Chapter-4 Overheads Cost Under Absorption Costing Method

CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A.
AGRAWAL
CHAPTER-4
OVERHEADS COST - Under
Absorption Costing Method
TABLE OF CONTENTS:
1. Introduction
2. Steps for Calculation & Absorption of Overhead Cost
3. Accounting & Control of Administrative Overheads
4. Accounting & Control of Selling & Distribution Overheads
5. Treatment of Certain Items in Cost Accounting
6. Concept of Capacity
7. Practical Problems
8. Past Exam Theory Questions
1. INTRODUCTION
We have studied Cost Matrix and various elements of Cost (In Chapter # 1). While calculation cost of a
product/job, one needs to not only consider the “Direct Costs” i.e. “Prime Cost” but also “Indirect Costs” i.e.
Indirect Material, Labour and Expenses. Indirect costs are those expenses which are not necessary to
produce/sell the product or render the service but which facilitates the entire process, as a whole.
2. STEPS FOR CALCULATION & ABSORPTION OF OVERHEAD COST
@cacsanshul @iamcacsanshul 4. 1
STEP # 1: Estimation, Collection & Classification of OH
The first stage is to estimate the amount of overheads, keeping in view the past figures and adjusting them for
known future changes. The sources available for the collection of factory overheads may include –
(a) Invoices, (b) Stores requisition, (c) Wage analysis book (d) Journal entries. etc.
CLASSIFICATION OF OVERHEADS
INDIRECT INDIRECT INDIRECT

MATERIAL LABOUR EXPENSES
OVERHEADS
On the Basis of On the Basis of On the Basis of

Function Variability Controllability
• Manufacturing OH • Fixed OH • Controllable OH
• Office • Variable OH • Non-Controllable OH
/Administrative OH • Semi-Variable OH
• Selling OH
• Distribution OH
TYPE OF OH DESCRIPTION
FACTORY / Manufacturing overhead is an indirect cost incurred for manufacturing or
MANUFACTURING / production activity in a factory. Manufacturing overhead includes all expenditures
PRODUCTION OH incurred from the procurement of materials to the completion of finished product.
Office and Administrative overheads are expenditures incurred on all activities
OFFICE / relating to general management and administration of an organisation. It includes
ADMINISTRATION formulating the policy, directing the organisation and controlling the operations of
OH an undertaking which is not related directly to production, selling, distribution,
research or development activity or function.
Selling overhead are an expenses related to sale of products and include all indirect
SELLING &
expenses in sales management for the organisation. Distribution overhead are cost
DISTRIBUTION OH
incurred on making product available for sale in the market.
These are the costs which are incurred for a period, and which, within certain
output and turnover limits, tend to be unaffected by fluctuations in the levels of
FIXED OH
activity (output or turnover). They do not tend to increase or decrease with the
changes in output.
These costs tend to vary with the volume of activity. Any increase in the activity
VARIABLE OH
results in an increase in the variable cost and vice-versa.
These costs contain both fixed and variable components and are thus partly affected
SEMI-VARIABLE OH
by fluctuations in the level of activity.
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CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
INDIRECT Materials which do not normally form part of the finished product (cost object) are
MATERIAL known as an indirect materials.
Employee costs which cannot be allocated but can be apportioned to or absorbed by
INDIRECT LABOUT
cost units or cost centres is known as an indirect employee.
Expenses other than direct expenses are known as an indirect expense, that cannot
INDIRECT EXPENSES
be directly, conveniently and wholly allocated to cost centres.
CONTROLLABLE These are those costs which can be controlled by the implementation of appropriate
COSTS managerial influence and proper policies.
Overhead costs which cannot be controlled by the management even after the
UNCONTROLLABLE
implementation of appropriate managerial influence and proper polices are known
COSTS
as uncontrollable costs.
STEP # 2: Allocation & Absorption of OH i.e. Primary Distribution

Allocation of Overheads: In this step, Whole items of overheads are allocated to production and service
departments. Cost allocation is defined as the process of allotment of items of cost to cost centers or cost
units i.e. various departments or activities (will be seen in Chapter # 5)
Apportionment of Overheads: Apart from specific costs (OH) incurred for the departments (which are
allocated to the departments), there are some general expenses, which does not belong to a specific
department only and which are common for all departments, such common expenses needs to be distributed
i.e. allocated amongst all departments on some suitable basis, this is known as Cost Allocation.
STEP # 3: Re-Apportionment of OH i.e. Secondary Distribution

In an organization, eventhough core manufacturing is carries out at a production department, yet it does needs
‘Service / Support department’ to support it entirely, like a Canteen or a Recreational facility near
manufacturing plant. Costs incurred in such service departments should also be charged to the product and
hence it needs to be distributed amongst various production departments, on some suitable basis/ratio, such
process of re-apportioning OH cost of service departments to production departments is known as “Secondary
Distribution of Overheads”.
There are various methods for Re-Apportionment of overheads, but which method to be used is primarily
dependent on –
CASE-1: NO SERVICE DEPARTMENT IS RENDERING ANY SERVICES TO EACH OTHER
DIRECT
REDISTRIBUTION
METHOD
CASE-2: ONE SERVICE DEPARTMENT ONLY IS RENDERING SERVICES TO ANOTHER SERVICE DEPT.
(Without any Reciprocal Services)
STEP
LADDER
METHOD
CASE-3: SERVICE DEPARTMENTS RENDERING SERVICES TO EACH-OTHER (i.e. Reciprocal Services)
SIMULTANEOUS
EQUATION
METHOD
or
REPEATED
DISTRIBUTION
METHOD

STEP # 4: Absorption of OH by Product/Service
The method selected for charging overheads to products or jobs should be such as will ensure:
(i) that the total amount charged (or recovered) in a period does not differ materially from the actual
expenses incurred in the period. And
(ii) that the amount charged to individual jobs or products is equitable. In case of factory overhead, this
means:
(a) that the time spent on completion of each job should be taken into consideration;
(b) that a distinction should be made between jobs done by skilled workers & unskilled workers. and
(c) that jobs done by manual labour and those done by machines should be distinguished.
In addition, the methods should be capable of being used conveniently; and yield uniform result from period to
period as far as possible; any change that is apparent should reflect a change in the underlying situation such
as substitution of human labour by machines. Several methods are commonly employed either individually or
jointly for computing the appropriate overhead rate. The more common of these are –
Overhead absorption rate =
S. NO. VARIOUS BASIS FORMULA

1. % of Direct Materials Total Factory Overheads
=  100
Direct Material
2. % of Direct Labour Cost Total Factory Overheads
=  100
Direct Labour Cost
3. % of Prime Cost Total Factory Overheads
=  100
Pr ime Cost
4. Direct Labour hour rate Total Factory Overheads
=
Direct Labour Hours
5. Machine Hour rate Total Factory Overheads
=
Machine Hours
6. Per unit of output basis Total Factory Overheads
=
Output units
Pre - Determined Overheads Rate Vs Actual Overhead Rate: Actual overhead rate is calculated on the basis
of actual overheads and actual units. However, it is practically difficult to implement actual overhead rate since
it cannot be calculated until the end of the period. Further the use of actual rate will result in frequent changes
in product cost. Hence in reality actual overhead rate is not worked out.
Pre - determined overhead rate is a rate which is determined in advance on the basis of normal cost and
normal production for a period. Use of this rate enables calculation of product cost immediately after
production. Further product costs are not subject to cyclical / seasonal fluctuations. Hence generally
companies use pre - determined overheads rate.
Departmental Vs Blanket Overhead Rates:
DEPARTMENTAL RATE BLANKET RATE
It refers to a separate rate for each individual cost It refers to the computation of one single overhead
center or department. rate for the whole factory.
It gives proper result for multi-product factory. It does not give proper result in case of multi
product organisations / factory.
Formula:- Formula:-
Overhead for department Overhead for the entire factory
= =
Base for the department Base for the period
(hours, units, etc.) (hours, units, etc.)
Therefore, a Blanket Rate may be applied:
(i) Where only one major product is being produced.
(ii) Where several products are produced, but
(a) all products pass through all departments and
(b) all products process for the same length of time in each department.
STEP # 5: Calculation and Treatment of Under/Over Absorption of OH

Overhead expenses are usually applied to production on the basis of pre-determined rates. Production
overheads are to be determined in advance as follows for fixing selling price, quote tender price and to
formulate budgets etc.
Pre-determined Overhead Rate =
The actual overhead rate will rarely coincide with the pre-determined overhead rate, due to variation in pre-
determined overhead rate and actual overhead rate.
UNDER / OVER ABSORPTION OF OVERHEADS: Overheads are usually applied to production on the basis of
pre-determined overhead rate. Hence overheads charged (absorbed) to production will not be the same as the
actual overheads incurred, due to various reasons, like price changes, volume changes etc. This difference is
known as under / Over absorption of overheads.
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Accounting of under and over absorption: There are three methods to deal with the under or over recovery
/ absorption of overheads -
1. Use of Supplementary Rate: When the amount of under recovery or over recovery of overheads is
sizeable (big) especially on account of price changes, then the supplementary rates are used to account for
the amount of under and over recovery of overheads.
2. Write off to Costing Profit and Loss Account: If the amount of under recovery or over recovery is
negligible or small, then it is transferred to Costing Profit and Loss Account. If OA/UA is due to abnormal
reasons then also it is transferred to costing Profit & Loss Account.

3. Carry Forward of Overheads: Sometimes management carries forward the amount of under recovery or
over recovery of overheads in 'Overheads Suspense A/c' or 'Overheads Reserve A/c' to be set - off against
the under or over recovery of the subsequent years' overheads.
3. ACCOUNTING & CONTROL OF ADMINISTRATIVE OVERHEADS
Administration overheads are defined as sum of those costs of general management and of secretarial,
accounting and administrative services which cannot be directly related to the production, marketing, research
or development functions of the enterprise.
Accounting of Administrative overheads
There are three different methods of accounting for administrative overheads. These are as follows
(a) Apportioning Administrative Overheads between Production and Sales Department.
(b) Charging to Costing Profit and Loss Account.
(c) Treating Administrative Overheads as a separate item of cost and charging it to Production or Sales on
some suitable basis e.g. as a % of works cost, % of sales value, per unit of production or sales etc.
4. ACCOUNTING & CONTROL OF SELLING & DISTRIBUTION OVERHEADS
These are the expenses incurred for promoting, marketing and distributing the goods to the customers.
Therefore, these overheads are charged to the cost of goods sold to determine the cost of sales. It may be
charged on any of the following basis:-
(a) Sale Value
(b) Cost of Goods Sold
(c) Gross Profit on Sales
(d) Number of Units Sold etc.
5. TREATMENT OF CERTAIN ITEMS IN COST ACCOUNTING
1. Royalties: If royalty paid is for the right to make use of patent processes, machine or components. It will
form part of factory cost.
If royalty is paid on units sold or percentage of sales value it will form part of selling overhead.
2. Drawing Office Cost: If services are provided to a specific job, costs shall be charged to the job directly.
But where, general service is provided these costs are treated as production overheads, and apportioned
on the basis of drawings made, man hours spent etc.
3. Material Carriage Inward: If the cost is incurred for a particular material then it is treated as a part of
material cost. But if carriage inward is for a large number of materials of different type then it is treated
as production overheads.
4. Interest & Financing Charges: It shall be presented in cost statement as a separate item of ‘Cost of
Sales’.
5. Depreciation: It shall be traced to the cost object to the extent economically feasible. Where it is not
directly traceable it should be assigned using either or two principles i.e. (i) Cause and Effect and (ii)
Benefit received.
6. Packing Expenses: Primary packing cost is treated as part of production cost. Secondary packing cost is
treated as Selling overhead.
7. Fringe Benefits: the amount of fringe benefit is considerably large, it may be recovered as direct charge
by means of a supplementary wage or labour rate; otherwise these may be collected as part of
production overheads.
8. Bad Debts: Bad debts should be treated in cost accounting in the same way as any other selling and
distribution cost. However extra ordinarily large bad debts should not be included in cost accounts.
9. Expenses for Welfare Activities: All expenses incurred on the welfare activities of employees in a
company are part of general overheads. Such expenses should be apportioned between factory, office,
selling and distribution overheads on the basis of number of persons involved.
6. CONCEPT OF CAPACITY
The term "capacity" signifies volume capacity of a business enterprise. It can be measured in the following
manner:
1. Maximum / Theoretical Capacity / Rated Capacity: It is that capacity of a plant or department which
will be achieved under 100 % operating time. It assumes round the clock operation of all plants with no
allowance for machine downtime, waits and delays or holidays. It cannot be achieved in reality.
2. Practical Capacity: The practical capacity of a plant is the theoretical maximum capacity less normal
and unavoidable operating interruptions, such as repairs, waits, breaks, machine failure etc.
3. Normal Activity or Capacity: It is the capacity of a plant which is expected to be utilised over a long
period based on sales expectancy. The determination of this capacity considers the average utilisation of
plant capacity during one full business cycle which may extend over 2 to 3 years. It is also known as
average capacity and is used to compute overhead recovery rate.
The normal capacity concept is generally the most suitable for product cost determinations which
further help in determining selling prices and valuation of inventories for purposes of financial
statements.
Idle Capacity: It denotes that plant, machinery and equipments are available for manufacturing or other
purposes but are not being used totally. The Institute of Cost and Management Accountants (U.K.) defines idle
capacity cost as "the cost of abnormal idleness of fixed assets or available services ". Idle capacity is the
difference between the normal capacity and capacity utilised. For example, if the normal capacity of a plant is
to produce 50,000 units a month, but the plant is being used to manufacture only 40,000 units per month due
to some reason (say, a low market demand of the product), then, in such a situation 10,000 units will be treated
as the idle capacity of the plant. The idle capacity may arise due to lack of product demand, non - availability of
raw materials, shortage of skilled labour, absenteeism, shortage of power, fuel or supplies, seasonal nature of
the product etc.
Idle capacity costs are mostly fixed in nature and are to be incurred because of unused capacity. Such costs
consist of depreciation, maintenance, insurance premium, rent, property taxes, management and supervisory
salaries and similar annual expenses. These costs remain unabsorbed or unrecovered due to under - utilisation
of plant capacity.

Idle capacity cost can be computed in the following manner.
Idle Capacity Cost = Idle capacity x
Idle capacity cost can be divided into normal and abnormal idle capacity cost. Under normal circumstances
such as servicing of a machine, intermittent use of plant during the processing might cause idle capacity, such
costs are treated as an overhead expense. If the idle capacity costs have occurred due to abnormal
circumstances such as lack of work or jobs, such costs would be transferred to the costing profit and loss
account and hence would not be included in the factory overheads. If the idle capacity cost is due to seasonal
normal factors, the cost would be charged to units produced by inflating overhead rates.
Note: Alternatively idle capacity may be calculated as difference between practical capacity and Actual
Capacity.
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7. PRACTICAL PROBLEMS
TYPE-1 “STEP 1 – 3”
Q1. Direct Redistribution Method REG. PAGE NO.

X Ltd. has three production departments and two service departments. The expenses for these
departments as per primary distribution summary is as under –
PRODUCTION DEPARTMENTS SERVICE DEPARTMENTS
A B C STORES ACCOUNTS POWER CANTEEN
30,00,000 26,00,000 24,00,000 4,00,000 3,00,000 1,60,000 1,00,000
The following information is also available in respect of the production departments:
A B C
Horse Power of Machine 300 300 200
Number of Workers 20 150 15
Value of Stores Requisition Rs. 2,50,000 Rs. 1,50,000 Rs. 1,00,000
Apportion the cost of service departments over the production departments.
Q2. Direct Redistribution Method REG. PAGE NO.

A company's production costs for the year ending 30th June are given below:
Production departments Service department Total
Item F1 F2 F3 Office Store Workshop
Direct Wages (Rs.) 20,000 25,000 30,000 -- -- -- 75,000
Direct Material (Rs.) 30,000 35,000 45,000 -- -- -- 1,10,000
Indirect Material (Rs.) 2,000 3,000 3,000 1,000 2,000 2,000 13,000
Indirect Wages (Rs.) 3,000 3,000 4,000 10,000 10,000 5,000 35,000
Area in sq. mtrs. 200 250 150 300 100 250 1,250
Book value of Machinery 30,000 35,000 25,000 -- -- 15,000 1,05,000
Total H.P. Machines 15 20 25 -- -- 5 65
Machines Hrs. worked 10,000 20,000 15,000 -- -- 5,000 50,000
General expenses:
1. Rent Rs. 12,500 2. Insurance of Plant & Machinery Rs. 1,050
3. Depreciation 15% of value of machinery 4. Power Rs. 3,800
5. Lighting Rs. 1,250.
The expenses of service Department are apportioned as follows:
F1 F2 F3
Office 30% 40% 30%
Store 60% 40% -
Workshop 20% 20% 60%
You are required to prepare an overheads analysis sheet for the departments showing clearly the basis of
apportionment, where ever necessary.
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Q3. Step Ladder Method REG. PAGE NO.
Bombay Machines Ltd. have three production departments (A, B, C) and two Service Departments (D, E).
From the records of the company, calculate the overheads rate per labour hour:
Rs.
Indirect Material 15,000
Indirect Wages 10,000
Depreciation on Machinery 25,000
Depreciation on Building 5,000
Rent, rates and taxes 10,000
Electric power for machinery 15,000
Lighting 500
General expenses 15,000
Items Total A B C D E
Direct Materials (Rs.) 60,000 20,000 10,000 19,000 6,000 5,000
Direct Wages (Rs.) 40,000 15,000 15,000 4,000 2,000 4,000
Value of Machinery (Rs.) 2,50,000 60,000 1,00,000 40,000 25,000 25,000
Floor Area (sq. ft.) 50,000 15,000 10,000 10,000 5,000 10,000
Horse Power of Machines 150 50 60 30 5 5
No. of light points 50 15 10 10 5 10
Labour hours 15,000 5,000 5,000 2,000 1,000 2,000
The expenses of service department D and E are apportioned as follows:
A B C D E
D 40% 20% 30% - 10%
E 30% 30% 40% - -
Q4. Step Ladder Method REG. PAGE NO.

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 Factory Direct Labour Number of Area in sq.mts.
Overheads (Rs.) Hours employees
Production -
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
Dept. P renders service to All production Departments and Dept. Q, R & S.
Dept. Q renders service to All production Departments and Dept. R & S.
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Dept. R renders service to All production Departments and Dept. S.
Dept. S provides services only to production Departments.
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.
Q5. Simultaneous Equation Method REG. PAGE NO.

Sanz 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 2018 –
PARTICULARS TOTAL A B C X Y
Direct Material 1,00,000 2,00,000 4,00,000 2,00,000 1,00,000
Direct Wages 5,00,000 2,00,000 8,00,000 1,00,000 2,00,000
Factory Rent 4,00,000
Power 2,50,000
Depreciation 1,00,000
Other Overheads 9,00,000
Additional Information –
PARTICULARS A B C X Y
Area (Sq. Fts.) 500 250 500 250 500
Capital Value of Assets (Rs. Lakhs) 20 40 20 10 10
Machine Hours 1,000 2,000 4,000 1,000 1,000
Horse Power of Machines 50 40 20 15 25
A technical assessment of the apportionment of expenses of service departments is as under –

PARTICULARS A B C X Y
Service Department – X 45% 15% 30% - 10%
Service Department – Y 60% 35% - 5% -
Required:
(i) A statement showing distribution of overheads to various departments;
(ii) A statement showing redistribution of service departments expenses to production departments.
(iii) Machine Hour Rates of Production Departments ‘A’, ‘B’ and ‘C’.
Q6. Simultaneous Equation Method (Calculation of Product Cost) REG. PAGE NO.
Modern manufacturers Ltd. Have three production departments P1, P2 and P3 and two Service
Departments S1 and S2 the details pertaining to which are as under:
P1 P2 P3 S1 S2
Direct Wages (Rs.) 3,000 2,000 3,000 1,500 195
Working Hours 3,070 4,475 2,419 – –
Value of Machines (Rs.) 60,000 80,000 1,00,000 5,000 5,000
HP of Machines 60 30 50 10 –
Light Points 10 15 20 10 5
Floor space (Sq.Ft.) 2,000 2,500 3,000 2,000 500
The following figures extracted from the Accounting records are relevant:
Rs.
Rent and Rates 5,000
General Lighting 600
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% 35% 5% –
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 is Rs. 50 Direct Labour cost Rs. 30.
A company has two production departments and two service departments. The data relating to a period
are as under:
Production Department Service Department
Expense Head Unit
PD1 PD2 SD1 SD2
Direct materials (Rs.) 80,000 40,000 10,000 20,000
Direct wages (Rs.) 95,000 50,000 20,000 10,000
Overheads (Rs.) 80,000 50,000 30,000 20,000
Power requirement at normal capacity (Kwh) 20,000 35,000 12,500 17,500
operations
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 Rs. 1,21,875 out of which a sum of Rs. 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 Rs. 5 and Rs. 4 per hour respectively.
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:
Expense Head Rs.
Rent and rates 62,500
General lighting 7,500
Power 25,000
Depreciation on machinery 50,000
Insurance of machinery 20,000
Other Information:
Expense Head P1 P2 P3 S1 S2
Direct wages (Rs.) 37,500 25,000 37,500 18,750 6,250
Horse Power of Machines used 60 30 50 10 −
Cost of machinery (Rs.) 3,00,000 4,00,000 5,00,000 25,000 25,000
Floor space (Sq. ft) 2,000 2,500 3,000 2,000 500
Number of light points 10 15 20 10 5
Production hours worked 6,225 4,050 4,100 − −
Expenses of the service departments S1 and S2 are reapportioned as below:

P1 P2 P3 S1 S2
S1 20% 30% 40% − 10%
S2 40% 20% 35% 5% −
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 Rs. 625 and
direct labour cost is Rs. 375.
Q9. Simultaneous Equation Method REG. PAGE NO.

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:
Total Production
Service Departments
Item Amount Departments
(Rs.) X (Rs.) Y (Rs.) Z (Rs.) A (Rs.) B (Rs.)
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
Superintendent's Salary 96,000 - - 96,000 - -
Fuel & Heat 15,000
Power 1,80,000
Rent & Rates 1,50,000
Insurance 18,000
Meal Charges 60,000
The following departmental data are also available:

Production Departments Service Departments
X Y Z A B
Area (Sq. ft.) 4,400 4,000 3,000 2,400 1,200
Capital Value of Assets (Rs.) 4,00,000 6,00,000 5,00,000 1,00,000 2,00,000
Kilowatt Hours 3,500 4,000 3,000 1,500 -
Radiator Sections 20 40 60 50 30
No. of Employees 60 70 120 30 20
Departments by the following percentages:
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.

Q10. Trial and Error Method REG. PAGE NO.
The ABC company has the following account balances and distribution of direct charges on 31st March
2018 –
PRODUCTION DEPT. SERVICE DEPT.
PARTICULARS TOTAL Machine General Stores &
Packing
Shop Plant Maint.
ALLOCATED OVERHEADS:
Indirect Labour 14,650 4,000 3,000 2,000 5,650
Maintenance Material 5,020 1,800 700 1,020 1,500
Misc. Supplied 1,750 400 1,000 150 200
Superintendent’s Salary 4,000 - - 4,000 -
Cost & Payroll Salary 10,000 - - 10,000 -
OVERHEADS TO BE APPORTIONED:
Power 8,000
Rent 12,000
Fuel and Heat 6,000
Insurance 1,000
Taxes 2,000
1,64,420 6,200 4,700 17,170 7,350
The following data was compiled through factory survey conducted in the previous year –
FLOOR SPACE RADIATOR NO. OF INVESTMENT

PARTICULARS H.P. HRS.
(SQ. FT.) SECTIONS EMPLOYEES (RS.)
Machine Shop 2,000 45 20 6,40,000 3,500
Packing 800 90 10 2,00,000 500
General Plant 400 30 3 10,000 -
Stores & Maintenance 1,600 60 5 1,50,000 1,000
4,800 225 38 10,00,000 5,000
Expenses charged to the stores and maintenance departments are to be distributed to the other
departments by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%; General Plant overheads is distributed on the basis
of number of employees:
(a) Prepare an overhead distribution statement with supporting schedules to show computations and
basis of distribution including distribution of the service department expenses to producing
department.
(b) Determine the service department distribution by the method of continued distribution. Carry
through 3 cycles. Show all calculations to the nearest rupees.
Q11. Trial and Error Method REG. PAGE NO.
PH Ltd., is a manufacturing company having 3 production departments A, B, C and 2 service departments
D and E. The following is the budget for December -
Total A B C D E
Rs. Rs. Rs. Rs. Rs. Rs.
Direct Material 1,000 2,000 4,000 2,000 1,000
Direct Wages 5,000 2,000 8,000 1,000 2,000
Factory Rent 4,000
Power 2,500
Depreciation 1,000
Other overheads 9,000
A B C D E
Rs. Rs. Rs. Rs. Rs.
Additional Information
Area (Sq. Ft.) 500 250 500 250 500
Capital value of assets
(Rs. '000) 20 40 20 10 10
Machine Hours 1,000 2,000 4,000 1,000 1,000
Horse power of machines 50 40 20 15 25
A technical assessment of the apportionment of expenses of service departments is as under -

A B C D E
% % % % %
Service Dept. 'D' 45 15 30 -- 10
Service Dept. 'E' 60 35 -- 5 --
You are required to prepare -
i. A statement showing primary distribution of overheads to various departments.
ii. A statement showing re - distribution of service department expenses to production departments.
iii. Machine hour rates of the production departments A, B and C
(Use Trial and Error Method)
TYPE-2 “STEP 4”
Q12. Step-4 (Understanding Absorption) REG. PAGE NO.

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 is as
follows:
Product X Product Y
M1 10 Machine hours 6 Machine hours
M2 4 Machine hours 14 Machine hours
A1 14 Direct Labour hours 18 Direct Labour hours
The annual budgeted overhead costs for the year are:

Indirect Wages Consumable Supplies
(Rs.) (Rs.)
M1 46,520 12,600
M2 41,340 18,200
A1 16,220 4,200
Stores 8,200 2,800
Engineering Service 5,340 4,200
General Service 7,520 3,200
The other expenses are as follows:
- Depreciation on Machinery 39,600
- Insurance of Machinery 7,200
- Insurance of Building 3,240 (Total building insurance cost for M1
is one third of annual premium)
- Power 6,480
- Light 5,400
- Rent 12,675 (The general service deptt. is located
in a building owned by the company.
It is valued at Rs. 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 following data are also available:

Department Book value Area Effective H.P. Direct Machine
Machinery (Rs.) (Sq. ft.) hours % Labour hours
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 12,000 1,500 -
Required:
(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.
Q13. Calculation of Comprehensive MHR (Single Tier) REG. PAGE NO.
A machine costs Rs. 90,000 and is deemed to have a scrap value of 5% at the end of its effective life (19
years). Ordinarily, the machine is expected to run for 2,400 hours p.a. but it is estimated that 150 hours
will be lost for normal repairs and maintenance and further 750 hour will be lost due to staggering. The
other details in respect of the machine shop are:
Rs.
(a) Wages, bonus and provident fund contribution of each of
two operators (each operator is in charge of two machines) 6,000 p.a.
(b) Rent and Rates of the shop 3,000 p.a.
(c) General lighting of the shop 250 p.m.
(d) Insurance premium for the machine 200 per quarter
(e) Cost of repairs and maintenance per machine 250 p.m.
(f) Shop Supervisor's Salary 500 p.m.
(g) Power consumption of the one machine per hour is 20 units.
Rate of power per 100 units 10
(h) Other factory overheads attributable to the shop 4,000 p.a.
There are four identical machines in the shop. The supervisor is expected to devote one - fifth of his time
for supervising one machine. Calculate the comprehensive M.H.R.
Q14. Calculation of OH Absorption (Single Tier) REG. PAGE NO.

A machine was purchased on January 1, for five lakhs. The total cost of all machinery inclusive of the new
machine was Rs. 75 lakhs. The following further particulars are available:
Expected life of the machine is 10 years. Scrap value at the end of 10 years Rs. 5,000. Repairs and
maintenance for the machine during the year Rs. 2, 000. Expected number of working hours of the
machine per year 4,000 hours. Insurance premium annually for all machines Rs. 4,500.
Electricity consumption for the machine per hour (@ 75 paise per unit) 25 units.
Area occupied by the machine 100 sq. ft. and area occupied by other machines 1,500 sq. ft. Rent per
month of the department Rs. 800.
Lighting charges for 20 points for the whole department, out of which three points are for the machine,
Rs. 120 per month. Compute the machine hour rate for the new machine on the basis of the data given
above.
Q15. Calculation of MHR (Single Tier) REG. PAGE NO.

The following annual charges are incurred in respect of a machine in a shop where manual labour is
almost nil and where work is done by means of five machines of exactly similar type and specification:
Rs.
i. Rent and Rates (proportional to the floor space occupied) for the shop 4,800
ii. Depreciation on each machine 500
iii. Repairs and maintenance for the five machines 1,000
iv. Power consumed @ 05 paise per unit for the shop 3,000
v. Electric charges for lights in the shop 540
vi. Attendants: There are two attendants for the five machines and they are
each paid Rs. 60 per month.
vii. Sundry supplies such as lubricants, jute and cotton waste, etc. for the shop 450

viii. Supervision: For the five machines in the shop there is one supervisor
Whose emoluments are Rs. 250 p.m.
ix. Hire purchase instalment payable for the machine
(including Rs. 300 as interest) 1,250
The machine uses 10 units of power per hour. Calculate the machine hour rate for the machine for the
year.

A Machine Shop cost center contains six machines of equivalent capacities. Three operators are employed
on each machine, one at Rs. 10 an hour and two at Rs. 5 per hour each. The factory works a forty - hour
week which includes four hours for set - up time. The work is jointly done by the operators. The
operators are paid fully for the forty hours. In addition they are paid a bonus of 10% on productive time.
Costs are reported for this company on the basis of thirteen four weekly periods.
The company for the purposes of computing machine hour rate includes the direct wages of the
operators and also recoups the factory overheads allocated to the machines. The following details of
factory overheads applicable to the cost center are available:-
1) Set - up time as described above.
2) Depreciation 10% per annum on original cost on each machine.
Original cost of each machine is Rs. 13,000.
3) Maintenance and repairs per week per machine is Rs. 25.
4) Consumable stores per week per machine Rs. 36.
5) Power - 20 units per hour per machine at 40 paise per unit.
6) Apportionment to the cost center
Rent per annum Rs. 3,000
Heat and light per annum Rs. 5,400
Foreman's salary per annum Rs. 7,200
a) Compute the cost of running one machine for a four - week period and
b) The machine hour rate.

Calculate machine hour rate for recovery of overheads for a machine from the following information:
Cost of machine is Rs. 25,00,000 and estimated salvage value is Rs. 1,00,000. Estimated working life of
the machine is 10 years. Annual working hours are 3,000 in the factory. The machine requires 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 Rs.
3,50,000. Power used 15 units per hour at a cost of Rs. 5 per unit. No power is consumed during
maintenance and setting-up time. A chemical required for operating the machine is Rs. 9,880 per annum.
Wages of an operator is Rs. 4,000 per month. The operator, devoted one-third of his time to the machine.
Annual insurance charges 2 per cent of cost of machine.
Light charges for the department is Rs. 2,500 per month, having 48 points in all, out of which only 8
points are used at this machine. Other indirect expenses are chargeable to the machine are Rs. 6,500 per
month.
A machine costing Rs. 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 Rs. 10,000. The total cost of all the machines including
new one was Rs. 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 Rs. 5,000.
(iii) Insurance Premium was paid for all the machine Rs. 9,000.
(iv) New machine consumes 8 units of electricity per hour, the rate per unit being Rs. 3.75.
(v) The new machine occupies 1/10 area of the department. Rent of the department is Rs. 2,400 per
month.
(vi) Depreciation is charged on straight line basis.
Compute machine hour rate for the new machine.

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
Rs. 8 lakhs. These particulars are furnished for a 6 month period:-
Normal available hours per month per worker 208
Absenteeism (without pay) Per month per worker – hours 18
Leave (with pay) per month per worker – hours 20
Normal idle time unavoidable-hours 10
Average rate of wages per day of 8 hours Rs. 20
Production Bonus estimated 15% on wages
Value of Power consumed for machine shop Rs. 8,050
Supervision and Indirect Labour for machine shop Rs. 3,300
Lighting and Electricity for machine shop Rs. 1,200
Following particulars are for a year:
Repairs and maintenance including consumables 3% on the value of machines.
Insurance Rs. 40,000. for machine shop
Depreciation 10% on original cost.
Other Sundry works expenses Rs. 12,000, for machine shop
General Management expenses allocated to machine shop Rs. 54,530
You are required to work out a comprehensive machine hour rate for the Machine Shop.
Q20. Calculation of OH Absorption (Single Tier) REG. PAGE NO.

From the details furnished below you are required to compute a comprehensive machine-hour rate:
Original purchase price of the machine (subject to Rs. 3,24,000
depreciation at 10% per annum on original cost)
Normal working hours for the month
(The machine works to only 75% of capacity) 200 hours
Wages of Machineman Rs. 125 per day (of

(Wages for working Hours) 8 hours)
Wages for Helper (machine attendant) Rs. 75 per day
(Wages for working Hours) (of 8 hours)
Power cost for the month for the time worked Rs. 15,000
Supervision charges apportioned for the machine centre
for the month Rs. 3,000
Electricity & Lighting for the month Rs. 7,500
Repairs & maintenance (machine) including
Consumable stores per month Rs. 17,500
Insurance of Plant & Building (apportioned) Rs. 16,250

for the year
Other general expense per annum Rs. 27,500
The workers are paid a fixed Dearness allowance of Rs. 1,575 each per month. Production bonus payable
to workers in terms of an award is equal to 33.33% of basic wages and dearness allowance. Add 10% of
the basic wage and dearness allowance against leave wages and holidays with pay to arrive at a
comprehensive labour-wages for debit to production.

You are given the following information of the three machines of a manufacturing department of X Ltd.:
Preliminary estimates of expenses
(Per annum)
Total Machines
(Rs.) A (Rs.) B (Rs.) C (Rs.)
Depreciation 20,000 7,500 7,500 5,000
Spare parts 10,000 4,000 4,000 2,000
Power 40,000
Consumable stores 8,000 3,000 2,500 2,500
Insurance of machinery 8,000
Indirect labour 20,000
Building maintenance expenses 20,000
Annual interest on capital outlay 50,000 20,000 20,000 10,000
Monthly charge for rent and rates 10,000
Salary of foreman (per month) 20,000
Salary of Attendant (per month) 5,000
(The foreman and the attendant control all the three machines and spend equal time on them.)
Machines
ADDITIONAL INFORMATION
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K. W. Rating 3 2 3
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.
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.

Calculate Machine Hour Rate from the following particulars:
Cost of Machine – Rs. 25,00,000
Salvage Value - Rs. 1,25,000
Estimated life of the machine - 25,000 Hours
Working Hours (per annum) - 3,000 Hours
Hours required for maintenance - 400 Hours
Setting-up time required - 8% of actual working hours
Additional Information:
(i) Power 25 units @ Rs. 5 per unit per hour.
(ii) Cost of repairs and maintenance Rs. 26,000 per annum.
(iii) Chemicals required for operating the machine Rs. 2,600 per month.
(iv) Overheads chargeable to the machine Rs. 18,000 per month.
(v) Insurance Premium (per annum) 2% of the cost of machine
(vi) No. of operators - 02 (looking after three other machines also)
(vii) Salary per operator per month Rs. 18,500

A manufacturing unit has purchased and installed a new machine of Rs. 12,70,000 to its fleet of 7 existing
machines. The new machine has an estimated life of 12 years and is expected to realise Rs. 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 Rs. 25,000 (p.a.).
(iii) Rs.The machine requires a special chemical solution, which is replaced at the end of each week (6
days in a week) at a cost of Rs. 400 each time.
(iv) Four operators control operation of 8 machines and the average wages per person amounts to Rs.
420 per week plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of Rs. 3 per unit.
No current is taken during maintenance and setting up.
(vi) Departmental and general works overhead allocated to the 8 machines during last year was Rs.
50,000. During the current year it is estimated to increase 10% of this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive.

The following particulars refers to process used in the treatment of material subsequently, incorporated
in a component forming part of an electrical appliance:
(i) The original cost of the machine used (Purchased in June 2008) was Rs. 10,000. Its estimated life is
10 years, the estimated scrap value at the end of its life is Rs. 1,000, and the estimated working
time per year (50 weeks of 44 hours) is 2200 hours of which machine maintenance etc., is
estimated to take up 200 hours.
No other loss of working time expected, setting up time, estimated at 100 hours, is regarded as
productive time. (Holiday to be ignored).
(ii) Electricity used by the machine during production is 16 units per hour at cost of a 9 paisa per unit.
No current is taken during maintenance or setting up.
(iii) The machine required a chemical solution which is replaced at the end of week at a cost of Rs. 20
each time.
(iv) The estimated cost of maintenance per year is Rs. 1,200.
(v) Two attendants control the operation of machine together with five other identical machines. Their
combined weekly wages, insurance and the employer's contribution to holiday pay amount Rs.
120.
(vi) Departmental and general works overhead allocated to this machine for the current year amount
to Rs. 2,000.
You are required to calculate the machine hour rate of operating the machine.

A machine costing Rs. 1,00,00,000 is expected to run for 10 years. At the end of this period its scrap value
is likely to be Rs. 9,00,000. Repairs during the whole life of the machine are expected to be Rs. 18,00,000
and the machine is expected to run 4,380 hours per year on the average. Its electricity consumption is 15
units per hour, the rate per unit being Rs. 5. The machine occupies one-fourth of the area of the
department and has two points out of a total of ten for lighting. The foreman has to devote about one
sixth of his time to the machine. The monthly rent of the department is Rs. 30,000 and the lighting
charges amount to Rs. 8,000 per month. The foreman is paid a monthly salary of Rs. 19,200. Find out the
machine hour rate, assuming insurance is @ 1% p.a. and the expenses on oil, etc., are Rs. 900 per month
Q26. Calculation of OH Absorption Rate (Two Tier) REG. PAGE NO.

AT Ltd., an engineering company having 25 different types of automatic machines, furnishes you the
following data for the year in respect of machine ‘B‘-
1. Cost of Machine Rs. 50,000
Life 10 years Scrap value is nil.
2. Overhead expenses are:
Factory Rent Rs. 50,000 p.a.
Heating and lighting for factory Rs. 40,000 p.a.
Supervision of Factory Rs. 1,50,000 p.a.
Cost of maintenance of Reserve equipment
for machine B Rs. 5,000 p.a.
Area of the Factory 80,000 Sq. ft.
Area occupied by machine B 3,000 Sq. ft.
Power cost Rs. 50 per hour while in operation
3. Wages of operator is Rs. 24 per day of 8 hours including all fringe benefits. He attends to one
machine when it is under set up and two machines while under operation.
4. Estimated production hours 3,600 p.a.
Estimated set up time 400 hours p.a.
Prepare a schedule of comprehensive machine hour rate and find the cost of the following jobs.
JOB-1102 JOB-1308
Set up time (Hours) 80 40
Operation time (Hours) 130 160

X Ltd having fifteen different types of automatic machines furnishes information as under for the year -
i) Overhead expenses - Factory rent Rs. 96,000 (Floor area 80,000 sq.ft.) and Insurance of Building
Rs. 45,000 and supervision Rs. 1,20,000.
ii) Wages of the operator are Rs. 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 Rs. 5,000.
ii) Annual expenses on special equipment attached to the machine are estimated at
Rs. 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 Rs. 2 per hour while machine is in operation.
Find out the comprehensive machine hour rate of machine B. Also find out machine costs to be absorbed
in respect of use of machine B on the following two work - orders.
Work-order 31 Work - order 32
Machine set up time (Hours) 10 20
Machine operation time (Hours) 90 180

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:
– Cost of the machine is Rs. 5,00,000. Life 10 years. Estimated scrap value at the end of life is Rs.
20,000.
Rs.
– Repairs and maintenance per annum 60,480
– Consumable stores per annum 47,520
– Rent of building per annum (The machine under reference occupies 1/6 of 72,000
the area)
– 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 Rs. 2 per unit
Power is required for productive purposes only. Set up time, though productive, does not require power.
The Supervisor and Operator are permanent. Repairs and maintenance and consumable stores vary with
the running of the machine.
Required
Calculate a two-tier machine hour rate for (a) set up time, and (b) running time

The normal expenses attributable to machine III and the normal hours for which the machine is expected
to be utilized in the current year are below:
Rs. Rs.
Expenses
Fixed 2,000
Variable:
Power 1,500
Repairs 900
Lubricants 600 3,000
Total 5,000
Predetermined normal hours of working:
To make ready 200 hours
Running on jobs 800 hours
Total 1,000 hours
Variable expenses are incurred only during running time.
From the data furnished below compute the of Cost of Job No. 8237
Materials consumed 10 units at Rs. 5 each 50.00
Labour:
To make ready: 2 hours at Rs. 1.00 2.00
Running on Job: 8 hours at Rs. 1.00 8.00

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 Rs.
4,20,000/- per annum. The expenses regarding the machine are estimated as follows.
Rs.
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
(a) Compute the machine hour rate for the firm as a whole for the month when the computer was used
and when the computer was not used.
(b) Overheads charged to individual jobs A, B and C.

In an engineering company, the factory overheads are recovered on a fixed percentage basis on direct
wages and the administrative overheads are absorbed on a fixed percentage basis on factory cost.
The company has furnished the following data relating to two jobs undertaken by it in a period:
JOB 101 JOB 102
Selling price Rs. 1,66,650 Rs. 1,28,250
Profit as percentage on cost 10% 20%
Direct Materials Rs. 54,000 Rs. 37,500
Direct Wages Rs. 42,000 Rs. 30,000
Required:
(i) Computation of percentage recovery rates of factory overheads and administrative overheads.
(ii) Calculation of the amount of factory overheads, administrative overheads and profit for each of the
two jobs.
(ii) Using the above recovery rates fix the selling price of job 103. The additional data being
Direct materials Rs. 24,000, Direct wages Rs. 20,000 and Profit percentage on selling price 12-½%

XYZ manufacturers of Mechanical Fittings which pass through three departments viz. Foundry, Machine
Shop and Assembling. The manufacturing expenses are as follows:
Foundry Machine Shop Assembling Total
Rs. Rs. Rs. Rs.
Direct Wages 10,000 50,000 10,000 70,000
Works Overhead 5,000 90,000 10,000 1,05,000
The factory cost of manufacturing a type 'C' fitting was prepared by the company as follows:
Rs. Rs.
Material 16
Direct Wages
Foundry 2
Machine Shop 4
Assembling 2 8
1,05,000
Works Overhead [150% of direct wages i.e = 150%] 12
70,000
Total Cost 36
There appears to be some conceptual mistake in the calculations shown above. You are required to
identify and correct the conceptual error.

TYPE-3 “STEP 5”
Q33. Calculation & Treatment of UA/OA REG. PAGE NO.

A cost center in a factory furnishes the following working conditions:
Normal working week - 40 hours
Number of machines - 15
Normal weekly lost hours on maintenance - 4 hours per machine
Estimated annual overheads - Rs. 1,55,520
Number of weeks estimated per year - 48
Actual results in respect of 4 week period are:
Overheads incurred - Rs. 15,000
Machine hours produced - 2,200
You are required to -
a. Calculate the overhead rate per machine hour and;
b. Calculate the amount of under or over absorption of overheads.

XYZ Company uses a historical cost system and applies overheads on the basis of predetermined rates.
The following data are available from the records of the Company for the year ended 31st March.
Manufacturing overheads incurred Rs. 8,50,000
Manufacturing overheads applied Rs. 7,50,000
Work in progress Rs. 2,40,000
Finished goods Stock Rs. 4,80,000
Cost of goods sold Rs.16,80,000
Assume that WIP has been given in respect of Equivalent production only.
Apply three methods for disposal of under absorbed overheads showing the implications of each method
on the profits of the company, for the year ended 31st March.

In a manufacturing unit, overhead was recovered at a predetermined rate of Rs. 25 per man day. The
total factory overhead incurred and the man days actually worked were Rs. 41,50,000 and 1,50,000
respectively.
Out of the 40,000 units produced during the period, 30,000 units were sold. There were also 30,000
uncompleted units which may be reckoned at 66 2 % complete.
3
On analysing the reasons, it was found that 40% of the unabsorbed overheads were due to defective
planning and the rest were attributable to increase in overhead cost.
How would unabsorbed overheads be treated in cost accounts?

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 Rs. 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 Rs. 6,79,000
Amount included in the production overheads:
Paid as per court’s order Rs. 45,000
Expenses of previous year booked in current year Rs. 10,000
Paid to workers for strike period under an award Rs. 42,000
Obsolete stores written off Rs. 18,000
Production and sales data of the concern for the first six months are as under:
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 ¼th 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.

ABC Ltd. manufactures a single product and absorbs the production overheads at a pre-determined rate
of Rs. 10 per machine hour. At the end of the year, it has been found that actual production overheads
incurred were Rs. 6,00,000. It included Rs. 45,000 on account of 'write off' of obsolete stores and Rs.
30,000 being the wages paid for the strike period under an award (Decision of court).
The stock and sales data for the year is as under:
Stock:
Finished Goods 20,000 Units
Work - in - progress 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 one-third of the
under absorption of production overheads was due to lack of production planning and the rest was
attributable to normal increase in costs.
i. Calculate the amount under-absorption of production overheads during the year and
ii. Show the accounting treatment of under-absorption of production overheads
iii. Show the accounting treatment of under absorption if words production are printed instead of
word stock.

A company produces a single product in three sizes A, B and C. Prepare a statement showing the selling
and distribution expenses apportioned over these three sizes applying the appropriate basis for such
apportionment in each case from the particulars indicated.
Express the total of the costs so apportioned to each size as:
a. cost per unit sold (nearest paise)
b. A percentage of sales turnover (nearest two places for decimal)
The expenses are:
Expenses Amount (Rs.) Basis of Apportionment
Salesmen salaries 10,000 No. of salesmen
Sales commission 6,000 Sales turnover
Sales office expenses 2,096 Number of orders
Advertisement-General 5,000 Sales turnover
Advertisement-Specific 22,000 Direct charges
Packing 3,000 Total volume in c.ft. of product sold
Delivery expenses 4,000 Total volume in c.ft of product sold
Warehouse expenses 1,000 Total volume in c.ft of product sold
Credit collection expenses 1,296 No.of orders
Total 54,392
Data available relating to the three sizes are as follows -
Total Size – A Size – B Size – C
No. of salesmen
(all are paid same salary) 10 4 5 1
Units sold 10,000 3,000 4,000 3,000
No. of orders 1,600 700 800 100
% of specific advertising 100% 30% 40% 30%
Sales turnover (Rs.) 2,00,000 58,000 80,000 62,000
Volume (C.ft./unit of FG) -- 5 8 17

A light engineering factory fabricates machine parts to customers. The factory commenced fabrication of
12 Nos. machine parts to customers’ specifications and the expenditure incurred on the job for the week
ending 21st August 2018 is given below:
PARTICULARS AMOUNT AMOUNT
Direct Material (all items) 780.00
Direct Labour (Manual) 20 Hours @ Rs. 15/Hr. 300.00
Machine Facilities:
Machine No. 1: 4 Hours @ Rs. 45 180.00
Machine No. 2: 6 Hours @ Rs. 65 390.00 570.00
TOTAL 1,650.00
Overheads @ Rs. 8/Hour on 20 manual hours 160.00
TOTAL COST 1,810.00
The overhead rate of Rs. 8 per hour is based on 3,000 man hours per week; similarly, the machine hour
rates are based on the normal working of Machine Nos. 1 and 2 for 40 hours out of 45 hours per week.
After the close of each week, the factory levies a supplementary rate for the recovery of full overhead
expenses on the basis of actual hours worked during the week. During the week ending 21st August,
20X1, the total labour hours worked was 2,400 and Machine Nos. I and II had worked for 30 hours and
32.5 hours respectively.
Prepare a Cost Sheet for the job for the fabrication of 12 Nos. machine parts duly levying the
supplementary rates.

A company which sells four products, some of them unprofitable, proposes discontinuing the sale of one
of them. The following information is available regarding income, costs and activity for the year ended
31st March, 2018.
PRODUCTS
PARTICULARS
A B C D
Sales 30,00,000 50,00,000 25,00,000 45,00,000
Cost of Sales 20,00,000 45,00,000 21,00,000 22,50,000
Area of Storage 50,000 40,000 80,000 30,000
Number of Parcels sent 1,00,000 1,50,000 75,000 1,75,000
Number of Invoices sent 80,000 1,40,000 60,000 1,20,000
Selling & Distribution overheads and the basis of their allocation is as under –
BASIS OF
PARTICULARS AMOUNT
ALLOCATION
FIXED COSTS:
Rent & Insurance 3,00,000 Square Feet
Depreciation 1,00,000 Parcel
Salesmen’s salaries & expenses 6,00,000 Sales Volume
Administrative Wages & Salaries 5,00,000 No. of Invoices
VARIABLE COSTS:
Packing Wages & Material Rs. 2/Parcel
Commission 4% of Sales
Stationery Rs. 1/Invoice
You are required to prepare Costing Profit & Loss Statement, showing the percentage of profit or loss to
sales for each product.

In a factory, overheads of a particular department are recovered on the basis of Rs. 5 per machine hour.
The total expenses incurred and the actual machine hours for the department for the month of August
were Rs. 80,000 and 10,000 hours respectively. Of the amount of Rs. 80,000, Rs. 15,000 became payable
due to an award of the Labour Court and Rs. 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?

In a manufacturing unit, factory overhead was recovered at a pre-determined rate of Rs. 25 per man-day.
The total factory overhead expenses incurred, and the man-days actually worked were Rs. 41.50 lakhs
and 1.5 lakh 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?
TYPE-3 “CAPACITY & MISCELLANEOUS PROBLEMS”
Q43. Capacity Related Problems REG. PAGE NO.

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 (b) Practical capacity (c) Normal capacity (d) Actual capacity
Q44. Separation of FC and VC REG. PAGE NO.

The following information is available:
01/04/18 – 30/06/18 01/07/18 – 31/03/19
Output 10,000 units 35,000 units
Total overheads Rs. 40,000 Rs. 1,35,000
You are required to calculate the amount of variable overhead per unit and amount of total fixed
overheads for whole the year 2018-19.
Q45. Separation of FC and VC REG. PAGE NO.

ABC Ltd has calculated a predetermined overhead rate of Rs. 22 per machine hour for its Testing
department. This rate has been calculated for the budgeted level of activity and is considered as
appropriate for absorbing overheads. The following overhead expenditures at various activity levels has
been estimated.
Testing Department. Total overheads Number of machine hours
Rs. 3,38,875 14,500
Rs. 3,47,625 15,500
Rs. 3,56,375 16,500
a) Calculate the variable overhead absorption rate per machine hour.
b) Calculate the estimated total fixed overheads.
c) Calculate the budgeted level of activity in machine hours.
d) Calculate the amount of under/over - recovery of overheads if the actual machine hours were
15,850 and actual overheads were Rs. 3,55,050.
Q46. Preparation of Performance Report REG. PAGE NO.
A Ltd., manufactures two products A and B. The manufacturing division consists of two production
departments P1 and P2 and two service departments S1 and S2. Budgeted overhead rates are used in the
production departments to absorb factory overheads to the products. The rate of Department P1 is based
on direct machine hours, 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 departments costs to production departments, the basis adopted is as follows:
i) Cost of Department S1 to Departments P1 and P2 equal and
ii) Cost of Department S2 to Departments P1 and P2 in the ratio of 2: 1 respectively.
The following budgeted and actual data are available:
Annual Profit Plan Data
Factory Overheads budgeted for the year:
Departments P1 Rs. 25,50,000 S1 Rs. 6,00,000
P2 Rs. 21,75,000 S2 Rs. 4,50,000
Budgeted output in units:
Product - A: 50,000
Product - B: 30,000
Budgeted raw - material cost per unit:
Product - A: Rs. 120
Product - B: Rs. 150.
Budgeted time required for production per unit:

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: Rs. 72 per hour and
Product - B: Rs. 75 per hour.
All materials are used in Department P1 only.
Actual Data: (for the month of July)
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.
Costs actually incurred:
Product A Product B
Raw Materials: Rs. 4,89,000 Rs. 4,56,000
Wages: Rs. 5,91,900 Rs. 5,52,000
Overheads: Department: P1 Rs. 2,31,000 S1 Rs. 60,000
P2 Rs. 2,04,000 S2 Rs. 48,000
i) Compute the predetermined overhead rate for each production department.
ii) Prepare a performance report for July, that will reflect the budgeted costs for actual output and
actual costs.
8. PAST EXAM THEORY QUESTIONS
Q1. Discuss ABC analysis as a system of inventory control

Ans. ABC analysis exercises discriminating control over different items of stores classified on the basis of
investment involved.
‘A’ category items consists of only a small proportion i.e. approximately 10% of total items of stores but
needs huge investment. Say about 70% of inventory vogue, because of their high prices or heavy
requirement.
'B' category items are relatively 20% of the total items of stoles. The proportion of investments requires
is also approximately 20% of total inventory investment.
‘C’ category items do not require much investment. It may be about 10% total inventory value but they
are nearly 70% of the total items of stores.
Q2. Distinguish between cost allocation and cost absorption.

Ans. 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 or apportioned
over particular cost centre or production department by the units produced.
Q3. Explain the treatment of over and under absorption of overheads in cost accounts.
Ans. 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/ gain 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.
Q4. Explain the treatment of over and under absorption of overheads in cost accounting.
Ans. 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.
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“If Success comes EASILY to you, turn and say, Dear you’ve chosen wrong
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person”. -ANSHUL A. AGRAWAL

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CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A.

2. STEPS FOR CALCULATION & ABSORPTION OF OVERHEAD COST

INDIRECT INDIRECT INDIRECT

On the Basis of On the Basis of On the Basis of

4. 2 Follow CA CS Anshul Agrawal on Unacademy’s YouTube Channels and Unacademy App

STEP # 2: Allocation & Absorption of OH i.e. Primary Distribution

STEP # 3: Re-Apportionment of OH i.e. Secondary Distribution

CASE-1: NO SERVICE DEPARTMENT IS RENDERING ANY SERVICES TO EACH OTHER

(Without any Reciprocal Services)

CASE-3: SERVICE DEPARTMENTS RENDERING SERVICES TO EACH-OTHER (i.e. Reciprocal Services)

4. 4 Follow CA CS Anshul Agrawal on Unacademy’s YouTube Channels and Unacademy App

Overhead absorption rate =

S. NO. VARIOUS BASIS FORMULA

STEP # 5: Calculation and Treatment of Under/Over Absorption of OH

4. 6 Follow CA CS Anshul Agrawal on Unacademy’s YouTube Channels and Unacademy App

3. ACCOUNTING & CONTROL OF ADMINISTRATIVE OVERHEADS

4. ACCOUNTING & CONTROL OF SELLING & DISTRIBUTION OVERHEADS

5. TREATMENT OF CERTAIN ITEMS IN COST ACCOUNTING

4. 8 Follow CA CS Anshul Agrawal on Unacademy’s YouTube Channels and Unacademy App

Q1. Direct Redistribution Method REG. PAGE NO.

Q2. Direct Redistribution Method REG. PAGE NO.

Q4. Step Ladder Method REG. PAGE NO.

@cacsanshul @iamcacsanshul 4.11

Q5. Simultaneous Equation Method REG. PAGE NO.

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

@cacsanshul @iamcacsanshul 4.13

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

Q9. Simultaneous Equation Method REG. PAGE NO.

The following departmental data are also available:

@cacsanshul @iamcacsanshul 4.15

FLOOR SPACE RADIATOR NO. OF INVESTMENT

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

Q12. Step-4 (Understanding Absorption) REG. PAGE NO.

@cacsanshul @iamcacsanshul 4.17

The following data are also available:

Q14. Calculation of OH Absorption (Single Tier) REG. PAGE NO.

Q15. Calculation of MHR (Single Tier) REG. PAGE NO.

@cacsanshul @iamcacsanshul 4.19

Q16. Calculation of MHR (Single Tier) REG. PAGE NO.

Q17. Calculation of MHR (Single Tier) REG. PAGE NO.

Q19. Calculation of MHR (Single Tier) REG. PAGE NO.

Q20. Calculation of OH Absorption (Single Tier) REG. PAGE NO.

@cacsanshul @iamcacsanshul 4.21

Insurance of Plant & Building (apportioned) Rs. 16,250

Q21. Calculation of MHR (Single Tier) REG. PAGE NO.

Q22. Calculation of MHR (Single Tier) REG. PAGE NO.

Q23. Calculation of MHR (Single Tier) REG. PAGE NO.

@cacsanshul @iamcacsanshul 4.23

Q25. Calculation of MHR (Single Tier) REG. PAGE NO.

Q26. Calculation of OH Absorption Rate (Two Tier) REG. PAGE NO.

Q27. Calculation of OH Absorption Rate (Two Tier) REG. PAGE NO.

Q28. Calculation of OH Absorption Rate (Two Tier) REG. PAGE NO.

Q29. Calculation of OH Absorption Rate (Two Tier) REG. PAGE NO.

Q30. Calculation of OH Absorption Rate (Two Tier) REG. PAGE NO.

Q31. Calculation of OH Absorption Rate (Two Tier) REG. PAGE NO.

Q32. Calculation of OH Absorption Rate (Two Tier) REG. PAGE NO.

@cacsanshul @iamcacsanshul 4.27

Q33. Calculation & Treatment of UA/OA REG. PAGE NO.