are available:
Annual profit plan data:
Factory overhead budgeted for the year:
`
Departments
`
P1
25,50,000
S1
6,00,000
P2
21,75,000
S2
4,50,000
Budgeted output in units:
Product A– 50,000; B – 30,000.
Budgeted raw material cost per unit:
Product A – `120 ; Product B –`150.
Budgeted time required for production per unit:
© The Institute of Chartered Accountants of India
4.66
Cost Accounting
Department P1: Product A: 1.5 machine hours
Product B: 1.0 machine hour
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 –Rs72 per hour
and Product B – `75 per hour.
All materials are used in Department P1 only.
Actual data (for the month of July,1993)
Units actually produced: Product A: 4,000 units
Product B: 3,000 units
–
Actual direct machine hours worked in Department P1
On product A – 6,100 hours, Product B-4,150 hours.
–
Actual direct labour hours worked in Department P2
On product A – 8,200 hours, Product B-7,400 hours.
Cost actually incurred:
Product A
`4,89,000
`5,91,900
Raw materials:
Wages:
Overheads: Department
P1
P2
Product B
`4,56,000
`5,52,000
`
`231,000
`2,04,000
`
`60,000
`48,000
S1
S2
You are required to:
(i)
Compute the predetermined overhead rate for each production department.
(ii)
Prepare a performance report for July. 1993 that will reflect the budgeted costs and actual costs.
Answer
Budgeted machine hour rate
41
P1
P2
`30
`15
In a manufacturing unit, factory overhead was recovered at a pre- determined rate of
`25 per man – day. The total factory overhead expenses incurred and the man-days actually worked were
`41.50 lakhs and 1.5 lakhs man-days respectively. Out of the 40,000 units produced during a period,
30,000 were sold .
On analysing the reasons, it was found that 60% of the unabsorbed overheads were due to defective
planning and the rest were attributable to increase in overhead costs.
How would unabsorbed overheads be treated in Cost Accounts?
© The Institute of Chartered Accountants of India
Overheads
4.67
Answer Treatment of Unabsorbed Overheads in Cost Accounts
42
(i)
The unabsorbed overheads of `2,40,000 due to defective planning to be treated as abnormal and
therefore be charged to Costing Profit and Loss Accounts.
(ii)
The balance unabsorbed overheads of `1,60,000 be charged to production i.e. 40,000 units at the
supplementary overhead absorption rate i.e. `4/- per unit .
A company has two production departments and two service departments. The data relating to a period are as
under:
Production Department
Service Department
PD1
PD2
SD1
SD2
Direct materials
(`)
80,000
40,000
10,000
20,000
Direct wages
(`)
95,000
50,000
20,000
10,000
Overheads
(`)
80,000
50,000
30,000
20,000
Power requirement at normal capacity operations
(Kwh)
20,000
35,000
12,500
17,500
During Power Consumption during the period
(Kwh)
13,000
23,000
10,250
10,000
The power requirement of these departments are met by a power generation plant. The said plant incurred
an expenditure, which is not included above of `1,21,875 out of which a sum of `84,375 was variable and
the rest fixed.
After apportionment of power generation plant costs to the four departments, the service department
overheads are to be redistributed on the following bases:
PD1
PD2
SD1
SD2
SD1
(`)
50%
40%
---
10%
SD2
(`)
60%
20%
20%
---
You are required to:
(i)
Apportion the power generation plant costs to the four departments.
(ii)
Re-apportion service department cost to production departments.
(iii)
Calculate the overhead rates per direct labour hour of production departments, given that the direct
wage rates of PD1 and PD2 are `5 and `4 per hour respectively.
Answer
Overhead rate per
PD1
PD2
10.87
12.43
Direct labour hour (`)
43
A machine was purchased January 1,1990, for 5 lakhs. The total cost of all machinery inclusive of the new
machine was `75 lakhs. The following further particulars are available:
Expected life of the machine 10 years.
Scrap value at the end of ten years ` 5,000.
© The Institute of Chartered Accountants of India
4.68
Cost Accounting
Repairs and maintenance for the machine during the year `2,000 Expected number of working hours of the
machine per year, 4,000 hours Insurance premium annually for all the machines `4,500
Electricity consumption for the machine per hour (@ 75 paise per unit) 25 units.
Area occupied by the machine 100 sq.ft.
Area occupied by other machine 1,500 sq.ft.
Rent per month of the department `800.
Lighting charges for 20 points for the whole department, out of which three points are for the machine `120
per month.
Compute the machine hour rate for the new machine on the basis of the data given above.
Machine hour rate (`)
44
31.904
An engine manufacturing company has two production departments: (i) Snow mobile engine and (ii) Boat
engine and two service departments: (i) Maintenance and (ii) Factory office. Budgeted cost data and
relevant cost drivers are as follows:
Departmental costs:
Snow mobile engine
Boat engine
Factory office
Maintenance
Cost drivers:
Factory office department:
Snow mobile engine department
Boat engine department
Maintenance department
`
6,00,000
17,00,000
3,00,000
2,40,000
No. of employees
1,080 employees
270 employees
150 employees
1,500 employees
No. of work orders
570 orders
190 orders
40 orders
800 orders
Maintenance department:
Snow mobile engine department
Boat engine department
Factory office department
Required:
(i)
Compute the cost driver allocation percentage and then use these percentage to allocate the service
department costs by using direct method.
(ii)
Compute the cost driver allocation percentage and then use these percentage to allocate the service
department costs by using non-reciprocal method/step method.
Answer
(i)
Cost Driver Allocation percentage
Percent used
Factory office dept.:
Snowmobile engine
© The Institute of Chartered Accountants of India
80%
Overheads
Boat engine
4.69
20%
Maintenance dept:
(ii)
Snowmobile engine
75%
Boat engine
25%
Cost Driver Allocation percentage
Percent used
Factory office dept.:
Snowmobile engine
72%
Boat engine
18%
Maintenance dept
10%
Maintenance dept:
45
Snowmobile engine
75%
Boat engine
25%
RST Ltd. has two production departments: Machining and Finishing. There are three service departments:
Human Resource (HR), Maintenance and Design. The budgeted costs in these service departments are as
follows:
Variable
Fixed
HR
Maintenance
`
`
Design
`
1,00,000
4,00,000
5,00,000
1,60,000
3,00,000
4,60,000
1,00,000
6,00,000
7,00,000
The usage of these Service Departments’ output during the year just completed is as follows:
Provision of Service Output (in hours of service)
Users of Service
HR
Maintenance
Design
Machining
Finishing
Total
HR
−
500
500
4,000
5,000
10,000
Providers of Service
Maintenance
−
−
500
3,500
4,000
8,000
Design
−
−
−
4,500
1,500
6,000
Required:
(i)
Use the direct method to re-apportion RST Ltd.’s service department cost to its production
departments.
(ii)
Determine the proper sequence to use in re-apportioning the firm’s service department cost by stepdown method.
(iii)
Use the step-down method to reapportion the firm’s service department cost.
Answer The proper sequence for apportionment of service department overheads is
First
HR
© The Institute of Chartered Accountants of India
4.70
Cost Accounting
Second
Maintenance
Third
Design
The sequence has been laid down based on service provided.
46
Two service departments, A and B, show expenses of ` 5,000 and ` 8,000 respectively. 1/10 expenses of
department A are chargeable to department B, whereas 1/4 of the expenses of the latter are chargeable to
department A. Ascertain the overheads of the departments to be apportioned to production departments of
the two departments.
Answer `7,180 and `8,718
47
Three machines A, B and C are in use, involving the undermentioned expenditure for a period:
A ` 639;
B ` 697;
C ` 951.
The machines sometimes require the use of a crane also for which ` 570 has to be spent. The number of
hours for the machines are:
A
B
C
480
With the use of crane
160
130
Without the use of crane
428
577
Calculate the rates for recovery of overheads.
Answer `1.09, ` 0.99, `1.98 plus ` 0.74 when crane is used.
48
The actual figures relating to production for a period in a factory were as follows:
Material used
Direct labour (Total 1,20,000)
Factory expenses
Machine hours totaled
` 5,00,000
` 4,00,000
` 3,00,000
1,00,000
A job requires ` 20,000 in material, and 4,000 hours of labour @ `3 per hour (on the average) of which
2,800 were machine hours. Ascertain the cost of the job using different methods of absorbing overheads.
Answer `44,000, `41,000, `42,667, `42,000 and `40,400 respectively on the basis of materials, labour,
prime cost, productive labour hours and machine hours.
49
Suppose in the factory mentioned in Question 3, administrative expenses total `2,50,000 and assume 1/5 of
goods produced remained unsold. What is the value that should be put on inventory with alternative
treatments of administrative expenses?
Answer ` 2,90,000 and ` 2,40,000.
50
The products of a factory pass through two departments, though the output emerging from the first
department is also saleable. The direct labour in the two processes per period is ` 60,000 and ` 40,000 and
the indirect expenses are ` 45,000 and ` 40,000. The rate for recovery of the overheads is 85%. Do you
think the method followed is proper?
Answer There should be separate rates for the two departments.
© The Institute of Chartered Accountants of India