B3.

OVERHEADS: ABSORPTION COSTING

CLASS + HOME EXERCISE

PRACTICE PROBLEMS
 

XL Ltd., has three production departments and four service departments. The expenses for these
departments as per Primary Distribution Summary are as follows:
Production Departments: (`) (`)
A 30,00,000
B 26,00,000
C 24,00,000 80,00,000

Service Departments: (`) (`)

Stores value or store 4,00,000 primary
No 04 Time-keeping and Accounts 3,00,000 Distribution
Power H P 1,60,000
Canteen
No of workers 1,00,000 9,60,000

The following information is also available in respect of the production departments:

Dept. A Dept. B Dept. C
Horse power of Machine 300 300 200
Number of workers 20 15 15
Value of stores requisition in (`) 2,50,000 1,50,000 1,00,000
Apportion the costs of service departments over the production departments.

Modern Manufactures Ltd. has three Production Departments P1, P2, P3 and two Service
Departments S1 and S2 details pertaining to which are as under:

P1 P2 P3 S1 S2
Direct wages (`) 3,000 2,000 3,000 1,500 195
Working hours 3,070 4,475 2,419 - -
Value of machines (`) 60,000 80,000 1,00,000 5,000 5,000
H.P. 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

B3.1
 The following figures extracted from the Accounting records are relevant:
(`)
Rent and Rates 5,000
General Lighting 600
Indirect Wages 1,939
Power 1,500
Depreciation on Machines 10,000
Sundries 9,695
The expenses of the Service Departments are allocated as under:
P1 P2 P3 S1 S2
S1 20% 30% 40% - 10%
S2 40% 20% 30% 10% -
Find out the total cost of product X which is processed for manufacture in Departments P1, P2
and P3 for 4, 5 and 3 hours respectively, given that its Direct Material Cost is ` 50 and Direct
Labour Cost is ` 30.

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:
`
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 (`) 60,000 20,000 10,000 19,000 6,000 5,000
Direct Wages (`) 40,000 15,000 15,000 4,000 2,000 4,000
Value of Machinery (`) 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

B3.2
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 - -



RST Ltd. has two production departments: Machining and Finishing. There are three service
departments: Human Resource (HR), Maintenance and Design. The budgeted costs in these
service departments are as follows:
HR Maintenance Design
` ` `
Variable 1,00,000 1,60,000 1,00,000
Fixed 4,00,000 3,00,000 6,00,000
5,00,000 4,60,000 7,00,000

The usage of these Service Departments’ output during the year just completed is as follows:
Provision of Service Output (in hours of service)
Providers of Service
Users of Service HR Maintenance Design
HR   
Maintenance 500  
Design 500 500 
Machining 4,000 3,500 4,500
Finishing 5,000 4,000 1,500
Total 10,000 8,000 6,000

Required:
(i) Use the direct method to re-apportion RST Ltd.’s service department cost to its production
departments.
(ii) Determine the proper sequence to use in re-apportioning the firm’s service department
cost by step-down method.
(iii) Use the step-down method to reapportion the firm’s service department cost.

B3.3
 PH Ltd., is a manufacturing company having three production departments, ‘A’, ‘B’ and ‘C’ and two
service departments ‘X’ and ‘Y’. The following is the budget for December 20X1:
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:
Area (Sq. ft.) 500 250 500 250 500
Capital value of assets (` 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:

A B C X Y
Service Dept. ‘X’ (%) 45 15 30 – 10
Service Dept. ‘Y’ (%) 60 35 – 5 –

Required:
(i) A statement showing distribution of overheads to various departments.
(ii) A statement showing re-distribution of service departments expenses to production
departments
(iii) Machine hour rates of the production departments ‘A’, ‘B’ and ‘C’.



E-books is an online book retailer. The Company has four departments. The two sales
departments are Corporate Sales and Consumer Sales. The two support – departments are
Administrative (Human Resources Accounting) and Information Systems each of the sales
departments conducts merchandising and marketing operations independently.
The following data are available for October, 2013:

Departments Revenues Number of Processing time used

Employees (in minutes)
Corporate Sales ` 16,67,750 42 2,400
Consumer Sales ` 8,33,875 28 2,000
Administrative -- 14 400
Information system -- 21 1,400

B3.4
Cost incurred in each of four departments for October, 2013 are as follow:
Corporate Sales ` 12,97,751
Consumer Sales ` 6,36,818
Administrative ` 94,510
Information systems ` 3,04,720
The company uses number of employees as a basis to allocate Administrative costs and processing
time as a basis to allocate Information systems costs.
Required:
(i) Allocate the support department costs to the sales departments using the direct method.
(ii) Rank the support departments based on percentage of their services rendered to other
support departments. Use this ranking to allocate support costs based on the step-down
allocation method.
(iii) How could you have ranked the support departments differently?
(iv) Allocate the support department costs to two sales departments using the reciprocal
allocation method.

The following particulars have been extracted from an engineering industry for the three-monthly
period ended 31.03. Compute the departmental overhead rates for each of the production
departments assuming that overheads are recovered as a percentage of direct wages.
Production Department Service Department
A B C D E
Direct Wages ` 2,000 3,000 4,000 1,000 2,000
Direct material ` 1,000 2,000 2,000 1,500 1,500
Staff Number 100 150 150 50 50
Electricity Kwh. 4,000 3,000 2,000 1,000 1,000
Light Points Number 10 16 4 6 4
Asset Value ` 60,000 40,000 30,000 10,000 10,000
Area Sq.Ft. 150 250 50 50 50
The expenses for the period were:
1. Power ` 550
2. Light ` 100
3. Stores overheads ` 400
4. Amenities to staff ` 1,500
5. Rent ` 2,750
6. Depreciation of assets ` 15,000
7. Repairs and Maintenance ` 3,000
8. General overheads ` 6,000
Apportion the expenses of service department ‘E’ proportionate to direct wages to A, B, C and
that of service department D to A, B, C and E respectively in the ratio 5 : 2 : 2 : 1.

B3.5
 

Rinku Ltd., has gensets and produces its own power. Data for Power Costs are as follows:
Production Department Service Department
Horse Power hours
A B X Y
Needed at capacity production 10,000 20,000 12,000 8,000
Used during the month of May 8,000 13,000 7,000 6,000
During the month of May costs for generating power amounted to ` 9,300: of this ` 2,500 was
considered to be fixed cost. Service Department X renders service to A, B and Y in the ratio of
13: 6: 1 while Y renders service to A and B in the ratio 31: 3. Given that the direct labour hours
in Departments A and B are 1650 hours and 2175 hours respectively, find the Power Cost per
labour hour in each of these two Departments.

Asha Co. Ltd., has three production departments X, Y and Z and two service department A and
B. the following estimated figures for a certain period have been made available:
`
Rent and Rates 10,000
Lighting and Electricity 1,200
Indirect Wages 3,000
Power 3,000
Depreciation of Machinery 20,000
Other expenses and Sundries 20,000

Following are further details which are also available:

Total X Y Z A B
Floor space (sq.mtr.) 10,000 2,000 2,500 3,000 2,000 500
Light points (Nos.) 120 20 30 40 20 10
Direct Wages (`) 20,000 6,000 4,000 6,000 3,000 1,000
H.P.of machines 300 120 60 100 20 --
Cost of Machinery 1,00,000 24,000 32,000 40,000 2,000 2,000
Working hours 4,670 3,020 3050

The expenses of service departments A and B are to be allocated as follows:

X Y Z A B
A% 20 30 40 -- 10
B% 40 20 30 10 --
a. You are required to calculate overhead absorption rates per hour in respect of the
three production departments.
b. What will be the total cost of an article with material cost ` 80 and labour cost of ` 40
which passes through X, Y and Z for 2, 3 and 4 hours, respectively?

B3.6
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 overhead Direct labour No. of Area in
(`) hours employees sq.m.
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
The overhead costs of the four service departments are distributed in the same order, viz., P, Q,
R and S respectively on the following basis.
Department Basis
P Number of employees
Q Direct labour hours
R Area in square metres
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.

The machine Shop of Kiran Ltd. has 5 distinct group of machines for which the recovery of
expenses is at a rate per machine hour –
A Budget for the machine shop for the year ended 31.12. is framed as under –
1 2 3 4 5
Consumable stores ` 210 420 700 850 1,260
Maintenance ` 630 840 1,500 2,000 1,800
Horse Power H.P. 5 15 20 25 35
Space occupied Sq.ft. 200 400 600 300 500
Book value of machinery ` 30,000 90,000 25,000 60,000 45,000
Estimated utilisation Hours 5,000 10,000 3,000 7,500 12,500

B3.7
 Common Expenses are –
`
Power 9,000
Rent, Rates and Taxes 25,000
Heat and Light 5,500
Insurance on building 2,400
Insurance on machinery 7,500
Depreciation 37,500
Shop Supervision 30,400
Other general expenses 60,800

Total 1,78,100

Calculate a machine hour rate for each group indicating the basis of allocation of expenses.

TT Ltd. has two production departments P1 and P2 and two service departments S1 and S2.
expenses of these departments are as follows:
P1 - ` 51,837, P2 - ` 12,163, S1 - ` 40,000, S2 - ` 16,000
The expenses of service departments are to be apportioned are as follows:
P1 P2 S1 S2
S1 50% 40% - 10%
S2 30% 50% 20% -
Required: Apportion the cost of service departments by using Simultaneous Equation Method.

The Satellite Production Company manufacturers components for radio and television satellites
using two service departments and two production departments.
The inter-departmental relationships and estimated overhead costs are given below:
Percentage of Services Provided to
Maintenance Scheduling Moulding Assembly
From: Maintenance - 10% 40% 50%
Scheduling 20% - 50% 30%
Total Overhead costs (`) 75,000 40,000 37,800 27,600
Required:
Reciprocal method (method of simultaneous equations may be used).

B3.8
Excellent Manufacturing Works have two production departments: Mixing and Curing and three
service departments: Time Office, Stores and Maintenance. The following details are available from
the Department Distribution Summary for the month of July 2001:
`
Production Departments : Mixing 1,44,000
Curing 96,000 2,40,000
Service Departments : Time Office 48,000
Stores 60,000
Maintenance 36,000 1,44,000

The following relevant data are also available:

Production Service
Departments Departments
Time
Mixing Curing Stores Maintenance
Office
No. of employees 20 15 10 8 5
No. of Stores Requisition Processed 120 100 30
Machine hours 3600 2400
The company consistently follows the method of Secondary Distribution on non-reciprocal basis.
Show the apportionment of the cost of Service Departments to Production Departments stating
the basis of computation in the form of a note at the end of the exercise.

A company has three production departments P.Q.R and two service departments M and C. The
following details in respect of Indirect expenses incurred are furnished for a typical month.

Item of expenses Amount (`)

Indirect labour 9,000
Lighting 1,200
Rent & rates 12,000
Power 6,000
Depreciation 24,000
Sundry expenses 7,800
60,000

B3.9
 Following further data are available for distribution of overheads:
Particulars Departments
P Q R M C
Value of machinery (’000 of `) 60 50 40 10 —
H.P. of machines 40 45 60 15 —
Light points (Nos.) 20 30 40 20 10
Floor space (Sq. meters) 150 200 250 100 50
Direct wages (’000 of `) 30 20 40 4 6
Machine hrs. worked 2,940 2,060 2,150 — —

The Service Dept. costs are apportioned as follows:

Department P Q R M C
M (%) 20 30 40 — 10
C (%) 40 20 30 10 —

Calculate:
(a) Overhead recovery rates showing the basis of apportionment.
(b) Total cost of job No. 234, the job card of which has recorded the following data:
Particulars Departments
P Q R
Materials consumed (`) 228 136 100
Direct wages (`) 162 144 256
Machine hrs worked 10 8 12

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 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 -
Amount
Expenses Basis of apportionment
`
Sales salaries 10,000 Direct charges
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

B3.10
 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 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 (`) 2,00,000 58,000 80,000 62,000
Volume in c.ft. per unit of finished product -- 5 8 17

Excellent Ltd. operates a standard cost system in connection with its manufacturing operations. It
produces Product A, B and C whose standard manufacturing costs per unit are as follows:
A B C
` ` `
Fixed 1.00 0.50 2.00
Variable 1.00 2.50 1.00
Total 2.00 3.00 3.00
The company’s selling and distribution costs are high, and the company’s profits have been
declining. Selling and distribution costs for the period just ended are summarised below –
`
Advertising 4,000
Direct Selling 12,000
General office expenses (related to sales) 3,480
Ordering and billing 2,450
Packing 3,600
Storage 5,060
Additional data concerning the company’s operations are –
A B C
Advertising space 30% 40% 30%
Average time in storage 10 days 20 days 12 days
No. of invoice lines 80 40 160
Sales volume (`) 24,000 18,000 18,000

B3.11
 A B C
Space occupied per unit of product 1 cu.ft. 2 cu.ft. ½ cu.ft.
Salesmen’s time 40% 30% 30%
Time required for packing -- ¾A ¼A
Units sold 4,000 2,000 2,000
You are required to -
a. Prepare an analysis of selling and distribution cost by products A, B and C.
b. Prepare an income statement for each product based on standard manufacturing costs and
analysis just completed.

 


A machine shop of Avon Ltd. has six identical machines manned by 6 operators. The machines
cannot be worked without an operator wholly engaged on it. The cost of all these 6 machines
including installation charges works out to ` 12 lakhs and these machines are deemed to have a
scrap value of 10% at the end of its effective life (9 years). These particulars are furnished for a six
months period:
Normal available hours per month 218
Absenteeism (without pay) hours 18
Leave (with pay) — hours 20
Stoppage for repairs and maintenance etc. — hours 20
Average rate of wages per day of 8 hours ` 80
Production bonus estimated 15% on wages
Value of power consumed ` 24,150
Supervision and indirect labour ` 9,900
Lighting and electricity ` 4,800
These particulars are for a year:
Repairs and maintenance including consumables ` 36,000
Insurance ` 60,000
Other sundry works expenses ` 36,000
General management expenses allocated ` 1,09,040
You are required to work out a comprehensive machine hour rate for the machine shop.

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

B3.12
Wages of Machineman ` 125 per day (of 8 hours)
Wages for a Helper (Machine attendant) ` 75 per day (of 8 hours)
Power cost for the month for the time worked ` 15,000
Supervision charges apportioned for the machine
centre for the month ` 3,000
Electricity & Lighting for the month ` 7,500
Repairs & maintenance (machine) including Consumable
stores per month ` 17,500
Insurance of Plant & Building (apportioned) for the year ` 16,250
Other general expenses per annum ` 21,500
The workers are paid a fixed Dearness allowance of ` 1,515 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-wage for debit to production.

A machine costs ` 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:
`
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 machine per hour 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 machine. Calculate the comprehensive M.H.R.

A machine was purchased on January 1, for five lakhs. The total cost of all machinery inclusive of
the new machine was ` 75 lakhs. The following further particulars are available:
Expected life of the machine is 10 years. Scrap value at the end of 10 years ` 5,000. Repairs and
maintenance for the machine during the year ` 2, 000. Expected number of working hours of the
machine per year 4,000 hours. Insurance premium annually for all machines ` 4,500.
Electricity consumption for the machine per hour (@ 75 paise per unit) 25 units.

B3.13
 Area occupied by the machine 100 sq. ft. Area occupied by other machine 1,500 sq. ft. Rent per
month of the department ` 800.
Lighting charges for 20 points for the whole department, out of which three points are for the
machine, ` 120 per month. Compute the machine hour rate for the new machine on the basis of
the data given above.

From the following data of a textile factory machine room, compute an hourly machine rate,
assuming that the machine room will work on 90% capacity throughout the year and that a
breakdown of 10% is reasonable.
There are three days holiday at Deepawali, two days at Holi and two days at Christmas exclusive
of Sundays. The factory works eight hours a day and four hours on Saturday.
Number of machines (each of same type) 40
Expenses per annum:
Power 3,120
Light 640
Salaries to foreman 1,200
Lubricating oil 66
Repairs to machine 1,446
Depreciation 785.60
7,257.60

 


A machine shop cost centre contains three machines of equal capacities. Three operators are
employed on each machine, payable ` 20 per hour each. The factory works for forty-eight hours
in a week which includes 4 hours setup time. The work is jointly done by operators. The operators
are paid fully for the forty-eight hours. In additions they are paid bonus of 10 per cent of productive
time. Costs are reported for this company on the basis of thirteen four-weekly period.
The company for the purpose of computing machine hour rate includes the direct wages of the
operator and also recoups the factory overheads allocated to the machines. The following details
of factory overheads applicable to the cost centre are available:
- Depreciation 10% per annum on original cost of the machine. Original cost of the each
machine is ` 52,000
- Maintenance and repairs per week per machine is ` 60.
- Consumable stores per week per machine are ` 75.
- Power: 20 units per hour per machine at the rate of 80 paise per unit.
- Apportionment to the cost centre: Rent per annum ` 5,400, Heat and Light per annum
` 9,720, and foreman’s salary per annum ` 12,960.
Required:
(i) Calculate the cost of running one machine for a four-week period.
(ii) Calculate machine hour rate.

B3.14
 

Gemini Enterprises undertakes three different jobs A, B and C. All of them require the use of a
special machine and also the use of a computer. The computer is hired and the hire charges work
out to ` 4,20,000 per annum. The expenses regarding the machine are estimated as follows:
(`)
Rent for the quarter 17,500
Depreciation per annum 2,00,000
Indirect charges per annum 1,50,000
During the first month of operation the following details were taken from the job register:
Job
A B C
Number of hours the machine was used:
(a) Without the use of the computer 600 900 —
(b) With the use of the computer 400 600 1,000
You are required to compute the machine hour rate:
(a) For the firm as a whole for the month when the computer was used and when the computer
was not used.
(b) Cost for the individual jobs A, B and C.

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 ` 50,000
Life 10 years Scrap value is nil.
2. Overhead expenses are:
Factory Rent ` 50,000 p.a.
Heating and lighting for factory ` 40,000 p.a.
Supervision of Factory ` 1,50,000 p.a.
Cost of maintenance of Reserve equipment
for machine B ` 5,000 p.a.
Area of the Factory 80,000 Sq. ft.
Area occupied by machine B 3,000 Sq. ft.
Power cost ` 50 per hour while in operation
3. Wages of operator is ` 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

B3.15
 

X Ltd having fifteen different types of automatic machines furnishes information as under for the
year -
i) Overhead expenses - Factory rent ` 96,000 (Floor area 80,000 sq.ft.) and Insurance of
Building ` 45,000 and supervision ` 1,20,000.
ii) Wages of the operator are ` 48 per day of 8 hours. He attends to one machine when it is
under set up and two machines while they are under operation.
In respect of machine B (one of the above machines) the following particulars are furnished:
i) Cost of machine ` 45,000, Life of machine - 10 years and scrap value at the end of its life
` 5,000.
ii) Annual expenses on special equipment attached to the machine are estimated at ` 3,000.
iii) Estimated operation time of the machine is 3,600 hours while set up time is 400 hours per
annum.
iv) The machine occupies 5,000 sq. ft. of floor area.
v) Power costs ` 2 per hour while machine is in operation.
Find out the comprehensive machine hour rate of machine B. Also find out machine costs to be
absorbed in respect of use of machine B on the following two work - orders.
Work-order 31 Work - order 32
Machine set up time (Hours) 10 20
Machine operation time (Hours) 90 180



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 ` 5,00,000. Life 10 years. Estimated scrap value at the end of life is ` 20,000.
(`)
– Repairs and maintenance per annum 60,480
– Consumable stores per annum 47,520
– Rent of building per annum
(The machine under reference occupies 1/6 of the area) 72,000
– Supervisor's salary per month (Common to three machines) 6,000
– Wages of operator per month per machine 2,500
– General lighting charges per month allocated to the machine 1,000
– Power 25 units per hour at ` 2 per unit
Power is required for productive purposes only. Set up time, though productive, does not require
power. The Supervisor and Operator are permanent. Repairs and maintenance and consumable
stores vary with the running of the machine.
Required:
Calculate a two-tier machine hour rate for (a) set up time, and (b) running time.

B3.16
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:
` `
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
From the data furnished below compute the of Cost of job No. 8237
Materials consumed 10 units at ` 5 each 50.00
Machine Labour:
To make ready: 2 hours at ` 1.00 2.00
Running on Job: 8 hours at ` 1.00 8.00

Compute the machine hours rate from the following data:

Cost of machine 1,00,000
Installation charges 10,000
Estimated scrap value after the expiry of its life (15 years) 5,000
Rent and rates for the shop per month 200
General lighting for the shop per month 300
Insurance premium for the machine p.a. 960
Repairs and maintenance expenses p.a. 1,000
Power consumption – 10 units per hour, rate of power for 100 units 20
Estimated working hours p.a. 2,200 (this includes setting up time of 200 hours)
Shop supervisor’s salary per month 600
The machine occupies one-fourth of the total area of the shop. The supervisor is expected to
devote one-fifth on his time for supervising the machine. Set up time is treated as unproductive.

B3.17
 Compute a comprehensive machine hour rate for a machine in Production department ‘A’ of a
factory from the following details:
Machine: Cost including installation charges : ` 20,00,000
Estimated useful life : 10 years
Estimated salvage value : 10%
Working hours: Number of working days : 300
Number of shifts per day :2
Effective working hrs. per shift :7
Stoppages for repairs and maintenance etc. : 200 hrs.
Operating & other costs:
(i) Wages of two operators (one for each shift)
@ ` 5,000 p.m. per worker
(ii) Salary of supervisor (one for each shift)
@ ` 7,500. Only one-fifth of the supervisor’s
time is devoted to this machine
(iii) Electric Power : 20 units per hour, each
unit costing ` 3.20
(iv) Insurance Charges : ` 5,000 per annum
(v) Repairs and Maintenance (estimated) : ` 12,500 p.m.
(vi) Rent, Rates and taxes (allocated) : ` 10,000 p.a.
(vii) General lighting etc. (allocated) : ` 750 p.m.
(viii) Other factory overheads (allocated) : ` 1,40,000 p.a.

 



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

` ` ` `
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:
` `
Material 16
Direct Wages
Foundry 2
Machine Shop 4
Assembling 2 8

B3.18
 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.

The budgeted production overheads and other budget data of Eiffel Ltd. are as follows:
Budget Production dept X
Overhead cost ` 36,000
Direct materials cost ` 32,000
Direct labour cost ` 40,000
Machine hours 10,000
Direct labour hours 18,000
What would be the absorption rate for Department X using the various bases of apportionment?
(a) % of direct material cost
(b) % of direct labour cost
(c) % of total direct cost
(d) Rate per machine hour
(e) Rate per direct labour hour

The following information relates to the production department for a certain period in a factory:
Direct Materials consumed ` 75,000
Direct Wages ` 50,000
Production overheads ` 1,50,000
Labour Hours 30,000 hours
Machine Hours 25,000 hours
For one Order No. 101 carried out in the department during the period, the relevant data were:
Direct Material consumed ` 14,000
Direct Wages ` 11,000
Machine hours worked 5,000 hours
Labour hours worked 7,000 hours
Required: Prepare a comparative Statement of Cost of this order by using the following methods:
(i) Direct Material Cost Percentage; (ii) Direct Labour Cost Percentage; (iii) Prime Cost
Percentage; (iv) Labour Hour Rate; (v) Machine Hour Rate.

B3.19
 

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 (`)
Direct materials 54,000 37,500
Direct wages 42,000 30,000
Selling price 1,66,650 1,28,250
Profit percentage on Total Cost 10% 20%
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.
(iii) Using the above recovery rates fix the selling price of job 103. The additional data being:
Direct materials ` 24,000
Direct wages ` 20,000
Profit percentage on selling price 12-½%

From the following data relating to a production unit work out the over - absorbed or under
absorbed overhead resulted 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 forecast 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 ` 75,000 and the unit follows
a system of recovering overheads on the basis of direct labour hour.
The actual overheads during the year amounted to ` 71,200 and the following details regarding
actual working of the unit are available:
1. The factory worked 3 extra days to meet the production targets, but one additional paid
holiday had to be declared.
2. There was severe breakdown of a major equipment leading to a loss of 350 man hours.
3. Total over time hours (in addition to 3 extra days worked) amounted to 680 hours.
4. The actual average absenteeism per workman was 12 days.

B3.20
 

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 ` 8,50,000
Manufacturing overheads applied ` 7,50,000
Work in progress ` 2,40,000
Finished goods Stock ` 4,80,000
Cost of goods sold `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.

A manufacturing company absorbs overhead into the cost of its three production departments by
means of predetermined departmental rates per direct labour-hour. The following information
regarding overhead incurred and overhead absorbed is obtained from the accounts for the year:
Department Overhead Actual Predetermined Total Direct labour-
Incurred direct lab. Departmental overhead hrs. contained
Hrs. rate used absorbed
` Re. ` Work-in- Finished
Progress goods
Hours Hours
Dept. A 10,000 25,000 0.50 12,500 3,000 7,000
Dept. B 37,800 84,000 0.30 25,200 14,000 8,000
Dept. C 22,500 45,000 0.40 18,000 2,000 4,000
You are required to:
(a) calculate for each department the direct labour-hour rates of overhead incurred;
(b) calculate the extent to which the values of the –
(i) closing work-in-progress, and
(ii) closing finished goods should be increased or decreased for each department for the
year in view of the corrected overhead rates.

AC Ltd. absorbs production overhead in the assembly department on the basis of direct labour
hours. Budgeted direct labour hours for the period were 200,000. The production overheads
absorption rate for the period was ` 2 per direct labour hour.
Actual results for the period were as follows.
Direct labour hours worked 220,000
Production overheads incurred ` 480,000
You are required to compute the over/under absorbed production overheads.

B3.21
 ABC Ltd. began business on 2nd January, 2005. It made a variety of products, each batch requiring
varying attention and effort. Predetermined overhead rates were computed on 2nd January, 2005
as follows:
Budgeted var iable overheads ` 50,000
Variable overheads = = = ` 2 per hour
Total exp ected activity 25,000 hrs.
Budgeted fixed overheads ` 1,50,000
Fixed overheads = = = ` 6 per hour
Total exp ectd activity 25,000 hrs.
A summary of results obtained for the month of January 2005 is given below:
`
Direct material purchased 1,10,000
Direct materials used 99,000
Direct labor cost incurred (21,250 hours @ `12.20) 2,59,250
Variable factory overhead incurred 42,000
Fixed factory overhead incurred 1,50,000
There was no work in process on 31.1.2005. The costs of goods sold (before considering under
applied overheads) was ` 3,96,188. The sales was ` 6,00,000 and selling and administration
expenses were ` 1,00,000. Prepare an income statement for the month where the under-applied
overhead is considered as a direct adjustment of cost of goods sold and determine the gross and
net profits. Ignore Income Tax.

The production department of a factory furnishes the following information for the month of
March 2007:
Materials used - ` 54,000
Direct wages - ` 45,000
Overheads - ` 36,000
Labour hours worked - 36,000
Hours of machine operation - 30,000
For an order executed by the department during a particular period, the relevant information was
as under:
Materials used - ` 6,000
Direct wages - ` 3,200
Labour hours worked - 3,200
Machine hours worked - 2,400
Calculated the overhead charges chargeable to the job by the following methods:
(i) Direct materials cost percentage rate;
(ii) Labour hours rate; and
(iii) Machine hour rate.

B3.22
 

PQR manufacturers – a small scale enterprise produces a single product and has adopted a policy
to recover the production overheads of the factory by adopting a single blanket rate based on
machine hours. The budgeted production overheads of the factory are ` 10,08,000 and budgeted
machine hours are 96,000.
For a period of first six months of the financial year 2007-2008, following information were
extracted from the books:
Actual production overheads ` 6,79,000
Amount included in the production overheads:
Paid as per court’s order ` 45,000
Expenses of previous year booked in current year ` 10,000
Paid to workers for strike period under an award ` 42,000
Obsolete stores written off ` 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 ¼ of the under-absorption was due to defective production policies
and the balance was attributable to increase in costs.
You are required:
(i) to determine the amount of under absorption of production overheads for the period,
(ii) to show the accounting treatment of under-absorption of production overheads, and
(iii) to apportion the unabsorbed overheads over the items.

From the following information calculate blanket and departmental overhead absorption rates:
Overheads Direct wages
` `
Deptt. A 50,000 25,000
Deptt. B 25,000 50,000

B3.23
 M.L. Auto Ltd. is a manufacturer of auto components and the details of its expenses for the year
2014 are given below:
(`)
(i) Opening Stock of Material 1,50,000
(ii) Closing Stock of Material 2,00,000
(iii) Purchase of Material 18,50,000
(iv) Direct Labour 9,50,000
(v) Factory Overhead 3,80,000
(vi) Administrative Overhead 2,50,400
During 2015, the company has received an order from a car manufacturer where it estimates that
the cost of material and labour will be ` 8,00,000 and ` 4,50,000 respectively. M.L. Auto Ltd.
charges factory overhead as a percentage of direct labour and administrative overhead as a
percentage of factory cost based on previous year's cost.
Cost of delivery of the components at customer's premises is estimated at ` 45,000.
You are required to:
(i) Calculate the overhead recovery rates based on actual costs for 2014.
(ii) Prepare a detailed cost statement for the order received in 2015 and the price to be quoted
if the company wants to earn a profit of 10% on sales.

ABC Ltd. manufactures a single product and absorbs the production overheads at a pre-
determined rate of ` 10 per machine hour.
At the end of financial year 2013-14, it has been found that actual production overheads incurred
were ` 6,00,000. It included ` 45,000 on account of 'written off' obsolete stores and ` 30,000
being the wages paid for the strike period under an award.
The production and sales data for the year 2013-14 is as under:
Production:
Finished goods 20,000 units
Work-in-progress (50% complete in all respects) 8,000 units
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.
You are required to:
(i) Calculate the amount of under – absorption of production overheads during the year 2013-
14; and
(ii) Show the accounting treatment of under – absorption of production overheads.

B3.24
In a factory, overheads of a particular department are recovered on the basis of ` 5 per machine
hour. The total expenses incurred and the actual machine hours for the department for the month
of August were ` 80,000 and 10,000 hours respectively. Of the amount of ` 80,000, ` 15,000
became payable due to an award of the Labour Court and ` 5,000 was in respect of expenses of
the previous year booked in the current month (August). Actual production was 40,000 units, of
which 30,000 units were sold. On analysing the reasons, it was found that 60% of the under-
absorbed overhead was due to defective planning and the rest was attributed to normal cost
increase. How would you treat the under-absorbed overhead in the cost accounts?



A light engineering factory has produced 20,000 units in the financial year. The financial year
commences on April 1 and ends on March 31. 4,000 units were lying in the finished goods stock
godown on 1st April. Similarly, there were 8,000 units in the same godown on 31.3.2,000 equivalent
units were in work-in-progress on 31.3. The cost department applies overheads at 500% on direct
labour cost, this percentage being calculated from the approved budget estimates for the year.
Direct labour cost calculated at ` 2 per hour and 40,000 direct labour hours are booked as per
the job cards. The actual expenditure revealed that - Actual expenditure was ` 6,00,000 excluding
D. M. and D. L.
a. a sum of ` 50,000 related to the earlier year.
b. ` 25,000 was paid as income tax.
c. ` 25,000 represent loss due to obsolescene.
d. ` 10,000 was paid to workers as wages during the strike period as a result of an arbitration
award.
An analysis conducted by the cost department revealed that 50 % of the difference between actual
and applied overheads was due to fluctuations in material prices and labour costs, resulting in
increase over the budget estimates. The balance was due to operational efficiency or inefficiency.
How will you proceed to close the cost books giving the necessary journal entries relating to the
treatment of under / over absorbed overhead?

In a manufacturing unit, factory overhead was recovered at a pre-determined rate of ` 25 per

man-day. The total factory overhead expenses incurred and the man-days actually worked were
` 41.50 lakhs and 1.5 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?

B3.25
 A furniture making business manufactures quality furniture to customers' order. It has three
production departments (A, B and C) which have overhead absorption rates (per direct labour
hour) of `12.86, `12.40 and `14.03 respectively.
Two pieces of furniture are to be manufactured for customers. Direct costs are as follows:
Job XYZ Job MNO
Direct material (`) 154 108
Direct labour 20 hours dept. A 16 hours dept. A
12 hours dept. B 10 hours dept. B
10 hours dept. C 14 hours dept. C
Labour rates are as follows ` 7.60 (A); ` 7.00 (B), ` 6.80 (C)
The firm quotes prices to customers that reflect a required profit of 25% on selling price.
Calculate the total cost and selling price of each job.

The total overhead expenses of a factory are ` 4,46,380. Taking into account the normal working
of the factory, overhead was recovered in production at ` 1.25 per hour. The actual hours worked
were 2,93,104. How would you proceed to close the books of accounts, assuming that besides
7,800 units produced of which 7,000 were sold, there were 200 equivalent units in work-in-
progress?
On investigation, it was found that 50% of the unabsorbed overhead was on account of increase
in the cost of indirect materials and indirect labour and the remaining 50% was due to factory
inefficiency. Also give the profit implication of the method suggested.

In the current quarter, a company has undertaken two jobs. The data relating to these jobs are as
under:
Job 1102 Job 1108
Selling price ` 1,07,325 ` 1,57,920
Profit as percentage on cost 8% 12%
Direct Materials ` 37,500 ` 54,000
Direct Wages ` 30,000 ` 42,000
It is the policy of the company to charge Factory overheads as percentage on direct wages and
Selling and Administration overheads as percentage on Factory cost.
The company has received a new order for manufacturing of a similar job. The estimate of direct
materials and direct wages relating to the new order are ` 64,000 and ` 50,000 respectively. A
profit of 20% on sales is required.
You are required to compute:
(i) The rates of Factory overheads and Selling and Administration overheads to be charged.
(ii) The Selling price of the new order

B3.26
In a manufacturing company factory overheads are charged as fixed percentage basis on direct
labour and office overheads are charged on the basis of percentage of factory cost.
The following information are available related to the year ending 31st March, 2014:
Product A Product B
Direct Materials ` 19,000 ` 15,000
Direct Labour ` 15,000 ` 25,000
Sales ` 60,000 ` 80,000
Profit 25% on cost 25% on sales price
You are required to find out:
(i) The percentage of factory overheads on direct labour.
(ii) The percentage of office overheads on factory cost.

X Ltd. manufactures four brands of toys – A, B, C and D. If the company limits the manufacture
to just one brand the monthly production will be:
A - 50,000 units
B - 1,00,000 units
C - 1,50,000 units
D - 3,00,000 units
You are given the following set of information from which you are requested to find out profit or
loss made on each brand showing clearly the following elements:
a. Direct cost
b. Works cost
c. Total cost
Brands
A B C D
Actual production (units) 6,750 18,000 40,500 94,500
Direct wages (`) 15,000 27,500 37,500 1,05,000
Direct material cost (`) 50,000 92,500 1,27,500 3,80,000
Selling price per unit 20 15 10 8
Factory overhead expenditure for the month was ` 1,62,000. Selling and distribution cost should
be assumed @ 20% of work cost. Factory overhead expenses should be allocated to each brand
on the basis of units which could have been produced in a month when single brand production
was in operation.

B3.27
  



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 department costs to production departments, the basis adopted is as
follows:
(i) Cost of Department S1 to Department P1 and P2 equally, and
(ii) Cost of Department S2 to Department P1 and P2 in the ratio of 2 : 1 respectively.

The following budgeted and actual data are available:

Annual profit plan data:
Factory overheads budgeted for the year:
Departments P1 25,50,000 S1 6,00,000
P2 21,75,000 S2 4,50,000
Budgeted output in units:
Product A 50,000; B 30,000.
Budgeted raw-material cost per unit:
Product A ` 120; Product B ` 150.
Budgeted time required for production per unit:
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 - ` 72 per hour and Product B – ` 75 per hour.
All materials are used in Department P1 only.
Actual data: (for the month of July, 2001)
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.

B3.28
Costs actually incurred:
Product A (`) Product B (`)
Raw materials 4,89,000 4,56,000
Wages 5,91,900 5,52,000
` `
Overheads: Department P1 2,31,000 S1 60,000
P2 2,04,000 S2 48,000
You are required to:
(i) Compute the pre-determined overhead rate for each production department.
(ii) Prepare a performance report for July, 20X1 that will reflect the budgeted costs and actual
costs.

ABC Limited manufactured two products A and B during the first year of its operations. The
company had budgeted Factory Overheads of ` 3,40,000 against the 2,00,000 budgeted labour
hours. This led to an Overhead absorption rate of ` 1.70 per direct labour hour. This rate was
used by the company for Product Costing purposes. Details of Budgeted Overheads and Labour
hours are as follows,
Budgeted Overhead Budgeted Hours
Department 1 ` 2,40,000 1,00,000
Department 2 ` 1,00,000 1,00,000
` 3,40,000 2,00,000

The number of labour hours required to manufacture each of these products was:
Product A Product B
In Department 1 4 1
In Department 2 1 4
5 5
There was no work-in-progress at the end of the year. There were, however, 2,000 and 6,000
finished units respectively of products A and B on hand. Assume that budgeted activity was
attained.
(a) What was the effect on the Company's income of using a plant wise overhead rate instead
of departmental overhead rates?
(b) Assume that material and labour costs per unit of product A were ` 10 and that the selling
price was established by adding 40 per cent to cover profit and selling and administrative
expenses. What difference in selling price would result from the use of departmental
overhead rate against plant wise overhead rates?

B3.29
 

A factory has three production departments. The policy of the factory is to recover the production
overheads of the entire factory by adopting a single blanket rate based on the percentage of total
factory overheads to total factory wages. The relevant data for a month are given below:
Department Direct Direct Factory Direct Machine
Materials Wages Over-heads Labour hours hours
(`)
Budget:
Machining 6,50,000 80,000 3,60,000 20,000 80,000
Assembly 1,70,000 3,50,000 1,40,000 1,00,000 10,000
Packing 1,00,000 70,000 1,25,000 50,000 –
Actual:
Machining 7,80,000 96,000 3,90,000 24,000 96,000
Assembly 1,36,000 2,70,000 84,000 90,000 11,000
Packing 1,20,000 90,000 1,35,000 60,000 –
The details of one of the representative jobs produced during the month are as under:
Job No. CW 7083:
Department Direct Direct Direct Machine
Materials Wages Labour hours hours
Machining 1,200 240 60 180
Assembly 600 360 120 30
Packing 300 60 40 –
The factory adds 30% on the factory cost to cover administration and selling overheads and profit.
Required:
(i) Calculate the overhead absorption rate as per the current policy of the company and
determine the selling price of the Job No. CW 7083.
(ii) Suggest any suitable alternative method(s) of absorption of the factory overheads and
calculate the overhead recovery rates based on the method(s) so recommended by you.
(iii) Determine the selling price of Job CW 7083 based on the overhead application rates
calculated in (ii) above.
(iv) Calculate the department-wise and total under or over recovery of overheads based on the
company’s current policy and the method(s) recommended by you.

B3.30
 

A company is making a study of the relative profitability of the two products – A and B. In addition
to direct costs, indirect selling and distribution costs to be allocated between the two products
are as under:
Particulars `
Insurance charges for inventory (finished) 78,000
Storage costs 1,40,000
Packing and forwarding charges 7,20,000
Salesmen salaries 8,50,000
Invoicing costs 4,50,000

Other details are:

Product A Product B
Selling price per unit (`) 500 1,000
Cost per unit (exclusive of indirect selling and
distribution costs) (`) 300 600
Annual sales in units 10,000 8,000
Average inventory (units) 1,000 800
Number of invoices 2,500 2,000
One unit of product A requires a storage space twice as much as product B. The cost to packing
and forwarding one unit is the same for both the products. Salesmen are paid salary plus
commission @ 5% on sales and equal amount of efforts are put forth on the sales of each of the
product.
Required:
(i) Set-up a schedule showing the apportionment of the indirect selling and distribution costs
between the two products.
(ii) Prepare a statement showing the relative profitability of the two products.

The budgeted data for the year is as follows:

`
Direct Materials 1,00,000
Direct Wages 3,00,000
Direct Expenses 25,000
Work Overheads 75,000

B3.31
 Administration Overheads ` 1,50,000; Selling and Distribution Overheads ` 2,50,000; Sales 10,000
units @ ` 100. Works overheads are charged as % of direct labour cost and administration
overheads are recovered as % of works cost. Selling price is fixed so as to earn profit @ 10% on
sales.
The details of Job No. 108 are as follows:
Direct Material ` 26,000
Direct Wages ` 78,000
Direct Expenses ` 6,500
No. of units 2,240
Required: Prepare a comparative statement of selling price of Job No. 108 by using the following
methods of absorption of selling and distribution overheads:
(i) A per unit of sales method
(ii) A percentage of sales value method
(iii) A percentage of works cost.

 



Rishabh Ltd. manufactures product A at the rate of 80 pieces per hour. The company has been
producing and selling 160,000 units annually during the period last 5 years. However, during the
current year, the Co. was able to produce 146000 units only. The company’s annual fixed overhead
for the year amounted to ` 5,84,000. The company works on a single shift only at 8 hrs. per day
and 6 days a week. The company declared 13 holidays during the year. The quarterly preventive
maintenance and repair work involved 77 hrs.
You are required to –
a. Calculate maximum, practical, normal and actual capacity for the year in terms of hour.
b. Compute the idle capacity and hourly rate of recovery of overheads for each of the
capacities computed in (a) above.
c. Prepare statement showing the idle capacity cost taking the different overhead rates
calculated above.



A manufacturing unit produces electronic circuits at the rate of 6 pieces an hour. The unit works
in single shift of 8 hours during a six-day week and remains closed for 18 days a year, on account
of holidays. Average idle hours per month is 20 for cleaning and maintenance of equipment. Against
an average annual output of 12,000 pieces during last ten years, the actual output achieved during
the year was 10,800 pieces. The fixed overheads for the year amounted to ` 5,40,000.
You are required to calculate the idle capacity costs.

B3.32
  

Calculate the fixed costs and the total cost at a level of 25,000 machine hours from the following
data:
Machine Hours Maintenance Cost
`
High Level 30,000 21,600
Low Level 20,000 17,600



ABC Ltd has calculated a predetermined overhead rate of ` 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
` 3,38,875 14,500
` 3,47,625 15,500
` 3,56,375 16,500
You are required to:
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 ` 3,55,050.

The following data relate to the overhead expenditure of a contract cleaner at two activity levels:
Square meters cleaned 6,375 7,550
Overheads ` 36,975 ` 41,792.5
What is the estimate of the overheads if 8,100 square meters are to be cleaned?

B3.33
 The following are the Maintenance costs incurred in a machine shop for six months with
corresponding machine hours:
Maintenance Costs
Month Machine Hours
`
January 2,000 300
February 2,200 320
March 1,700 270
April 2,400 340
May 1,800 280
June 1,900 290
Total 12,000 1,800
Analyse the Maintenance cost which is semi-variable into fixed and variable element.

RECENT EXAM QUESTIONS

 

M/s. NOP Limited has its own power plant and generates its own power. Information regarding
power requirements and power used are as follows:
(Horse power hours)
Production Dept. Service Dept.
A B X Y
Needed capacity production 20,000 25,000 15,000 10,000
Used during the quarter ended September 2018 16,000 20,000 12,000 8,000

During the quarter ended September 2018, costs for generating power amounted ` 12.60 lakhs
out of which ` 4.20 lakhs was considered as fixed cost.
Service department X renders services to departments A, B, and Y in the ratio of 6:4:2 whereas
department Y renders services to department A and B in the ratio of 4:1: The direct labour hours
of department A and B are 67500 hours and 48750 hours respectively.
Required:
(i) Prepare overheads distribution sheet.
(ii) Calculate factory overhead per labour hour for the dept. A and dept. B.

B3.34
State the bases of apportionment of following overhead costs:
(i) Air-conditioning
(ii) Time keeping
(iii) Depreciation of plant and machinery
(iv) Power /steam consumption
(v) Electric power (Machine operation).

M/s. Zaina Private Limited has purchased a machine costing ` 29,14,800 and it is expected to have
a salvage value of ` 1,50,000 at the end of its effective life of 15 years. Ordinarily the machine is
expected to run for 4,500 hours per annum but it is estimated that 300 hours per annum will be
lost for normal repair & maintenance. The other details in respect of the machine are as follows:
(i) Repair & Maintenance during the whole life of the machine are expected to be` 5,40,000.
(ii) Insurance premium (per annum) 2% of the cost of the machine.
(iii) Oil and Lubricants required for operating the machine (per annum) ` 87,384.
(iv) Power consumptions: 10 units per hour @ ` 7perunit. No power consumption during
repair and maintenance.
(v) Salary to operator per month` 24,000. The operator devotes one third of his time to the
machine.
You are required to calculate comprehensive machine hour rate.

ABS Enterprises produces a product and adopts the policy to recover factory overheads applying
blanket rate based on machine hours. The cost records of the concern reveal following
information:
Budgeted production overheads ` 10,35,000
Budgeted machine hours 90,000
Actual machine hours worked 45,000
Actual production overheads ` 8,80,000
Production overheads (actual) include-
Paid to worker as per court's award ` 50,000
Wages paid for strike period ` 38,000
Stores written off ` 22,000
Expenses of previous year booked in current year ` 18,500
Production -
Finished goods 30000 units
Sale of finished goods 27000 units

B3.35
 The analysis of cost information reveals that 1/3 of the under absorption of overheads was due to
defective production planning and the balance was attributable to increase in costs.
You are required:
(i) To find out the amount of under absorbed production overheads.
(ii) To give the ways of treating it in cost accounts.
(iii) To apportion the under absorbed overheads over the items.

TEE Ltd. is a manufacturing company having three production departments 'P', 'Q' and 'R' and two
service departments 'X' and 'Y' details pertaining to which are as under:
P Q R X Y
Direct wages (`) 5,000 1,500 4,500 2,000 800
Working hours 13,191 7,598 14,995 - -
Value of machine (`) 1,00,000 80,000 1,00,000 20,000 50,000
H.P. of machines 100 80 100 20 50
Light points (Nos.) 20 10 15 5 10
Floor space (sq. ft.) 2,000 2,500 3,500 1,000 1,000
The expenses are as follows: (`)
Rent and Rates 10,000
General Lighting 600
Indirect Wages 3,450
Power 3,500
Depreciation on Machines 70,000
Sundries (apportionment on the basis of direct wages) 13,800
The expenses of Service Departments are allocated as under:
P Q R X Y
X 45% 15% 30% - 10%
Y 35% 25% 30% 10% -
Product 'A' is processed for manufacture in Departments P, Q and R for 6, 5 and 2 hours
respectively.
Direct Costs of Product A are:
Direct material cost is 65 per unit and Direct labour cost is 40 per unit.
You are Required to:
(i) Prepare a statement showing distribution of overheads among the production and service
departments.
(ii) Calculate recovery rate per hour of each production department after redistributing the
service departments costs.
(iii) Find out the Total Cost of a 'Product A'.

B3.36
A machine shop has 8 identical machines manned by 6 operators. The machine cannot work
without an operator wholly engaged on it. The original cost of all the 8 machines works out to
` 32,00,000. The following particulars are furnished for a six months period:
Normal available hours per month per operator 208
Absenteeism (without pay) hours per operator 18
Leave (with pay) hours per operator 20
Normal unavoidable idle time - hours per operator 10
Average rate of wages per day of 8 hours per operator ` 100
Production bonus estimated 10% on wages
Power consumed ` 40,250
Supervision and Indirect Labour ` 16,500
Lighting and Electricity ` 6,000
The following particulars are given for a year:
Insurance ` 3,60,000
Sundry work Expenses ` 50,000
Management Expenses allocated ` 5,00,000
Depreciation 10% on the original cost
Repairs and Maintenance (including consumables): 5% of the value of all the machines.
Prepare a statement showing the comprehensive machine hour rate for the machine shop.

Explain Blanket Overhead Rate and Departmental Overhead Rate. How they are calculated? State
the conditions required for the application of Blanket Overhead Rate.

SNS Trading Company has three Main Departments and two Service Departments. The data for
each department is given below:
Departments
Expenses (in `) Area In (Sq. Mtr.) Number of Employees
Main Department:
Purchase Department 5,00,000 12 800
Packing Department 8,00,000 15 1700
Distribution Department 3,50,000 7 700
Service Departments:
Maintenance 6,40,000 4 200
Department
Personnel Department 3,20,000 6 250
The cost of Maintenance Department and Personnel Department is distributed on the basis of
‘Area in Square Metres’ and ‘Number of Employees’ respectively.

B3.37
 You are required to:
(i) Prepare a Statement showing the distribution of expenses of Service Departments to the
Main Departments using the “Step Ladder method” of Overhead Distribution.
(ii) Compute the Rate per hour of each Main Department, given that, the Purchase Department,
Packing Department and Distribution Department works for 12 hours a day, 24 hours a day
and 8 hours a day respectively. Assume that there are 365 days in a year and there are no
holidays.

XYZ Ltd. manufactures a single product. It recovers factory overheads at a pre-determined rate
of ` 20 per man-day.
During the year 2020-21, the total factory overheads incurred and the man-days actually worked
were ` 35.50 lakhs and 1.50 lakh days respectively. Out of the amount of ` 35.50 lakhs, ` 2.00
lakhs were in respect of wages for strike period and ` 1.00 lakh was in respect of expenses of
previous year booked in this current year. During the period, 50,000 units were sold. At the end
of the period, 12,000 completed units were held in stock but there was no opening stock of
finished goods. Similarly, there was no stock of uncompleted units at the beginning of the period
but at the end of the period there were 20,000 uncompleted units which may be treated as 65%
complete in all respects.
On investigation, it was found that 40% of the unabsorbed overheads were due to factory
inefficiency and the rest were attributable to increase in the cost of indirect materials and indirect
labour.
You are required to:
(i) Calculate the amount of unabsorbed overheads during the year2020-21.
(ii) Show the accounting treatment of unabsorbed overheads in cost accounts and pass journal
entry.

In a manufacturing company, the overhead is recovered as follows:

Factory Overheads: a fixed percentage basis on direct wages and
Administrative overheads: 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 1 (`) Job 2 (`)
Direct materials 1,08,000 75,000
Direct wages 84,400 60,000
Selling price 3,33,312 2,52,000
Profit percentage on total cost 12% 20%
You are required to:
(i) Compute the percentage recovery rates of factory overheads and administrative overheads.
(ii) Calculate the amount of factory overheads, administrative overheads and profit for each of
the two jobs.

B3.38
 (iii) Using the above recovery rates, determine the selling price to be quoted for job 3.
Additional data pertaining to Job 3 is as follows:
Direct materials ` 68,750
Direct wages ` 22,500
Profit percentage on selling price 15%

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B3.39
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B3.40