ASSIGNME

NT
ACT(441)

SUBMITTED TO
Anup Kumar Saha
Lecturer
Department of Business
Administration

SUBMITTED BY
Onickul Haque
ID NO# 2008-1-10-109
Section – 1
Department of Business
Administration

Date of Submission
15th April, 2011
Illustration 6

Decan 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 Factory overhead Direct Labor No. of Area in

production Rs. hours employees Sq.m.
X 1,93,000 4,000 100 3,000
y 64,000 3,000 125 1,500
z 83,000 4,000 85 1,500
Service
P 45,000 1,000 10 500
Q 75,000 5,000 50 1,500
R 1,05,000 6,000 40 1,000
s 30,000 3,000 50 1,000

The overhead costs of the four service departments are distributed in the same order, and P,Q,R and S
respectively on the following basis:

Department Basis
P Number of employees
Q Direct labor hours
R Area in square metres

You are required to:

(a) Prepare a schedule showing the distribution of overhead costs of the four service departments
to the three production department; and
(b) Calculate the overhead recovery rate per direct labor hours for each of the three production
departments.
Solution:

Schedule Showing Distribution of Overhead Costs

Overhead costs Production department Service department

X Y Z P Q R S
Rs. Rs. Rs. Rs. Rs. Rs. Rs.

As per primary 1,93,000 61,000 83,000 45,000 75,000 1,05,000 30,000

distribution statement
Department P 10,000 12,500 8,500 -45,000 5,000 4,000 5,000
Department Q 16,000 12,000 16,000 -80,000 24,000 12,000

Department R 57,000 28,500 28,500 -1,33,000 19,000

Department S 24,000 18,000 24,000 -66,000

Total 3,00,000 1,35,000 1,60,000

Direct labor hours 4,000 3,000 4,000

Recovery rate per Rs.3,00,000 Rs.1,35,000 Rs.1,60,000

hours 4,000 3,000 4,000
=Rs. 75 =Rs. 45 =Rs. 40
Illustration 7:

The following particulars relate to a manufacturing company which has three production departments A,
B and C and two service departments X and Y:

Total departmental overhead as per primary distribution:

Department: A B C X Y
Expenses: Rs. 6,300 7,400 2,800 5,400 2,000

The decided to charge service department costs on the basis of the following percentages:

Service Depts. Production Departments Service Departments

A B C X Y
X 40% 30% 20% - 10%
Y 30% 30% 20% 20% -

Find the total overheads of production departments charging service departmental costs to production
on the repeated distribution method.

Solution:

Departmental Overhead Distribution Summery

Overhead Basis Production Dept Service departments

A B C X Y
Rs. Rs. Rs. Rs. Rs.
Total departmental overhead 6,300 7,400 2,800 5,400 2,000
as per primary distribution
Department X Given % 2,160 1,620 1,080 -5,400 540
Department Y “ 762 762 508 508 -2,540
Department X “ 203 152 102 -508 51
Department Y “ 15 15 11 10 -51
Department X “ 4 3 3 -10 -
Total 9,444 9,952 4,504 0 0
Illustration 8:

Vasanth Engineering Co. has three production certres and two service centres. The overhead analysis
sheet gives the following overhead costs:

Production Centres Rs.

A 1,380
B 2,190
C 1,290

Service Centres
D 630
E 510

You are required to calculate:

(a) Machine hours rate for each department and

(b) The cost of production of a product requiring Rs. 20 for material and Rs. 30 for labor. The
product had to pass through department A, B and C for 5, 4 and 5 hours respectively.

Solution:

Departmental Overhead Distribution Summery

Overhead Basis Production Depts. Service Depts.

A B C D E
Rs. Rs. Rs. Rs. Rs.
Allocated and 1,380 2,190 1,290 630 510
apportioned
Dept D Given % 189 252 126 -630 63
Dept E “ 57 114 286 116 -573
Dept D “ 35 46 23 -116 12
Dept E “ 1 2 6 3 -12
Dept D “ - 2 1 -3 -
Total 1,662 2,606 1,732 0 0
Machine hours 1,642 1,303 876
Machine hour rate Rs. 1 Rs. 2 Rs. 2
Material Rs. 20
Labor 30
Prime cost 50
Works O/H:
A: 5 hrs. @ Rs. 1
B: 4 hrs. @ Rs. 2
C: 5 hrs. @ Rs. 2
25
Cost of Production: Rs.75

Illustration 9:

A firm has three production departments and two service departments. The following figures are
extracted from the books of the firm:

Rs.

Depreciation 4,000

Lighting 240

Rent 2,000

Indirect wages 600

Power 600

Others 4,000

Other A B C X Y
particulars:
Floor 400 500 600 400 100
space(sq.ft)
Direct 900 600 900 900 700
wages(Rs.)
Light points 20 30 40 20 10
H.P. of 75 30 25 10 -
machines
Value of the 12,000 16,000 20,000 1,000 1,000
machinery(Rs.)
Working hours 3,113 2,014 2,033 - -

The expenses of service departments X and Y are to be allocated as follows:

A B C X Y
X 20% 30% 40% - 10%
Y 40% 20% 20% 20% -

You are requested to distribute the service department expenses to the production departments and
calculate the hourly rate of each production department.

Solution:

Departmental Overhead Distribution Summery

Overhead Basis Total Production Depts. Service Depts.

Rs. A B C X Y
Rs. Rs. Rs. Rs. Rs.
Direct wages Direct 1,600 - - - 900 700
Depreciation Value of 4,000 960 1,280 1,600 80 80
machines
Lighting Light 240 40 60 80 40 20
points
Rent Area 2,000 400 500 600 400 100
Indirect Direct 600 135 90 135 135 105
wages wages
Power H.P. 600 321 129 107 43 -
Others Direct 4,000 900 600 900 900 700
wages
13,040 2,765 2,659 3,422 2,498 1,705
Dept. X Given % 500 749 999 -2,498 250
Dept. Y “ 782 391 391 391 -1,955
Dept. X “ 78 118 156 -391 39
Dept. Y “ 15 8 8 8 -
Dept. X “ 2 2 4 -8

(a) 4,133 3,927 4,980

Working hour (b) 3,113 2,014 2,033
Hourly Rs. 1.32 Rs. 1.94 Rs. 2.44
Rate(a)÷(b)
Let X be the overheads of service department D and

Y be the overhead of service E.

Then, X= 15,950+ 20% received from department E

Y= 10,050+ 10% received from department D

X= 15,950+ 1/5Y or X= 15,950+ 0.2Y

Y=10,050+ 1/10 X or Y+10,050+0.1X

Re-arranging and multiplying by 10 to eleminate decimals,

10X-2Y=1,59,500 ………(1)

-X+ 10Y= 1,00,500………….(2)

Multiplying equation (1) by 5 and adding,

50X-10Y= 7,97,500

-X+10Y=1,00,500

49X = 8,98,000

X= 8,98,000÷ 49

=Rs. 18,326

Substituting the value of X in equation (1)

1,83,260-2Y= 1,59,500

2Y= 23,760

Y= Rs. 11,880

Overhead of department D is Rs. 18,326 and that of E is Rs. 11,880.

Allocation:

Secondary overhead distribution statement

Overhead Total Production Department Service Department

Rs. A B C D E

Rs. Rs. Rs. Rs. Rs.

Totals as per 1,14,400 27,350 26,500 34,550 15,950 10,050

primary
distribution
summery

Service dept. 3,665 5,498 7,330 -18,326 1,833

D:

20%, 30%
and 40%

Service dept. 4,755 2,376 2,376 2,376 -11,883

E:

40%,20%
and 20%

1,14,400 35,770 34,374 44,256

Working 3,113 2,014 2,033

hours

Hourly rate Rs. 11.49 Rs. 17.06 Rs. 21.76

Ilustration 10:

PH Ltd. Is a manufacturing company having three production departments A, B and C and service
departments X and Y.

Total A B C X Y

Rs. Rs. Rs. Rs. Rs.

Direct 1,000 2,000 4,000 2,000 1,000

material

Direct 5,000 2,000 8,000 1,000 2,000

wages

Factory rent 4,000

Power 2,500

Depreciation 1,000

Other 9,000
overheads

Additional Information:

A B C X Y

Rs. Rs. Rs. Rs. Rs.

Area (sq.ft.) 500 250 50 250 500

Capital value of assets(in 20 40 20 10 10

Rs. Lacs)

Machine hours 1,000 2,000 4,000 1,000 1,000

H.P. of machines 50 40 20 15 25
A technical assessment of the apportionment of expenses of service departments is as under:

A B C X Y

% % % % %

Service dept. X 45 15 30 - 10

Service dept. Y 60 35 - 5 -

Required:

(a) A statement showing distribution of overheads to various departments.

(b) A statement showing re- distribution of service department expenses to production departments;
and
(c) Machine hour rates of the production departments A, B and C.

Solution:

a) Departmental overhead distribution summery

Items Basis Total Production depts. Service depts.

Rs. A B C X Y

Rs. Rs. Rs. Rs. Rs.

Direct Allocation - - - - 2,000 1,000

materials

Direct labor Do - - - - 1,000 2,000

Factory rent Area 4,000 1,000 500 1,000 500 1,000

Power H.P. hours 2,500 500 800 800 150 250

Depreciation Value of 1,000 200 400 200 100 100

assets

Other Machine 9,000 1,000 2,000 4,000 1,000 1,000

overheads hours

16,500 2,700 3,700 6,000 4,750 5,350

 b) Statement showing Re-distribution

Production depts. Service depts.

Total A B C X Y

Rs. Rs. Rs. Rs. Rs. Rs.

Total overhead 16,500 2,700 3,700 6,000 4,750 5,350

allocated and
apportioned

Dept. 2,138 712 1,425 -4,750 475

Y 3,495 2,039 - 291 -5,825

X 131 44 87 -291 29

Y 17 10 - 2 -29

X 1 1 -2

Total 16,500 8,482 6,506 7,012 0 0

c) Machine hour rate Rs. 8.48 Rs. 3.25 Rs. 1.88

= Overhead ÷ Machine
hours