COST ACCOUNTING – I

Module V: Overheads (PART 2 )

Example 12:
A machine was purchased for Rs. 5 lakhs. The total cost of all machinery inclusive of the new
machine was Rs. 75 lakhs. The following further particulars are available for new machine:
1. Expected life of the machine 10 years
2. Scrap value at the end of the ten years Rs. 5,000.
3. Repairs and Maintenance for the machine during the year Rs. 20,000
4. Expected no of working hours of the machine per year 4,000 hours
5. Insurance premium annually for all the machines Rs. 45,000
6. Electricity consumption for the machine per hour (@ Rs. 4.50 per unit) 25 units
7. Area occupied by the machine 100 sq. ft.
8. Area occupied by other machines 1,500 sq. ft.
9. Rent per month of the department Rs. 8,000.
10. Lighting charges for 20 points for the whole department is Rs. 1200 per month, out
of which 3 points are for this machine.
Compute the machine hour rate for the new machine on the basis of the data given above.

Example 13:
Work out the Machine Hour rate for the following machine whose scrap value is nil:
Details Amounts (Rs.)
Insurance 20,000
Cost of machine 1,90,000
Freight and installation charges 10,000
Working life Five years
Repairs and maintenance 40% of deprecation
Annual power expenses @ 25 paise p.u 6,000
Eight hourly day charges :
i. Power 24
ii. Lubrication oil 20
iii. Consumable stores 28
iv. Wages 80
Example 14:
Calculate the machine hour rate of a machine with the information given below :

Operating Data:
Total no. of weeks per quarter 13
Total no. of hours per week 48
Stoppage due to maintenance 8 hrs. p.m.
Time taken for set up 2 hrs/week

Cost details:

Cost of machine Rs. 2,00,000

Repairs and Maintenance Rs. 24,000 p.a.
Consumable Stores Rs. 30,000 p.a.
Rent, rates and taxes Rs. 8,000 per quarter
Operator’s wages Rs. 3,000 p.m.
Supervisor’s salary Rs. 5,000 p.m.
Cost of Power 15 units per hour @ Rs.
3/unit
Notes:
i. Life of the machine is 10 years. SLM of depreciation and is treated as a variable cost.
ii. Power is consumed for production runs only and not for set up or maintenance. But
all the overhead costs are to be borne by the total time excluding maintenance
stoppage.
iii. The supervisor is working on five identical machines including the one now being
considered.

Example 15:
In a machine shop, the machine hour rate worked out at the beginning of the year on the
basis of 13 weeks period which is equal to 3 calendar months. The following estimates for
operating a machine are relevant:
Total working hours available per week 48 hours
Maintenance time included in above 2 hours
Setting up time included above 2 hours
Cost details:
Operator’s wages p.m. 6,500
Supervisory salary p.m. (Common supervisor for 3 machines) 15,000
W.D.V. of machine (Dep. @ 12% on W.D.V.) 18,00,000
Repairs and maintenance p.a. 160,000
Consumable stores p.a. 300,000
 Rent, rates and taxes (for the quarter apportioned) 50,000

Power consumed @15 units per hour @ Rs. 4 per unit. Power is consumed for productive
hours only. Setting up time is part of productive time but no power is required for setting up
jobs. The operator and supervisors are permanent. Repairs and maintenance and
consumable stores are variable.
Work out the machine hour rate also work out the rate for quoting party for utilizing the idle
capacity in the machine shop assuming a profit of 20% above variable cost.

Example 16:
Compute the machine hour rate from the following data :
i. Cost of the new machine to be depreciated is Rs.2,30,000
ii. Life : 10 years
iii. Depreciation to be calculated on straight line basis
iv. Departmental overheads (annual)
Rent – Rs. 50,000
Lighting – Rs. 20,000
Supervision – Rs. 1,30,000
v. Area of the Department with all the machines is 70,000 sq. ft.;
New Machine occupies 2,500 sq. ft. of the total area.
vi. Other annual standing charges for all the machines is Rs. 15,000.
vii. Hours run on production - 1,800.
viii. Hours for setting and adjusting - 200.
ix. Power cost Rs. 0.50 per hour of running time
x. The Indirect Labour rate Rs. 6 per hour.
xi. Indirect Labour :
(a) when setting and adjusting the machines, full time attention is needed
(b) when machine is producing, one man looks after three machines at once.
xii. The department has a total of 26 machines

Example 17: From the following particulars, calculate machine hour rate :

Cost of machine Rs. 10,00,000

Estimated life 10 years

Scrap value Rs. 100,000

Other information :

Time taken up in maintenance 200 hrs. p.a.

Setting up time 100 hrs. p.a.

 There are 50 weeks in a year, one week is of 44 hrs. Set up time is regarded as
productive time.
i. Power used during production is 16 units per hour @ Rs. 5 per unit. No current is
taken during maintenance or setting up time.
ii. The machine requires a chemical solution which is replaced at the end of each week
at a cost of Rs. 200 each time
iii. Cost of maintenance Rs. 12,000 per annum.
iv. Two attendants control the operation of this machine together with five other
identical machines. Their combined weekly wages amount to Rs. 1,200.
v. General work overheads allocated to this machine for the year amount to Rs. 20,000.

Example 18:

The cost accountant of Novo chemicals Ltd. Determined the overhead recovery rate for the
year 2004 (based on direct hours) with the following estimates :

Indirect labour 1,15,000

Inspection 70,000
Factory supervision 50,000
Depreciation and maintenance 1,25,000
Total factory overhead 3,60,000
Direct labour hours 75,000
Hourly wage rate Rs.15
The actual results for the year are as follows :
Indirect labour 99,000
Inspection 73,000
Factory supervision 51,000
Depreciation and maintenance 1,15,000
Total actual factory overhead 3,38,000
Direct labour hours 67,600
Hourly wage rate Rs. 16
Calculate the pre determined overhead recovery rate and find out the amount of
over/under absorption, if any.

Example 19:
During the year ended 31st March, 2016, the factory overhead costs of three production
departments of an organization are as under :
Department X – Rs. 48,950 ; Y – Rs. 89,200; Z – Rs. 64,500
The basis of apportionment for each department is given below :
X – Rs.5.00 per machine hour for 10,000 hours
Y – 75% of direct labour cost of Rs. 1,20,000.
Z – Rs. 4.00 per piece for 15,000 pieces.
Calculate departmentwise under or over absorption of overheads and present the data in a
tabular form.
Example 20:

A manufacturing company has four production departments. Overhead is absorbed to its

production departments by means of departmental rates per direct labor hour. In a
particular year, there was a large difference between the overhead incurred and the
overhead absorbed. On analysis you get the following information :

Departments (Amt in Rs.)

A B C D
Overhead incurred 12,320 44,385 18,180 16,720
Actual direct labour hours worked 30,800 80,700 40,400 30,400
Estimated departmental rate used 0.50 0.45 0.40 0.50
Total overheads absorbed 15,400 36,315 16,160 15,200
Direct labour hours contained in:
Closing Work in progress 3,000 10,400 1,900 7,200
Closing stock of Finished goods 4,300 8,300 4,000 2,900
You are required to :

a) Calculate the direct labour hour rate of overheads for each department
b) Calculate the extent to which the values of WIP and Finished Goods should be
increased or decreased for each department for the year in view of corrected rates.
c) What will be the impact on total profit of the company in view of the correction
above.

Example 21 :

Separate department overhead application rates based on direct labour hours are being
used by a manufacturing company. At the end of the year, following information is supplied
to you:

Dept I Dept II Dept III

Amount in Rs
Overhead absorption rates used 4.00 3.00 7.00
Actual overhead incurred 81,900 1,20,960 79,360
Overhead absorbed 72,800 1,00,800 86,800
Direct labour hours recorded against :
Closing stock of WIP 2,800 4,930 820
Closing stock of Finished Goods 5,400 3,700 1,210

a) Calculate the revised overhead application rate in rupee per direct labour hour (in
nearest paise ) in light of actual figures supplied to you for the year.
b) Calculate the total amounts by which the WIP and finished goods stock in each
department will have to be increased or decreased in the light of the revision of the
overhead application rate.
Example 22 :

A machine shop has 8 identical drilling machines by operated 6 operators. The machine
cannot be worked without an operator wholly engaged on it. The original cost of all the
machines works out to Rs. 8 lakh. These particulars are furnished for a 6 month period.

Normal available hours per month per worker 208

Absenteeism (without pay) hours p.m. per worker 18
Leave (with pay) hours per worker p.m. 20
Normal idle time unavoidable hours per worker p.m. 10
Average rate of wages per worker for 8 hours a day Rs. 20
Average rate of production bonus estimated 15% on wages
Value of power consumed Rs. 8,050
Supervision and indirect labour Rs. 3,300
Lighting and Electricity Rs. 1,200

These particulars are for the year :

Repairs and Maintenance including consumables 3% of value of machines

Insurance Rs. 40,000
Depreciation 10% of original cost
Other Sundry works expenses Rs. 12,000
General management expenses allocated Rs. 54,530
You are required to work out composite machine hour rate for machine shop
(FYB Com – Final exam 2016)
Example 23:
A manufacturing company uses two large and four small identical machines. Each large
machine occupies one quarter of the workshop and fully employs three workers, each small
machine occupies half the space of a large machine and fully employs two workers. The
workers are paid by piece work.
Each of the six machines is estimated to work 1,440 hours per year, while the effective
working life is taken as 12,000 working hours for each large machine and 9000 working
hours for each of the small machines. Large machines cost Rs.20,000 each and small
machines cost Rs. 4,000 each. Scrap values are Rs, 4,000 and Rs. 100 respectively.
Repairs maintenance and oil are estimated to cost for each large machine Rs. 4,000 and
each small machine Rs. 1,200 during its effective life.
Power consumption cost is 5 paise per unit and amounts for a large machine 20 units per
hour and for a small machine 2 units per hour.
The manager is paid Rs. 4,800 a year and workshop supervision occupies ½ of his time,
which is divided equally among the six machines.
Details of other expenses are:
Rent and rates to workshop: Rs. 6,400 a year
Lighting (to be apportioned in the ratio of workers employed): Rs. 1,820 a year.
Taking a period of three months as a basis, calculate the Machine Hour Rate for a large
machine and small machine respectively.

Example 24 :
From the following data relating to a production unit, work out the over absorbed or under
absorbed overhead resulting during the month of review :
The unit having a strength of 20 workmen planned for 290 working days of 8 hours each
with half an hour break. Based on the earlier years trend it is forecasted that average
absenteeism per workman would be 10 days, in addition to the eligibility of 30 days annual
leave.
The budgeted overheads related to the unit for the year amounted to Rs. 75,000 and the
unit follows a system of recovering overheads on the basis of direct labour hours.
The actual overheads during the year amounted to Rs. 71,200 and the following details
regarding actual working of the unit are available :
a) The factory worked 3 extra days to meet the production targets, but one additional
paid holiday has to be declared.
b) There was a severe breakdown of a major equipment leading to a loss of 350 man
hours.
c) Total overtime hours (in addition to 3 extra days worked) amounted to 680 hours.
d) The actual average absenteeism per workman was 12 days.

Example 25 :
The following information is provided on three machines functioning in a manufacturing
department of Suvendhu Private Limited

Preliminary estimated expenses per annum are as follows

Particulars Total Machine A Machine B Machine C

Depreciation on machines 2,00,000
Salary of supervisor (per month) 25,000
Salary of attendant (per month) 8,000
Spare parts consumption 1,00,000 40,000 40,000 20,000
Power 4,00,000
Rent for the shop floor (per month) 1,00,000
Interest on capital investment 3,00,000
Consumable stores 80,000 30,000 25,000 25,000
Insurance of Machinery 1,60,000
Indirect Labour 2,00,000
Building maintenance 3,20,000

Note: Supervisor and the attendants are spending equal time on all the three machines.

The following additional information might be of use

 Machine A Machine B Machine C
Cost of Machines 15,00,000 15,00,000 10,00,000
K.W of Machines 30 20 30
Floor space occupied (sq. feet) 4000 4000 2000
Estimated Direct Labour hours 50,000 75,000 75,000

There are 12 holidays besides Sundays in a year. 2 of the holidays will fall on Saturday and
none on Sunday. The manufacturing department (Machines) works 8 hours on weekdays
and 4 hours on Saturday.

Calculate Machine hour rate for the above machines, after considering the updated
information:
1. As Machines B and C have turned old, consumption of spare parts is estimated to go
up by 25% than the estimated figures
2. Governments decision to ban the imports of spare parts will be resulting in a 15%
increase in the price of spare parts for all the machines
3. Labour unions are constantly demanding hike in wages. The management has
decided to increase the wages of all the Direct and Indirect Labour by 20% above the
estimated rates. However, the above hike is not applicable to the salary of
Supervisors and attendant.

Note: You may assume a year to comprise of 52 complete weeks

You may round off the machine hour rate to the nearest whole number

(Final Exam – FYBBA – May 2022)