4 Overheads : Absorption Costing Method

CHAPTER

Learning Outcomes
After studying this chapter you will be able to:
‰‰Discuss the meaning of Overheads-Production, Administrative and Selling & Distribution.
‰‰Discuss the meaning and methods of allocation, apportionment and absorption of overheads.
‰‰Discuss the meaning and treatment of under-absorption and over-absorption of overheads and apply the same
in cost computation.
‰‰State the accounting and control of administrative, selling and distribution overheads.
‰‰Discuss and apply the various methods to calculate overhead rate.
‰‰Differentiate between direct costs and overheads.
‰‰Identify, whether overheads are absorbed or over absorbed.
‰‰Understand the meaning and computation of machine hour rate.

RE-APPORTIONMENT OF SERVICE DEPARTMENT OVERHEADS OVER PRODUCTION

DEPARTMENTS OR PRIMARY AND SECONDARY DISTRIBUTION
1. 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: (`) (`)
Dept. -A 30,00,000
Dept. -B 26,00,000
Dept. -C 24,00,000 80,00,000
Service Departments: (`) (`)
Stores 4,00,000
Time-keeping and Accounts 3,00,000
Power 1,60,000
Canteen 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

PREPARE a statement apportioning the costs of service departments over the production departments using direct
re-distribution method.

Overheads 1
Ans. Secondary Overhead Distribution Statement
Items of cost Total (`) Production Departments
Basis of
(as per primary
apportionment A (`) B (`) C (`)
distribution summary)
Cost as per primary 80,00,000 30,00,000 26,00,000 24,00,000
distribution summary
Stores (5:3:2) Value of Store requisition 4,00,000 2,00,000 1,20,000 80,000
Time-keeping and Accounts No. of workers 3,00,000 1,20,000 90,000 90,000
(4:3:3)
Power (3:3:2) H.P. of Machine 1,60,000 60,000 60,000 40,000
Canteen (4:3:3) No. of workers 1,00,000 40,000 30,000 30,000
89,60,000 34,20,000 29,00,000 26,40,000
2. Suppose the expenses of two production departments A and B and two service departments X and Y are as under:
Apportionment Basis
Department Amount
Y A B
Dept. -X 2,00,000 25% 40% 35%
Dept. -Y 1,50,000 – 40% 60%
Dept. -A 3,00,000
Dept. -B 3,20,000
Prepare a statement apportioning the costs of service departments over the production departments using step
method.
Ans. Summary of Overhead Distribution
Departments X (`) Y(`) A(`) B(`)
Amount as given above 2,00,000 1,50,000 3,00,000 3,20,000
Expenses of service dept.-X IS apportioned (2,00,000) 50,000 80,000 70,000
among other departments- Y, A and B in the
ratio (5:8:7)
2,00,000 3,80,000 3,90,000
Expenses of Dept.-Y apportioned between – (2,00,000) 80,000 1,20,000
department A and B in the ratio (2:3)
Total Nil Nil 4,60,000 5,10,000
3. Service departments' expenses
(`)
Boiler house 3,00,000
Pump room 60,000
Total 3,60,000

The allocation basis is:
Production Department Service Department
A B Boiler House Pump Room
Boiler House 60% 35% – 5%
Pump Room 70% 40% 50% –

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Ans. The total expenses of the two service departments will be determined as follows:
Let B stand for Boiler House expenses and P for Pump Room expenses.
Then B = 3,00,000 + 0.50 P
P = 60,000 + 0.05 B
Substituting the value of B,
P = 60,000 + 0.05 (3,00,000 + 0.5 P)
= 60,000 + 15,000 + 0 .025 P
= 75 ,000 + 0.025 P
P – 0.025P = 75 ,000
75, 000
P =
0.975

P = `76,923

The total of expenses of the Pump Room is `76,923 and that of the Boiler House is `3,38,462 i.e.,
`3,00,000 + 0.5 × `76,923.

The expenses will be allocated to the production departments as under:
Production Department
Dept.-A Dept.-B
Boiler House (60% and 35% of `3,38,462) 2,03,077 1,18,462
Pump Room (10% and 40% of `76,923) 7,692 30,769
Total 2,10,769 1,49,231
The total of expenses apportioned to A and B is `3,60,000.
4. Taking all the information from Illustration 4 above, PREPARE a statement showing redistribution of service
departments' expenses to production departments using repeated distribution method. Also CALCULATE machine
hour rates of the production departments ‘A’, ‘B’ and ‘C’.
Ans. Redistribution of Service Department’s expenses using ‘repeated distribution method’:
A (`) B (`) C (`) X (`) Y (`)
Total overheads {Refer (i) of Solution 2,70,000 3,70,000 6,00,000 4,75,000 5,35,000
to Illustration 4}
Dept. X overhead apportioned in the 2,13,750 71,250 1,42,500 (4,75,000) 47,500
ratio (45:15:30: - :10)
Dept. Y overhead apportioned in the 3,49,500 2,03,875 – 29,125 (5,82,500)
ratio (60:35: - :5: - )
Dept. X overhead apportioned in the 13,106 4,369 8,738 (29,125) 2,912
ratio (45:15:30: - :10)
Dept. Y overhead apportioned in the 1,747 1,019 – 146 (2,912)
ratio (60:35: - :5: - )
Dept. X overhead apportioned in the 65 22 44 (146) 15
ratio (45:15:30: - :10)
Dept. Y overhead apportioned in the 9 6 – – (15)
ratio (60:35: - :5: - )
8,48,177 6,50,541 7,51,282 – –

Calculation of machine hour rate:
A B C
A Total overheads (`) 8,48,177 6,50,541 7,51 ,282
B Machine hours 1,000 2,000 4,000
C Machine hour rate (`) [A ÷ B] 848.18 325.27 187.82

Overheads 3
 5. A company’s production for the year ending 30.06.2017 is given below:
Production Departments Service Departments
Items Total
P1 P2 P3 Office Stores Work Shop
Direct wages 20,000 25,000 30,000 - - - 75,000
Direct materials 30,000 35,000 45,000 - - - 1,10,000
Indirect materials 2,000 3,000 3,000 1,000 2,000 2,000 13,000
Indirect wages 3,000 3,000 4,000 10,000 10,000 5,000 35,000
Area (Square Meters) 200 250 300 150 100 250 1,250
Book value of machinery 30,000 35,000 25,000 - - 15,000 1,05,000
Machine capacity (H.P.) 15 20 25 - - 5 65
Machine hours worked 10,000 20,000 15,000 - - 5,000 50,000
General Expenses:
Rent : `12,500
Insurance (Machine) : `1,050
Depreciation : 15% of value of machinery
Power : `3,800
Light : `1,250
You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of
apportionment when necessary.
Ans. Overhead Analysis Sheet

Basis of Production Departments Service Departments

Items
Charge P1 P2 P3 Office Stores Work Shop
Indirect materials Allocation 2,000 3,000 3,000 1,000 2,000 2,000
Indirect wages Allocation 3,000 3,000 4,000 10,000 10,000 5,000
Rent Area 2,000 2,500 3,000 1,500 1,000 2,500
Insurance Value 300 350 250 - - 150
Depreciation Value 4,500 5,250 3,750 - - 2,250
Power H.P. used 600 1,600 1,500 - - 100
Light Area 200 250 300 150 100 250
Total - 12,600 15,950 15,800 12,650 13,100 12,250
6. Modern Machines Ltd. have three production departments (A, B, and C) and two service departments (D and E).
From the following figures extracted from the records of the company, calculate the overhead rate per labour hour:
Indirect Materials `15,000 Rent, Rates and Taxes `10,000
Indirect Wages `10,000 Electric Power for Machinery `15,000
Depreciation on Machinery `25,000 Electric Power for Lighting `500
Depreciation on Buildings `5,000 General Expenses `15,000

Production Departments Service Departments

Items Total
A B C D E
Direct materials 20,000 10,000 19,000 6,000 5,000 60,000
Direct wages 15,000 15,000 4,000 2,000 4,000 40,000
Area (Square Meters) 15,000 10,000 10,000 5,000 10,000 50,000
Book value of machinery 60,000 1,00,000 40,000 25,000 25,000 2,50,000
Machine capacity (H.P.) 50 60 30 5 5 150
Labour hours worked 5,000 5,000 2,000 1,000 2,000 15,000
No. of light points 15 10 10 5 10 50
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 The expenses of service departments D and E are to be apportioned as follows:
A B C D E
Expenses of department D: 40 20 30 - 10
Expenses of department E: 30 30 40 - -
Ans. Statement Showing Overhead Rate per Labour Hour

Basis of Production Departments Service Departments

Items
Charge A B C D E
Direct materials Allocation - - - 6,000 5,000
Direct wages Allocation - - - 2,000 4,000
Indirect materials Materials 5,000 2,500 4,750 1,500 1,250
Indirect wages Wages 3,750 3,750 1,000 500 1,000
Depreciation:
Machinery Value 6,000 10,000 4,000 2,500 2,500
Building Area 1,500 1,000 1,000 500 1,000
Rent, rates, taxes Area 3,000 2,000 2,000 1,000 2,000
Power for machine H.P. 5,000 6,000 3,000 500 500
Power for lighting Light points 150 100 100 50 100
General expenses Labour hours 5,000 5,000 2,000 1,000 2,000
Total Overheads Prim. Dist. 29,400 30,350 17,850 15,550 19,350
Department D 4:2:3:1 6,220 3,110 4,665 (15,550) 1,555
Department E 3:3:4 6,272 6,271 8,362 - (20,905)
Total OH Secon. Dist. 41,892 39,731 30,877 - -
÷ Labour hours - 5,000 5,000 2,000 - -
OH rate per labour hour `8.3784 `7.9462 `15.4385 - -
7. Deccan Manufacturing Ltd. have three departments which are regarded as production departments. Service
department’s 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:
Departments Factory overheads Direct labour hours No. of employee Area in square meters
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

Overheads 5
 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 three production department
 [(a) X `3,00,000; Y `1,35,000; Z `1,60,000 (b) X `75; Y `45; Z `40]
8. A factory has two service departments P and Q and three production departments A, B, and C. You are supplied with
the following information:
Production Departments Service Departments
Particulars Total
A B C P Q
Rent 2,400 4,800 2,000 2,000 800 12,000
Electricity 800 2,000 500 400 300 4,000
Indirect labour 1,200 2,000 1,000 800 1,000 6,000
Depreciation of 2,500 1,600 200 500 200 5,000
machinery
Sundries 910 2,143 847 300 300 4,500
Estimated working hours 1,000 2,000 1,400 - - 4,400
Expenses of service departments P and Q are apportioned as under:
A B C P Q
P 30% 40% 20% - 10%
Q 10% 20% 50% 20% -

You are required to show the apportionment of overheads under different methods of apportioning inter-
service departments overheads (Reciprocal Method) and also to work-out the production hour rate recovery
of overheads in departments A, B and C.
Ans. (A) Statement Showing Overhead Rate per Hour (Repeated Distribution Method)

Basis of Production Departments Service Departments

Items
Charge A B C P Q
Rent Allocation 2,400 4,800 2,000 2,000 800
Electricity Allocation 800 2,000 500 400 300
Indirect labour Allocation 1,200 2,000 1,000 800 1,000
Depreciation Allocation 2,500 1,600 200 500 200
Sundries Allocation 910 2,143 847 300 300
Total Overheads - 7,810 12,543 4,547 4,000 2,600
Reapportionment: 3:4:2:1 1,200 1,600 800 (4,000) 400
Department P
Department Q 1:2:5:2 300 600 1,500 600 (3,000)
Department P 3:4:2:1 180 240 120 (600) 60
Department Q 1:2:5:2 6 12 30 12 (60)
Department P 3:4:2 4 5 3 (12)
Total Overheads - 9,500 15,000 7,000 - -
÷ hours - 1,000 2,000 1,400 - -
OH rate per hour `9.50 `7.50 `5.00 - -

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 (B) Statement Showing Overhead Rate per Hour (Equation Method)

Items Basis of Production Departments Service Departments

Charge A B C P Q
Rent Allocation 2,400 4,800 2,000 2,000 800
Electricity Allocation 800 2,000 500 400 300
Indirect labour Allocation 1,200 2,000 1,000 800 1,000
Depreciation Allocation 2,500 1,600 200 500 200
Sundries Allocation 910 2,143 847 300 300
Total Overheads - 7,810 12,543 4,547 4,000 2,600
Reapportionment: 3:4:2:1 1,384 1,845 922 (4,612) 461
Department P
Department Q 1:2:5:2 306 612 1,531 612 (3,061)
Total Overheads - 9,500 15,000 7,000 - -
÷ hours - 1,000 2,000 1,400 - -
OH rate per hour `9.50 `7.50 `5.00 - -

Working Note:
Calculation of expenses by using equation:
Expenses of Department P = 4,000 + 20% of Expenses of Q
Expenses of Department Q = 2,600 + 10% of Expenses of P
Now:
Expenses of Department P = 4,000 + 20% (2,600 + 10% of P)
Expenses of Department P = 4,000 + 520 + 2% of P

Expenses of Department P = 4,520 = 4,612

98%
Expenses of Department Q = 2,600 + 10% of 4,612 = 3,061

(C) Statement Showing Overhead Rate per Hour (Trial and Error Method)

Basis of Production Departments Service Departments

Items
Charge A B C P Q
Rent Allocation 2,400 4,800 2,000 2,000 800
Electricity Allocation 800 2,000 500 400 300
Indirect labour Allocation 1,200 2,000 1,000 800 1,000
Depreciation Allocation 2,500 1,600 200 500 200
Sundries Allocation 910 2,143 847 300 300
Total Overheads - 7,810 12,543 4,547 4,000 2,600
Reapportionment:
Department P 3:4:2:1 1,384 1,845 922 (4,612) 461
Department Q 1:2:5:2 306 612 1,531 612 (3,061)
Total Overheads - 9,500 15,000 7,000 - -
÷ hours - 1,000 2,000 1,400 - -
OH rate per hour `9.50 `7.50 `5.00 - -

Overheads 7
 Working Note:
Calculation of expenses under Trial and Error Method:
Items % P Q
Total Overheads 4,000 2,600
Reapportionment:
Expenses of Department P 10% - 400
Expenses of Department Q 20% 600 -
Expenses of Department P 10% - 60
Expenses of Department Q 20% 12 -
Expenses of Department P 10% - 1
Total Overheads - 4,612 3,061
9. In a manufacturing unit factory overhead was recovered at predetermined rate of `25 per man day. The total factory
overhead expenses incurred and the man days actually worked were `41.50 lakhs and 1.5 lakhs man days respectively.
Out of the 40,000 units produced during a period 30,000 were sold.
On analysing the reasons, it was found that 60% of the unabsorbed overheads were due to defective planning and
the rest were attributable to increase in overhead costs.
How would unabsorbed overheads be treated in Cost Account?
Ans.
(a) Computation of under absorption of Production Overheads:
Recovered Overheads (1,50,000 man days × `25) `37,50,000
Actual Overheads Incurred `41,50,000
Under absorption `4,00,000
(b) Accounting treatment of under-recovered production overheads:
1. `2,40,000 (4,00,000 × 60%) of under absorbed overheads were due to defective planning. This being
abnormal should be debited to Costing Profit and Loss Account.
2. The balance of `1,60,000 of under absorbed overheads should be distributed over finished goodsand cost
of sales by using supplementary rate.

Supplementary OH Rate = Under Recovered OH ÷ Equivalent Units

= `1,60,000 ÷ 40,000 units = `4 per unit

Distribution of unabsorbed overheads of `1,60,000:

Cost of Sales (30,000 × `4) `1,20,000

Finished Goods (10,000 × `4) `40,000
Journal Entries

Entries Dr. Cr.

Cost of Sales A/c Dr. 1,20,000 -
Finished Goods Control A/c Dr. 40,000 -
Costing Profit & Loss A/c Dr. 2,40,000 -
To Overhead Control A/c - 4,00,000
(Being under recovery of under absorbed oh recovered/charged)

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10. 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 2020:
Production Department Services Departments
Items Total Amount
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:
Production Department Service Departments
Details
A B C X Y
Area (Sq. ft) 500 250 500 250 500
Capital Value of Assets (in 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:

Departments A B C X Y
Department X (%) 45 15 30 - 10
Department Y (%) 60 35 - 5 -
Required:
1. A statement showing distribution of overheads to various departments.
2. A statement showing re-distribution of service departments expenses to production departments using Trial
and error method.
3. Machine hour rates of the production department A, B and C.
Ans. 1. Statement Showing Distribution of Overheads
Production Departments Service Departments
Items Basis of Charge
A B C X Y
Direct material Allocation - - - 2,00,000 1,00,000
Direct wages Allocation - - - 1,00,000 2,00,000
Factory rent Area 1,00,000 50,000 1,00,000 50,000 1,00,000
Power H.P. used 50,000 80,000 80,000 15,000 25,000
Depreciation Capital Value 20,000 40,000 20,000 10,000 10,000
Other over- Machine Hours 1,00,000 2,00,000 4,00,000 1,00,000 1,00,000
heads
Total Overheads - 2,70,000 3,70,000 6,00,000 4,75,000 5,35,000

Overheads 9
 2. Statement Showing Redistribution of Overheads (Trial and Error Method)

Basis of Production Departments Service Departments

Items
Charge A B C X Y
Total Overheads - 2,70,000 3,70,000 6,00,000 4,75,000 5,35,000
Reapportionment:
Department X 45:15:30:10 2,26,922 75,641 1,51,281 (5,04,271) 50,428
Department Y 60:35:5 3,51,256 2,04,900 - 29,272 (5,85,428)
Total Overheads - 8,48,178 6,50,541 7,51,281 - -

3. Machine Hour Rate:

Machine Hour rate = Budgeted Overheads
Machine Hours
Department A = 8,48,178 ÷1,000 = `848.18
Department B = 6,50,541 ÷2,000 = `325.27
Department C = 7,51,281 ÷4,000 = `187.82

Working Note:
Calculation of expenses under Trial and Error Method:

Items % X Y
Total Overheads 4,75,000 5,35,000
Reapportionment:
Expenses of Department X 10% - 47,500
Expenses of Department Y 5% 29,125 -
Expenses of Department X 10% - 2,913
Expenses of Department Y 5% 146 -
Expenses of Department X 10% - 15
Expenses of Department Y 5% 1 -
Total Overheads - 5,04,272 5,85,428

Working Note:
Calculation of H.P used

Departments A B C X Y
Machine hours 1,000 2,000 4,000 1,000 1,000
Horse power of machines 50 40 20 15 25
H.P. used (H.P. × Machine hours) 50,000 80,000 80,000 15,000 25,000

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11. The ABC Company has the following account balances and distribution of direct charges on 31st March, 2020.

Production Department Services Departments

Total
Items Stores and
Amount Machine Shop Packing General Plant
maintenance
Allocated overheads:
Indirect labour 14,650 4,000 3,000 2,000 5,650
Maintenance materials 5,020 1,800 700 1,020 1,500
Misc. supplies 1,750 400 1,000 150 200
Superintendent’s salary 4,000 - - 4,000 -
Cost & payroll salary 10,000 - - 10,000 -
OH to be apportioned:
Power 8,000
Rent 12,000
Fuel & heat 6,000
Insurance 1,000
Taxes 2,000
Depreciation 1,00,000

The following data were compiled by means of the factory survey made in the previous year:

Floor space in Radiator No. of Investment

Details H.P. hours
Sq. ft. sections employees in `
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 -
Store & maintenance 1,600 60 5 1,50,000 1,000
Total 4,800 225 38 10,00,000 5,000

Expenses charged to the stores and maintenance departments are to be distributed to the other departmentsby the
following percentages:

Machine shop 50%; Packing 20%; General Plant 30%; General Plant overheads is distributed on thebasis of number
of employees:
Requirements:

(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.

Overheads 11
Ans. (a) Overhead Distribution Statement

Production Department Services Departments

Total
Items Amount Stores and
Machine Shop Packing General Plant
maintenance
Allocated overheads:
Indirect labour 14,650 4,000 3,000 2,000 5,650
Maintenance materials 5,020 1,800 700 1,020 1,500
Misc. supplies 1,750 400 1,000 150 200
Superintendent’s salary 4,000 - - 4,000 -
Cost & payroll salary 10,000 - - 10,000 -
Apportioned overheads (see 1,29,000 77,720 25,800 2,830 22,650
schedule below)
Total 1,64,420 83,920 30,500 20,000 30,000

Statement of Apportioned Expenses

Production Department Services Departments

Items Basis Stores and

Machine Shop Packing General Plant
maintenance
Power H.P. hours 5,600 800 - 1,600
Rent Floor space 5,000 2,000 1,000 4,000
Fuel & heat Radiator secs. 1,200 2,400 800 1,600
Insurance Investment 640 200 10 150
Taxes Investment 1,280 400 20 300
Depreciation Investment 64,000 20,000 1,000 15,000
Total - 77,720 25,800 2,830 22,650

(b) Distribution of Service Department Expenses

Production Department Services Departments

Items Basis Machine General Stores and

Packing
Shop Plant maintenance
Total Expenses [as per (a)] 83,920 30,500 20,000 30,000
Re-apportionment:
Expenses of General plant 20 : 10 : 5 11,429 5,714 (20,000) 2,857
Expenses of Stores & maintenance 50 : 20 : 30 16,429 6,571 9,857 (32,857)
Expenses of General plant 20 : 10 : 5 5,633 2,816 (9,857) 1,408
Expenses of Stores & maintenance 50 : 20 : 30 704 282 422 (1,408)
Expenses of General plant 20 : 10 : 5 241 121 (422) 60
Expenses of Stores & maintenance 50 : 20 43 17 - (60)
Total - 1,18,399 46,021 - -

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12. Modern Manufactures Ltd. has three Production Departments P1, P2, P3 and two Service Departments S1 and S2
details pertaining to which are as under:
Production Departments Service Departments
Items
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
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:
Departments 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.
Ans. Statement Showing Overhead Rate per Hour
Production Departments Service Departments
Items Basis of Charge
P1 P2 P3 S1 S2
Direct wages Allocation - - - 1,500 195
Rent and rates Area 1,000 1,250 1,500 1,000 250
General lighting Light points 100 150 200 100 50
Indirect wages Direct wages 600 400 600 300 39
Power H.P. 600 300 500 100 -
Depreciation on Value of 2,400 3,200 4,000 200 200
machines Sundries machines 3,000 2,000 3,000 1,500 195
Direct wages
Total overheads Primary Dist. 7,700 7,300 9,800 4,700 929
Re-apportionment:
Department S1 2:3:4:1 940 1,410 1,880 (4,700) 470
Department S2 4:2:3:1 559 280 420 140 (1,399)
Department S1 2:3:4:1 28 42 56 (140) 14
Department S2 4:2:3 6 3 5 - (14)
Total OH - 9,233 9,035 12,161 - -
÷ Working hours - 3,070 4,475 2,419 - -
OH rate per hour `3.01 `2.02 `5.03 - -

Overheads 13
 Calculation of cost of product X:
Direct material cost `50.00
Direct labour cost `30.00
Overheads: Department P1 (4 hours × `3.01) `12.04
Department P2 (5 hours × `2.02) `10.10
Department P3 (3 hours × `5.03) `15.09
Cost of product X `117.23
13. A company has three production departments and two service departments. Distribution summary of overheads
is as follows:
Production Department:
A `13,600
B `14,700
C `12,800
Service Department:
X `9,000
Y `3,000
The expenses of service departments are charged on a percentage basis which is as follows:
A B C X Y
Department X 40% 30% 20% - 10%
Department Y 30% 30% 20% 20% -

Apportion the cost of Service Departments by using the Repeated Distribution method.
[(8 Marks) Nov 1998]
Ans.
Distribution of Overheads (Repeated Distribution Method)
Production departments Service departments
Particulars Basis
A B C X Y
Total overheads 13,600 14,700 12,800 9,000 3,000
Apportionment of Expenses:
Department X 40:30:20:10 3,600 2,700 1,800 (9000) 900
Department Y 30:30:20:20 1,170 1,170 780 780 (3,900)
Department X 40:30:20:10 312 234 156 (780) 78
Department Y 30:30:20:20 23 23 16 16 (78)
Department X 40:30:20:10 6 5 3 (16) 2
Department Y 30:30:20 1 1 - - -
Total - 18,712 18,833 15,555 - -
14. A company has three production departments (M1, M2 and A1) and three service departments, one of which
Engineering service department, servicing the M1 and M2 only.
The relevant information are 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

14 CA P
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 The annual budgeted overhead costs for the year are:

Indirect Wages Consumable Supplies

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
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 department 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 of Area in Square Effective H.P. Direct Labour Capacity
Machinery Feet Hours % Hour Machine Hrs
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 - - -
Engineering Service 36,000 2,500 10 - -
General Service 12,000 1,500 - - -

Required:
(i) Prepare an 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.
[(15 Marks) May 2007]

Overheads 15
Ans. (i) Overhead Analysis Sheet

Production departments Service departments

Particulars Basis
M1 M2 A1 Stores ES GS
Indirect wages Allocation 46,520 41,340 16,220 8,200 5,340 7,520
Consumables Allocation 12,600 18,200 4,200 2,800 4,200 3,200
Depreciation Value 15,840 11,880 3,960 1,584 4,752 1,584
Insurance on:
Machine Value 2,880 2,160 720 288 864 288
Building (1/3 to M1) Area 1,080 648 864 216 270 162
Power H.P. % 3,240 2,268 324 - 648 -
Light Area 1,080 1,296 1,728 432 540 324
Rent Area 2,697 3,236 4,315 1,079 1,348 -
Notional rent 8% of 6,000 - - - - - 480
Total - 85,937 81,028 32,331 14,599 17,962 13,558

(ii) Allocation of Service Department Overheads

Production departments Service departments

Particulars Basis
M1 M2 A1 Stores ES GS
Total Overheads 85,937 81,028 32,331 14,599 17,962 13,558
Apportionment:
Stores Consumables 5,256 7,591 1,752 (14,599) - -
(126:182:42)
Engineering Dept Machine 7,983 9,979 - - (17,962) -
hours
General Service (4:5) 4,172 3,129 6,257 - - (13,558)
Labour hours
(20:15:30)
Total OH - 1,03,348 1,01,727 40,340 - - -

(iii) Calculation of recovery rate

Particulars M1 M2 A1
Total OH 1,03,348 1,01,727 40,340
÷ Base of recovery
Machine hours 40,000 50,000 -
Labour hours - - 3,00,000
Recovery rate (per machine/labour hour) `2.5837 `2.0345 `0.1345

16 CA P
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 (iv) Absorbed overheads

Particulars Product X Product Y

M1 @ `2.5837 per machine hour of 10/6 machine hours 25.84 15.50
M2 @ `2.0345 per machine hour of 4/14 machine hours 8.14 28.48
A1 @ `0.1345 per labour hour of 4/18 labour hours 0.54 2.42
Absorbed OH 34.52 46.40

Note: Machine Shops A and B have got the production capacity of both direct labour hours and machine hours. It
appears to reason that overhead absorption of Machine Shops. A and B should be based on machine hours absorption
overhead rate of Assembly shop should be based on labour hours.
15. The following account balances and distribution of indirect charges are taken from the accounts of amanufacturing
concern for the year ending on 31st March, 2012.
Production Department Services Departments
Items Total Amount
X Y Z A B
Indirect material 1,25,000 20,000 30,000 45,000 25,000 5,000
Indirect Labour 2,60,000 45,000 50,000 70,000 60,000 35,000
Superintendence 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
Deprecation 2,70,000

The departmental data are also available:

Production Department Service Departments
Details
X Y Z A B
Area (Sq. ft) 4,400 4,000 3,000 2,400 1,200
Capital Value of Assets (`) 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

Expenses charged to the service departments are to be distributed to other departments by the following
percentage:
Departments X Y Z A B
Department A 30 30 20 - 20
Department B 25 40 25 10 -
Prepare an overhead distribution statement to show total overhead of production department after re-apportioning
service departments overhead by using simultaneous equation method. Show all the calculation to the nearest rupee.
[(8 Marks) Nov 2012]

Overheads 17
Ans. Statement Showing Secondary Distribution
Production Service
Particulars Basis
X Y Z A B
Indirect Mat. Allocation 20,000 30,000 45,000 25,000 5,000
Indirect labour ” 45,000 50,000 70,000 60,000 35,000
Superintendent’s ” - - 96,000 - -
Fuel & Heat Radiator Sec. 1,500 3,000 4,500 3,750 2,250
Power Kwt. Hours 52,500 60,000 45,000 22,500 -
Rent & Rates Area
44,000 40,000 30,000 24,000 12,000
Insurance Capital Asset value
4,000 6,000 5,000 1,000 2,000
No of Employees
Meals charges 12,000 14,000 24,000 6,000 4,000
Capital Value
Depreciation 60,000 90,000 75,000 15,000 30,000
Total (Prim. Dist) 2,39,000 2,93,000 3,94,500 1,57,250 90,250
Apportionment:
Department A (30 : 30 : 20 : 20) 50,900 50,900 33,934 (1,69,668) 33,934
Department B (25 : 40 : 25 : 10) 31,046 49,674 31,046 12,418 (1,24,184)
Total OH - 3,20,946 3,93,574 4,59,480 - -

Working Note:

Calculation of adjusted expenses of service department by using Simultaneous Equation method:

Expenses of Department A = 1,57,250 + 10% of Expenses of B
Expenses of Department B = 90,250 + 20% of Expenses of A
Now:
Expenses of Department A = 1,57,250 + 10% (90,250 + 20% of A)
Expenses of Department A = 1,57,250 + 9,025 + 2% of A
98% of Expenses of A = 1,66,275
Expenses of Department A = 1,66,275 ÷ 98% = 1,69,668

Expenses of Department B = 90,250 + 20% of A = 1,24,184

16. Delta Ltd. Is a manufacturing concern having two production departments P1 and P2 and two service departments
S1 and S2. After making a primary distribution of factory overheads of all departments are as under:

P1 = `4,02,000
P2 = `2,93,000
S1 = `3,52,000
S2 = `33,000

Overheads of service departments are apportioned as below:

P1 P2 S1 S2
Department S1 40% 50% - 10%
Department S2 50% 40% 10% -
A product ‘Z’ passes through all the two production departments – P1 and P2 and each unit of product remain in process
for 2 and 3 hours respectively. The material and labour cost of one unit of product ‘Z’ is `500 and `350 respectively.
The company run for all 365 days of the year and 16 hours per day.

18 CA P
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 You are required to:
1. To make secondary distribution of overheads of service departments by applying Simultaneous Equation
method and
2. Determine the total cost of one unit of product Z. [(8 Marks) May 2018]
Ans. 1. Statement Showing Secondary Distribution

Production Departments Service Departments

Particulars Basis
P1 P2 S1 S2
Overheads Primary 4,02,000 2,93,000 3,52,000 33,000
distribution
Apportionment:
Department S1 (40:50:10) 1,43,555 1,79,445 (3,58,889) 35,889
Department S2 (50:40:10) 34,445 27,555 6,889 (68,889)
Total Overheads 5,80,000 5,00,000 - -
÷ Production Hours 5,840 5,840 - -
Recovery rate per hour - 99.32 85.62 - -

Calculation of adjusted expenses of service department by using Simultaneous Equation method:

Expenses of Department S1 = 3,52,000 + 10% of Expenses of S2
Expenses of Department S2 33,000 + 10% of Expenses of S1
Now:
Expenses of Department S1 = 3,52,000 + 10% (33,000 + 10% of S1)
Expenses of Department S1 = 3,52,000 + 3,300 + 1% of S1
Expenses of Department S1 = 3,55,300 ÷ 99% = 3,58,889
Expenses of Department S2 = 33,000 + 10% of S1
= 33,000 + 10% of 3,58,889
= 33,000 + 35,889 = 68,889
Calculation of production hours = 365 × 16 hours = 5,840 hours

2. Statement Showing Cost Per Unit of ‘Z’

Particulars Amount
Direct Materials 500
Direct Labour 350
Prime Cost 850
Production Overheads:
Department P1 (2 hours × 99.32) 198.64
Department P2 (3 hours × 85.62) 256.86
Total Cost 1,305.50
17. RJS produces a single product and absorbs the production overheads at a pre determined rate. Informationrelating
to a period is as under:
Production overheads actually incurred `4,84,250
Overheads recovery rate at production `1.45 per hour
Actual hours worked 2,65,000 hours

Overheads 19
 Production:
Finished goods 17,500 units
Work-in-progress 5,000 units
(50% complete in all respects)
Sales:
Finished goods 12,500 units
At the end of the period, it was discovered that the actual production overheads incurred included `40,000 on account
of ‘written off obsolete stores’ and wages paid for the strike period under an award.It was also found that 30% of the
under absorption of production overheads was due to production inefficiency and the rest was attributable to normal
increase in costs.
Required to calculate:
1. The amount of under absorbed production overheads during the period.
2. Show the accounting treatment of under absorption of production overheads and pass journal entry.
[(8 Marks) Nov 2018]
Ans. 1. Computation of under absorption of Production Overheads during the period
Particulars Amount
Total production overheads actually incurred during the period 4,84,250
Less: Written off obsolete stores and wages paid for strike period (40,000)
Net production overheads actually incurred 4,44,250
Production overheads absorbed (2,65,000 hours × `1.45) 3,84,250
Under Recovery of production overheads 60,000
2. Accounting treatment of under-absorption of production overheads:
(a) `18,000 (i.e. 60,000 × 30%) of under absorbed overheads were due to lack of production planning. This
being abnormal should be debited to Costing Profit and Loss Account.
(b) The balance of `42,000 (i.e. 60,000 × 70%) of under absorbed overheads should be distributed over work in
progress, finished goods and cost of sales by using supplementary rate.
Under Absorbed Overhead
Supplementary OH Rate (Positive) =
Equivalent Units
42,000
= = `2.10 per unit
12,500 +5,000 +2,500
Distribution of unabsorbed overheads of `42,000 over work-in-progress, finished goods and cost of sales:
Work-in-Progress (2,500 units × `2.10) `5,250
Finished goods (5,000 units × `2.10) `10,500
Cost of sales (12,500 units × `2.10) `26,250
Journal Entries
Entries Dr. Cr.
Cost of Sales A/c Dr. 26,250 -
Finished Goods Control A/c Dr. 10,500 -
Work in Progress Control A/c Dr. 5,250 -
Costing Profit & Loss A/c Dr. 18,000 -
To Overhead Control A/c - 60,000
(Being under recovery of under absorbed oh recovered/charged)

20 CA P
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18. M/s. NOP Limited has its own power plant and generates its own power. Information regarding power requirements
and power used are as follows:

Production Departments Service Departments

Particulars
A B X Y
Needed capacity production (in hours) 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, cost for generating power amounted to `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 67,500 hours
and 48,750 hours respectively.
Required:
1. Prepare overheads distribution sheet.
2. Calculate factory overhead per labour hour for department A and department B.
[(5 Marks) Nov 2018]
Ans.
1. Overheads Distribution Sheet

Production Departments Service Departments

Particulars Basis
A B X Y
Fixed overheads (4,20,000) Needed capacity 1,20,000 1,50,000 90,000 60,000
(20:25:15:10)
Variable overheads Used capacity 2,40,000 3,00,000 1,80,000 1,20,000

(12,60,000 – 4,20,000) (16:20:12:8)

Total overheads - 3,60,000 4,50,000 2,70,000 1,80,000
Apportionment of expenses of:
Department X 6:4:2 1,35,000 90,000 (2,70,000) 45,000
Department Y 4:1 1,80,000 45,000 - (2,25,000)

Total overheads - 6,75,000 5,85,000 - -

2. Calculation of factory overhead per hour

Department A = 6,75,000 ÷ 67,500 hours = `10 per hour

Department B = 5,85,000 ÷ 48,750 hours = `12 per hour

MACHINE HOUR RATE [METHOD OF ABSORBING OVERHEADS TO VARIOUS

PRODUCTS OR JOBS]
19. Job No. 198 was commenced on October 10, 2021 and completed on November 1, 2021. Materials used were `6,000
and labour charged directly to the job was `4,000. Other information is as follows:
Machine No. 215 used for 40 hours, the machine hour rate being `35.
Machine No. 160 used for 30 hours, the machine hour rate being `40. Six welders worked on the job for five days of
8 hours each: the Direct labour hour per welder is `20.
General expenses related to production not included for calculating either the machine hour or direct labour hour
rate totaled `20,000, total direct wages for the period being `2,00,000. Compute the works costs for job No. 198.

Overheads 21
Ans. Computation for works costs for job No. 198
(`) (`)
Materials 6,000
Direct labour 4,000
10,000
Factory overheads:
Machine No. 215: 40 hours @ `35 1,400
Machine No. 160: 30 hours @ `40 1,200
*240 hours of welders @ `20 per hr. 4,800
**General expenses 10% of wages 400 7,800
Work cost 17,800
*6 welders × 5 days × 8 hours = 240 hours
** Un-apportioned expenses `20,000 which works out at 10% of direct wages.
20. A machine costing `1,00,00,000 is expected to run for 10 years. At the end of this period its scrap value is likely to be
`9,00,000. Repairs during the whole life of the machine are expected to be `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 `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 `30,000
and the lighting charges amount to `8,000 per month. The foreman is paid a monthly salary of `19,200. Insurance
is @ 1% p.a. and the expenses on oil, etc., are `900 per month.
Find out the machine hour rate.
Ans. Machine Hour Rate
Particulars Amount
(A) Standing charges/ Fixed costs
Depreciation [(`1,00,00,000 – 9,00,000) × 1/10 years × 1/12] 75,833.33
Rent(`30,000 × ¼) 7,500
Lighting charges (`8,000 × 2/10) 1,600
Foreman’s salary (`19,200 × 1/6) 3,200
Insurance Premium (`1,00,00,000 × 1% × 1/12) 8,333.33

Total (A) 96,466.66

(B) Running charges/ Variable costs
Repairs (`18,00,000 × 1/10 years × 1/12) 15,000
Electricity [(15 units × 4,380 hours × `5) × 1/12] 27,375
Sundry expenses (oil etc.) 900
Total (B) 43,275
Total Cost (A + B) 1,39,741.66
÷ Productive Machine Hours in a month (4,380 ÷ 12) ÷ 365
Machine Hour Rate `382.85
21. A Manufacturing unit has added a new machine to its fleet of five existing machines. The total cost of purchase and
installation of the machine is `7,50,000. The machine has an estimated life of 15 years and is expected to realize
`30,000 as scrap at the end of its working life.
Other relevant data are as following:
(i) Budgeted working hours is 2,400 based on 8 hours per day for 300 days. This includes 400 hours for plant
maintenance.
(ii) Electricity used by the machine is 15 units per hour at a cost of `2.00 per unit. No current is drawn during
maintenance.
(iii) The machine requires special oil for heating which is replaced once in every month at a cost of `2,500 on each
occasion.

22 CA P
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 (iv) Estimated cost of maintenance of the machine is `500 per week of 6 working days.
(v) 3 operators control the operations of the entire battery of six machines and the average wages per person
amounts to `450 per week plus 40% fringe benefits.
(vi) Departmental and general works overheads allocated to the operation during the last year was `60,000. During
the current year it is estimated that there will be an increase of 12.5% of this amount.No incremental overhead
is envisaged for the installation of the new machine.
You are required to compute the machine hour rate.
Ans. Machine Hour Rate

Particulars Amount
(A) Standing charges/ Fixed costs
Depreciation [(`7,50,000 – 30,000) × 1/15 years] 48,000
Operators wages and fringe benefits [(`450 × 300/6 × 3 × 1/6) + 40%] 15,750
Departmental and general overheads [(`60,000 + 12.5%) × 1/6] 11,250
Total (A) 75,000
(B) Running charges/ Variable costs
Maintenance (`500 × 300/6) 25,000
Electricity (15 units × 2,000 hours × `2) 60,000
Special oil (`2,500 × 12) 30,000
Total (B) 1,15,000
Total Cost (A + B) 1,90,000
÷ Productive Machine Hours (2,400 – 400) ÷ 2,000
Machine Hour Rate `95.00

22. A manufacturing unit has purchased and installed a new machine of `12,70,000 to its fleet of 7 existing machines.
The new machine has an estimated life of 12 years and is expected to realise `70,000 as scrap at the end of its
working life.
Other relevant data are as follows:
(i) Budgeted working hours are 2,592 based on 8 hours per day for 324 days. This includes 300 hours for plant
maintenance and 92 hours for setting up of plant.
(ii) Estimated cost of maintenance of the machine is `25,000 p.a.
(iii) The machine requires a special chemical solution, which is replaced at the end of each week (6 days in a week)
at a cost of `400 each time.
(iv) Four operators control operation of 8 machines and the average wages per person amounts to `420per week
plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of `3 per unit. Nocurrent is
taken during maintenance and setting up.
(vi) Departmental and general works overhead allocated to the operation during last year was `50,000.During the
current year it is estimated to increase 10% of this amount.
Calculate machine hour rate, if (a) setting up time is unproductive; (b) setting up time is productive.
Ans.
Total Cost
Machine Hour Rate =
Productive Hours

(a) Setting up time is unproductive = 2,72,116 ÷ 2,200 = `123.69 per hour

(b) Setting up time is productive = 2,72,116 ÷ 2,292 = `118.72 per hour

Overheads 23
 Statement Shoeing Total Cost Related to Machine
Particulars Amount
(A) Standing charges/ Fixed costs
Depreciation [(`12,70,000 – 70,000) × 1/12 years] 1,00,000
Operators wages and fringe benefits [(`420 × 324/6 × 4 × 1/8) + 15%] 13,041
Departmental and general overheads [(`50,000 + 10%) × 1/8] 6,875
Total (A) 1,19,916
(B) Running charges/ Variable costs
Maintenance 25,000
Electricity (16 units × 2,200 hours × `3) 1,05,600
Special oil (`400 × 324/6) 21,600
Total (B) 1,52,200
Total Cost (A + B) 2,72,116
23. Operating data of a company given below:
Total number of weeks per quarter = 13 weeks
Total number of hours per week = 48 hours
Stoppage due to maintenance = 8 hours per month
Time taken for set up = 2 hours per week
Cost details:
Cost of machine = `2,00,000
Repair and maintenance = `24,000 per annum
Consumable stores = `30,000 per annum
Rent, rates and taxes = `8,000 per quarter
Operator’s wages = `3,000 per month
Supervisor’s salary = `5,000 per month
Cost of power = 15 units per hour at `3 p.u.
Notes:
(i) Life of the machine is 10 years. Depreciation is provided on straight line basis and is treated as variable cost.
(ii) Repairs and maintenance and consumable stores are variable costs.
(iii) Power is consumed for production runs and for set up but not for maintenance.
(iv) The supervisor is supervising work on five identical machines including the one now considered.
Calculate the machine hour rate (if set up time is productive).
Ans. (a) Machine Hour Rate
Particulars Amount
(A) Running charges/ Variable costs
Depreciation(`2,00,000 × 1/10) 20,000
Repairs and maintenance 24,000
Consumables 30,000
Power (15 units × 2,400 hours × `3) 1,08,000
Total (A) 1,82,000
(B) Standing charges/ Fixed costs
Rent, rates and taxes (`8,000 × 4 quarters) 32,000
Operators wages (`3,000 × 12) 36,000
Supervisor’s salary (`5,000 × 12 × 1/5) 12,000
Total (B) 80,000
Total Cost (A + B) 2,62,000
÷ Productive Machine Hours ÷ 2,400
Machine Hour Rate `109.17

24 CA P
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 Working notes:
Productive machine hours = Total hours – Maintenance hours
= (48 hours per week × 13 weeks × 4 quarters) – (8 hours × 12 months)
= 2,496 hours – 96 hours
= 2,400 hours
24. A machine shop has 8 identical drilling machines manned by 6 operators. The machine cannot be worked without
an operator wholly engaged on it. The original cost of all these machines works out to `8 lakhs.
These particulars are furnished for a 6 month period:
Normal available hours per month 208
Absenteeism (without pay) hours per months 18
Leave (with pay) hours per months 20
Normal idle time (unavoidable) hours per month 10
Average rate of wages per day of 8 hours `20
Production bonus 15% on wages
Power and fuel consumption `9,000
Supervision & indirect labour `3,300
Electricity `1,200
The following particulars are on a yearly basis:
Repairs and maintenance 3% of value of machines
Insurance `42,000
Depreciation 10% of original cost
Other factory expenses `12,000
Allocated general management expenses `54,530
You are required to work out a comprehensive machine hour rate for the machine shop.
[(8 Marks) May 2000]
Ans. Computation of Comprehensive Machine Hour Rate for the “Machine Shop”
Particulars Amount
(A) Standing Charges:
Operators wages (Refer working note 1) 17,100
Production bonus (17,100 × 15%) 2,565
Supervision & indirect labour 3,300
Lighting and electricity 1,200
Insurance (42,000 × 6/12) 21,000
Depreciation (8,00,000 × 10% × 6/12) 40,000
Other sundry works expense (12,000 × 6/12) 6,000
General management expense allocated (54,530 × 6/12) 27,265
Total (A) 1,18,430
(B) Running Charges
Repairs and maintenance (8,00,000 × 3% × 6/12) 12,000
Power consumed 9,000
Total (B) 21,000
Total OH for the shop (i.e. for all machineries) for 6 month (A+B) 1,39,430
÷ Total machine hours ÷ 5,760
Machine Hour Rate `24.21

Overheads 25
 Working Notes:

1. Normal available hours per month per operator are 208 Hours. Since there are in all 6 operators over 8 machines
& machine can be worked without an operator being wholly engaged on it so at any point of time maximum
6 machines can be operated & 2 machines will remain idle so, effective hours have been calculated by taking only
6 machines into account. Absenteeism per month operator without pay are 18 hours. Hence, wages payable per
operator per month for 190 hours.
20
Wages rate per operator per hour = = 2.50 per hour
8 Hours
Thus, wages of 6 operators for 6 months = 190 Hours × 6 Months × 6 Operators × 2.5
= `17,100
2. Total effective productive hours available to the machine shop

Total hours available per month 208

Less: Hours when there is no production
Less: Absenteeism per month (18)
Less: Leave per month (20)
Less: Unavailable normal idle time per month (10)
Total & effective hours per month 160 hours
Total effective hours in 6 months (160 hours × 6 machines × 6 months) 5,760 hours
25. From the details furnished below you are required to compute a comprehensive machine hour rate:
Purchase price of the machine (depreciation @ 10% p.a.) `3,24,000
Normal working hours for the month 200 hours
(The machine works to only 75% of capacity)
Wages of Machine man `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 `3,000 for the month
Electricity & Lighting for the month `7,500
Repairs & maintenance (machine) including consumable stores `17,500 per month
Insurance of Plant & Building (apportioned) for the year `16,250
Other general expenses per annum `27,500
The workers are paid a fixed dearness allowance of `1,575 per month. Production bonus payable to workers in
terms of an award is equal to 33-⅓% 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 labourwage for debit to production.
[(14 Marks) Nov 2005]
Ans.
Statement Showing Comprehensive Machine Hour Rate

Particulars Amount
(A) Standing Charges:
Supervision charges 3,000
Electricity and lighting 7,500
Insurance of Plant and Building (16,250 × 1/12) 1,354
Depreciation (32,400 × 1/12) 2,700
Other general expense (27,500 × 1/12) 2,292
Total (A) 16,846

26 CA P
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 Particulars Amount
(B) Running Charges 17,500
Repairs and maintenancePower 15,000
Wages of machine man (W.N. 2) (can be treated as fixed cost) 6,737
Wages of helper (W.N. 2) (can be treated as fixed cost) 4,945
Total (B) 44,182
Total OH for the shop (i.e. for all machineries) for 6 month (A+B) 61,028
÷ Total machine hours ÷ 150
Machine Hour Rate `406.85

Working Notes:

1. Effective machine working hours per month = 200 hour × 75% = 150 hours
2. Calculation of Labour Cost:
Particulars Machine Man Helper
Wages for 200 hours (`125 ÷ 8H) × 200H and (`75 ÷ 8H) × 200H 3,125 1,875
Dearness Allowance 1,575 1,575
4,700 3,450
Production bonus (33 – 1/3% of Basic plus D.A.) 1,567 1,150
Leave wages (10% of Basic plus D.A.) 470 345
Total labour cost 6,737 4,945
26. 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:

Particulars HR Maintenance Design

Variable 1,00,000 1,60,000 1,00,000
Fixed 4,00,000 3,00,000 6,00,000
Total 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 services
Users of services
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:
1. Use the direct method to re-apportion RST Ltd’s service department cost to its production departments.
2. Determine the proper sequence to use in re-apportioning the firm’s service department cost by step-down
method.
3. Use the step-down method to reapportion the firm’s service department cost. [(7 Marks) Nov 2006]

Overheads 27
Ans.
1. Statement Showing Re-apportionment of Service Departements Cost (Using Direct Method)

Production department
Service department Basis Total
Machining Finishing
H.R. (4:5) 5,00,000 2,22,222 2,77,778
Maintenance (7:8) 4,60,000 2,14,667 2,45,333
Design (3:1) 7,00,000 5,25,000 1,75,000
Total 9,61,889 6,98,111
2. Squence of re-apportioning:
As H.R. department serves large number of departements, so its cost should be first re apportioned then
overhead of maintenance departement should be re-apportioned and lastly overhead of design department
should be re-apportioned.
3. Statement Showing Re-apportionment of Service Department Cost (Using Step Down Method)
Departments
Particulars
H.R. Maintenance Design Machining Finishing
Total Overhead 5,00,000 4,60,000 7,00,000 - -
Re-Apportionment:
H.R. (1:1:8:10) (5,00,000) 25,000 25,000 2,00,000 2,50,000
Maintenance (1:7:8) - (4,85,000) 30,313 2,12,187 2,42,500
Design (3:1) - - (7,55,313) 5,66,485 1,88,828
Total - - - 9,78,672 6,81,328

27. 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 addition, they
are paid a bonus of 10 percent of productive time. Costs are reported for this company on the basis of four-weekly
period.
The company for the purpose of computing machine hour rate includes the direct wages of the operator and also
recoups overheads allocated to the machine. 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. [(8 Marks) Nov 2007/ May 2015]

28 CA P
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Ans. (i) Computation of Cost of Running One Machine for a Four Week Period
Particulars Amount
(A) Standing Charges:
Rent (5,400 × ⅓ × 4/52) 138.46
Heat and light (9,720 × ⅓ × 4/52) 249.23
Forman’s salary (12,960 × ⅓ × 4/52) 332.31
Depreciation (52,000 × 10% × 4/52) 400
Wages (48 hours × 4 weeks × `20 per hour × 3 operators per machine) 11,520
Bonus 10% of (44 hours × 4 weeks × `20 per hour × 3 operators) 1,056
Total Standing Charges (A) 13,696
(B) Running Expenses:
Repairs and maintenance (`60 × 4 weeks) 240
Consumable stores (`75 × 4 weeks) 300
Power (44 hours × 4 weeks × 20 units × .80) 2,816
Total Running expenses (B) 3,356
Total Expenses of one machine for four week (A+B) 17,052
(ii) Machine hour rate = Total Expenses for 4 weeks ÷ Effective Hours for 4 weeks
= 17,052 ÷ 176 hours (44 hours × 4 weeks)
= `96.89 per hour
28. A machine costing `10 lacs was purchased on 01.04.2011. The expected life of the machine is 10 years. At theend of
this period its scrap value is likely to be `10,000. The total cost of all the machines including new one was `90 lacs.
The other information is given as follows:
(a) Working hours of the machine for the year was `4,200 including 200 non productive hours.
(b) Repairs and maintenance for the new machine during the year was `5,000.
(c) Insurance premium was paid for all the machines `9,000.
(d) New machine consumes 8 units of electricity per hour, the rate per unit being `3.75.
(e) The new machine occupies 1/10 area of the department. Rent of the department is `2,400 per month.
(f) Depreciation is charged on straight line basis.
Compute machine hour rate for the new machine. [(5 Marks) May 2012]
Ans. Machine Hour Rate
Particulars Amount
(A) Standing charges
Rent [(`2,400 × 12 months) × 1/10] 2,880
Depreciation (10 lacs – 10,000) × 1/10 years 99,000
* Insurance Premium (9,000 ÷ 90,00,000) × 10 lacs 1,000
Total (A) 1,02,880
(B) Running charges
Repairs & Maintenance 5,000
* Electricity (8 units × 4,000 hours × `3.75) 1,20,000
Total (B)
1,25,000
Total Cost (A + B)
2,27,880
Machine Hour Rate (Total cost ÷ Productive hours)
`56.97

Overheads 29
 Note:
(a) Electricity expense assumed to be incurred on productive hours only i.e. 4,000 hours.
(b) Insurance premium assumed to be incurred on the basis of cost of machine & same basis has been used for
apportionment of expense.
29. Calculate Machine Hour Rate from the following particulars:
Cost of machine : `25,00,000
Salvage value : `1,25,000
Estimated life of 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 @ `5 per unit per hour.
(ii) Cost of repairs and maintenance `26,000 per annum.
(iii) Chemicals required for operating the machine `2,600 per month.
(iv) Overheads chargeable to the machine `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 `18,500. [(8 Marks) Nov 2013]
Ans. Statement of Machine Hour Rate

Particulars Amount
(A) Standing Charges:
Overhead chargeable (`18,000 × 12) 2,16,000

Insurance premium (2% of `25,00,000) 50,000

Operators salaries (2 × `18,500 × 12 × ¼) 1,11,000
Total (A) 3,77,000
(B) Running Charges:
Depreciation (25,00,000 – 1,25,000) × 2,407/25,000 2,28,665
Power ( 25 units × 2,407 hours × `5) 3,00,875
Repairs & Maintenance 26,000
Chemicals (`2,600 × 12) 31,200
Total (B) 5,86,740
Total Operating Cost (A + B) 9,63,740
÷ Productive hours ÷ 2,407

Machine Hour Rate `400.39

Working Notes:
Calculation of actual hours and productive hours:
Total working hours per annum 3,000
Less: hours required for maintenance (400)
Working hours after maintenance 2,600
Less: Setting-up hours (2,600 × 8/108) (193)
Actual hours/ Effective working hours 2,407

30 CA P
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 Assumptions as per suggested answer:
1. Working hours (i.e. 3,000 hours) are inclusive of maintenance and setting-up time.
2. It is assumed that no power is consumed by the machine during unproductive hours i.e. during maintenance
and unproductive setting-up hours.
3. Depreciation is calculated on the basis of estimated life of the machine hours actually work.
Note: As this numerical problem does not specifically mention about the nature of setting-up time; means whether
setting-up time is unproductive or productive is not clear. The problem can be solved assuming setting-up time either
as productive or as unproductive.
30. The following particulars refers to process used in the treatment of materials subsequently, incorporated in a
component forming part of an electrical appliance:
(i) The original cost of the machine used (Purchased in June 2008) was `10,000. Its estimated life is 10 years, the
estimated scrap value was `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 `20 each time.
(iv) The estimated cost of maintenance per year is `1,200.
(v) Two attendants control the operation of machine together with five other machines. Their combined weekly
wages, insurance and employer’s contribution to holiday pay amount `120.
(vi) Departmental and general works overhead allocated to this machine for the current year amount to `2,000.
You are required to calculate machine hour rate of operating the machine.
[(5 Marks) May 2016]
Ans. Statement of Machine Hour Rate (1 Machine; 1 Year)
Particulars Amount
(A) Standing Charges:
Depreciation [(10,000 – 1,000) ÷ 10 Years] 900
Attendants wages, insurance etc. (120 × 50 weeks × 1/6) 1,000
Departmental and works overhead 2,000
Total Standing Charges (A) 3,900
(B) Running Expenses:
Electricity (1900 hours × 16 units per hour × 0.09) 2,736
Chemical solution (`20 × 50 weeks) 1,000
Maintenance 1,200
Total Running expenses (B) 4,936
Total Expenses of one machine for four week (A+B) 8,836
÷ Productive Machine Hours (Running and setting up) ÷ 2000
Machine Hour Rate `4.418
31. 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:
(a) Repair & maintenance during the whole life of the machine are expected to be `5,40,000.
(b) Insurance premium (per annum) 2% of the cost of the machine.
(c) Oil and lubricants required for operating the machine (per annum) `87,384.
(d) Power consumption: 10 units per hour @ `7 per unit. No power consumption during repair and maintenance.
(e) 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. [(5 Marks) May 2019]
Overheads 31
Ans.
Machine Hour Rate
Particulars Amount
(A) Standing charges/ Fixed costs
Depreciation [(`29,14,800 – 1,50,000) × 1/15 years] 1,84,320
Insurance Premium (`29,14,800 × 2%) 58,296
Salary to Operator (`24,000 × 1/3 × 12) 96,000
Total (A) 3,38,616
(B) Running charges/ Variable costs
Repairs (`5,40,000 × 1/15 years) 36,000
Power (10 units × 4,200 hours × `7) 2,94,000
Oil and lubricants 87,384

Total (B) 4,17,384

Total Cost (A + B) 7,56,000
÷ Productive Machine Hours (4,500 – 300) ÷ 4,200
Machine Hour Rate `180.00

RECOVERY RATE
32. The preliminary budget for a company with four departments was as under:

Direct overheads Apportioned overheads Direct labour

Departments
allocation (%) hours
1 `14,200 10 60,000
2 `7,200 30 2,00,000
3 `16,400 20 1,20,000
4 `22,600 40 1,50,000
Total `60,400 `1,76,000 5,30,000
It was decided to establish a new department 5 and to slightly re organize the existing departments.
The following alternations were agreed to in making a revised budget:
(a) A sum of `15,000 being additional overhead will be allocated directly to department 5.
(b) An amount of `6,600 being overhead previously allocated directly to department 3 will now be transferred to
department 5.
(c) `30,000 additional overhead expected to be incurred due to re organization will be apportioned as follows:
Department 1 2 3 4 5
Proportion (%) 10 20 - 10 60
(d) Revised direct labour hours are expected to be
Department Hours
1 69,600
2 2,00,000
3 1,00,000
4 1,60,000
5 90,000
Total 6,19,600

32 CA P
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 You are required to calculate:

(a) The departmental direct labour hours rates of overhead, based on the preliminary budget.
(b) The department direct labour rate of overhead, based on the revised budget.
(c) The overhead chargeable at the revised rates to one unit of product X for which the following hours are spent
in each department:
Department 1 3 4 5
Hours 6 4 8 3
Ans. (a) Statement of Departmental Direct Labour Hour Rate of Overheads (Based on Preliminary Budget)

Items Basis 1 2 3 4
Allocated Overheads - 14,200 7,200 16,400 22,600
Apportioned Overheads 10:30:20:40 17,600 52,800 35,200 70,400
Total OH - 31,800 60,000 51,600 93,000
÷ Labour Hours - 60,000 2,00,000 1,20,000 1,50,000
Direct Labour Hour Rate `0.53 `0.30 `0.43 `0.62

(b) Statement of Departmental Direct Labour Hour Rate of Overheads (Based on Revised Budget)

Items Basis 1 2 3 4 5
Total Overheads Preliminary 31,800 60,000 51,600 93,000 -
Budget
Additional Overheads Allocation - - - (6,600) - 15,000
Transfer of OH 3 to 5 - - - - 6,600
Additional Overheads 10:20:10:60 3,000 6,000 3,000 18,000
Total OH - 34,800 66,000 45,000 96,000 39,600
÷ Labour Hours - 69,600 2,00,000 1,00,000 1,60,000 90,000
Direct Labour Hour Rate `0.50 `0.33 `0.45 `0.60 `0.44

(c) Chargeable overheads on one unit of Product X

Overheads on one unit of X = 6 hours × `0.50 + 4 hours × `0.45 + 8 hours × `0.60 + 3 hours × `0.44
= `10.92
33. 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 Job B Job 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:
(i) For the firm as a whole for the month when the computer was used and when the computer was not used.
(ii) For the individual jobs A, B and C.
[(i) `27.50 and `10.00 per machine hour (ii) Job A: `17, Job B: `17, Job C: `27.50]
Overheads 33
 MACHINE HOUR RATE/UNDER AND OVER ABSORPTION OF OVERHEADS
34. In 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
were in respect of expenses off 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 tonormal cost increase.
How would you treat the under absorbed overhead in the cost accounts?
Ans.
(a) Computation of under absorption of Production Overheads:
Particulars Amount
Total production overheads actually incurred 80,000
Less: Amount payable due to an award of the Labour Court (15,000)
Less: Expenses off the previous year (5,000)
Net production overheads actually incurred 60,000
Production overheads recovered (10,000 hours × `5) 50,000
Under Recovery of production overheads 10,000

(b) Accounting treatment of under-recovered production overheads:

1. `6,000 (10,000 × 60%) of under absorbed overheads were due to defective production planning.This being
abnormal should be debited to Costing Profit and Loss Account.

2. The balance of `4,000 of under absorbed overheads should be distributed over finished goods and cost of
sales by using supplementary rate.
Supplementary OH Rate = Under Recovered OH ÷ Equivalent Units
= `4,000 ÷ 40,000 units = `0.10 per unit
Distribution of unabsorbed overheads of `4,000:
Cost of Sales (30,000 × `0.1) `3,000
Finished Goods (10,000 × `0.1) `1,000
Journal Entries

Entries Dr. Cr.

Cost of Sales A/c Dr. 3,000 -
Finished Goods Control A/c Dr. 1,000 -
Costing Profit & Loss A/c Dr. 6,000 -
To Overhead Control A/c - 10,000
(Being under recovery of under absorbed oh recovered/charged)
35. ABC Ltd. manufactures a single product and absorbs the production overheads at a pre determined rate of `10 per
machine hour. At the end of financial year 1998-99, it has been found that actual production overheads incurred
were `6,00,000. It included `45,000 on account of ‘written off’ obsolete stores and `30,000 being thewages paid for
the strike period under an award.
The production and sales data for the year 1998-99 is as under:
Production:
Finished goods 20,000 units
Work-in-progress 8,000 units
(50% complete in all respects)
Sales:
Finished goods 18,000 units

34 CA P
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 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 1998-99 and
(ii) Show the accounting treatment of under absorption of production overheads. [(10 marks) Nov 1999]
Ans.
(i) Computation of under absorption of Production Overheads:
Particulars Amount
Total production overheads actually incurred during the year 1998-99 6,00,000
Less: Written off obsolete stores (45,000)
Less: Wages paid for strike period (30,000)
Net production overheads actually incurred 5,25,000
Production overheads absorbed (48,000 hours × `10) 4,80,000
Under Recovery of production overheads 45,000

(ii) Accounting treatment of under-absorption of production overheads:

1. `15,000 (i.e., 45,000 × ⅓) of under absorbed overheads were due to lack of production planning.This being
abnormal should be debited to Costing Profit and Loss Account.
2. The balance of `30,000 (i.e., 45,000 × ⅔) of under absorbed overheads should be distributed overwork in
progress, finished goods and cost of sales by using supplementary rate.
30,000
Supplementary OH Rate = Under Absorbed Overhead =
Equivalent Units 4,000 + 2,000 + 18,000
= `1.25 per unit
Distribution of unabsorbed overheads of `30,000 over work-in-progress, finished goods and cost of sales:
Work-in-Progress (4,000 units × `1.25) 5,000
Finished goods (2,000 units × `1.25) 2,500
Cost of sales (18,000 units × `1.25) 22,500
Journal Entries

Entries Dr. Cr.

Cost of Sales A/c Dr. 22,500 -
Finished Goods Control A/c Dr. 2,500 -
Work in Progress Control A/c Dr. 5,000 -
Costing Profit & Loss A/c Dr. 15,000 -
To Overhead Control A/c - 45,000
(Being under recovery of under absorbed oh recovered/charged)
36. 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 unitsproduced 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 thecost of indirect
materials and indirect labour and the remaining 50% was due to factory inefficiency.
Also give the profit implication of the method suggested.
[(8 Marks) Nov 2000]

Overheads 35
Ans. Calculation of Unabsorbed Overheads
Particulars Amount
Actual overhead incurred 4,46,380
Less: overhead absorbed (OH recovery ` per hour × Actual hours worked)
`1.25 × 2,93,104 Hours 3,66,380
Unabsorbed OH 80,000
Unabsorbed OH on account of increase in cost (80,000 × 50%) 40,000
Unabsorbed OH on account of factory inefficiency (80,000 × 50%) 40,000
Treatment of Unabsorbed OH & its implication on Profit:
(i) The unabsorbed OH on account of increase in cost of indirect material & labour of `40,000 should beadjusted
in the cost books by applying positive supplementary rates.
UnbsorbedOH
Supplementary Rate =
Equivalent completed units of Production
Where, Equivalent completed units are as under:
Unit sold 7,000
Units in closing stock of Finished Goods (7,800 – 7,000) 800
Equivalent WIP units 200
Total Equivalent Completed Units 8,000 units
40,000
Supplementary Rate =
= `5 per unit
8,000 Units
The unabsorbed OH of `40,000 should be applied by using supplementary rate of `5 per equivalent completed unit

proportionately on the basis of equivalent completed unit among Cost of Sales A/c, Stock of Finished Goods A/c, &
WIP A/c as under:
Items Equivalent completed units Rate Share of unabsorbed overheads
Cost of Sales A/c 7,000 `5 `35,000
Stock of Finished 800 `5 `4,000
WIP A/c 200 `5 `1,000
Total `40,000
The above treatments of unabsorbed OH will reduce the profit by `35,000, the amount by which the cost of
sales has been increased. Moreover, the value of stock of Finished Goods & WIP will increase by `4,000& `1,000
respectively.
(ii) The unabsorbed OH of `40,000 due to factory inefficiency being in the nature of abnormal loss shouldbe changed
to costing P/L A/c & thereby the profit would be reduced by `40,000.
37. X Ltd. recovers overheads at a pre-determined rate of `50 per man-day. The total factory overheads incurred and
the man-days actually worked were `79 lakhs and 1.5 lakhs days respectively. During the period 30,000 units were
sold. At the end of the period 5,000 completed units were held in stock but there was no opening stock of finished
goods. Similarly, there was no stock of uncompleted units at the beginning of the period but at the end of the period
there were 10,000 uncompleted units which may be treated as 50% complete.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defective planning and
the balances were attributable to increase in overhead cost.
How would unabsorbed overhead be treated in cost accounts? [(8 Marks) Nov 2011]
Ans.
Calculation of under or over absorption of overheard:

Absorbed OH = 1,50,000 × 50 = 75,00,000

Actual OH = 79,00,000
Under absorption = 79,00,000 – 75,0000 = 4,00,000

36 CA P
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 Treatment of unabsorbed overheads:
60% Abnormal = `2,40,000 charged to Profit and Loss A/c
40% Normal increase in OH costs = `1,60,000 charged to FG stock, WIP and COGS
Supplementary OH Recovery Rate = Under recovery ÷ Total equivalent units
= `1,60,000 ÷ 40,000 = `4 per unit
Distribution of unabsorbed overheads of `30,000 over work-in-progress, finished goods and cost of sales:
Work-in-Progress (5,000 units × `4) 20,000
Finished goods (5,000 units × `4) 20,000
Cost of sales (30,000 units × `4) 1,20,000
Journal Entries

S. No. Particulars Dr. Cr.

1 Production OH Control A/c Dr. 79,00,000
To General Ledger Adjustment A/c 79,00,000
2 WIP of Sales A/c Dr. 75,00,000
To Production OH Control A/c 75,00,000
3 Cost of Sales A/c Dr. 1,20,000
Finished Goods Control A/c Dr. 20,000
WIP Control A/c Dr. 20,000
Costing P/L A/c Dr. 2,40,000
To Production OH Control A/c 4,00,000
38. APP Limited is a manufacturing concern and recovers overheads at a pre-determined rate of `30 per man-day. The
total factory overheads incurred and the man-days actually worked were `51 lakhs and 1.5 lakhs days respectively.
During the period 50,000 units were sold. At the end of the period 5,000 completed units were held in stock but there
was no opening stock of finished goods. Similarly, there was no stock of uncompleted units at the beginning of the
period but at the end of the period there were 10,000 uncompleted units which may be treated as 50% complete.
On analyzing the reasons, it was found that 60% of the unabsorbed overheads were due to defectiveplanning and
the balances were attributable to increase in overhead cost.
How would unabsorbed overhead be treated in cost accounts? [(8 Marks) Nov 2017]
Ans.
Calculation of under or over absorption of overheard:
Absorbed OH = 1,50,000 × 30 = 45,00,000
Actual OH = 51,00,000
Under absorption = 51,00,000 – 45,0000 = 6,00,000

Treatment of unabsorbed overheads:

60% Abnormal = `3,60,000 charged to Profit and Loss A/c

40% Normal increase in OH costs = `2,40,000 charged to FG stock, WIP and COGS
Supplementary OH Recovery Rate = Under recovery ÷ Total equivalent units
= `2,40,000 ÷ 60,000 = `4 per unit

Apportionment of unrecovered overheads (due to increase in overheads):

Work-in-Progress (5,000 units × `4) 20,000
Finished goods (5,000 units × `4) 20,000
Cost of sales (50,000 units × `4) 2,00,000

Overheads 37
39. ABS enterprise produces a product and adopts the policy to recover factory overheads applying blanket ratebased
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 30,000 units
Sale of finished goods 27,000 units
The analysis of cost information reveals that ⅓ of the under absorption of overheads was due to defective production
planning and the balance was attributable to increase in costs.
You are required:
1. To find out the amount of under absorbed production overheads.
2. To give the ways of treating it in cost accounts.
3. To apportion the under absorbed overheads over the items.
[(10 Marks) Nov 2019]
Ans. 1. Computation of Amount of Under Absorption of Production Overheads

Particulars Amount
Total production overheads actually incurred 8,80,000
Less: Paid to worker as per court’s award (50,000)
Less: Wages paid for strike period (38,000)
Less: Stores written off (22,000)
Less: Expenses of previous year booked in current year (18,500)
Net production overheads actually incurred 7,51,500
Production overheads absorbed (10,35,000 ÷ 90,000 hours) × 45,000 hours 5,17,500
Under Recovery of production overheads 2,34,000

2. Accounting treatment of under-absorption of production overheads:

(a) `78,000 (i.e., `2,34,000 × ⅓) of under absorbed overheads were due to defective production planning.
This being abnormal should be debited to Costing Profit and Loss Account.
(b) The balance of `1,56,000 (i.e., `2,34,000 × ⅔) of under absorbed overheads should be distributed over
finished goods and cost of sales by using supplementary rate.
Under Absorbed Overheads 1,56,000
Supplementary OH Rate = = = `5.20 per unit
Total Units 30,000
3. Apportionment of Under Absorbed Overheads:
Distribution of unabsorbed overheads of `1,56,000 over finished goods and cost of sales:
Finished goods (3,000 units × `5.20) `15,600
Cost of sales (27,000 units × `5.20) `1,40,400

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 Journal Entries
Entries Dr. Cr.
Finished Goods Control A/c Dr. 15,600 -
Cost of Sales A/c Dr. 1,40,400 -
Costing Profit & Loss A/c Dr. 78,000 -
To Overhead Control A/c 2,34,000
(Being under recovery of under absorbed oh recovered/charged)

REVERSE (REVERSE CALCULATION OF FACTORY OVERHEAD AND

ADMINISTRATIVE OVERHEADS)
40. 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 107 Job 102
(`) (`)
Direct materials 54,000 37,500
Direct wages 42,000 30,000
Selling price 7,66,650 7,28,250
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 determine the selling price of job 103. The additional data being:
Direct materials `24,000
Direct wages `20,000
Profit percentage on selling price 12–1/2%
Ans. (i) Computation of percentage recovery rates of factory overheads and administrative overheads.
Let the factory overhead recovery rate as percentage of direct wages be F and administrative overheads recovery
rate as percentage of factory cost be A.
Factory Cost of Jobs:
Direct materials + Direct wages + Factory overhead
For Job 101 = `54,000 + `42,000 + `42,000F
For Job 102 = `37,500 + `30,000 +`30,000F
Total Cost of Jobs:
Factory cost + Administrative overhead
For Job 101 = (`96,000 + `42,000F) + (`96,000 + `42,000F) A = `1,51,500*
For Job 102 = (`67,500 + `30,000F) + (`67,500+ `30,000F) A = `1,06,875**
The value of F and A can be found using following equations
96,000 + 42,000F + 96,000A + 42,000AF = 1,51 ,500 …(i)
67,500 + 30,000F + 67,500A + 30,000AF = 1,06,875 …(ii)
Multiply equation (i) by 5 and equation (ii) by 7
4,80,000 + 2,10,000F + 4,80,000A + 2,10,000AF = 7,57,500 …(iii)
4,72,500 + 2,10,000F + 4,72,500A + 2,10,000AF = 7,48,125 …(iv)
–
– – – –
7,500 + 7,500A = 9,325
7,500 A = 9,325 – 7,500
A = 0.25

Overheads 39
 Now put the value of A in equation (i) to find the value of F
96,000 + 42,000F + 24,000 + 10,500F = 1,51 ,500
52,500F = 1,51 ,500 - 1,20,000
F = 0.6
On solving the above relations: F = 0.60 and A = 0.25
Hence, percentage recovery rates of:
Factory overheads = 60% of wages and
Administrative overheads = 25% of facto ry cost.
Working note:
Selling Price
Total Cost =
(100% + Percentage of Profit)
`1, 66, 650
For Job 101 = = `1,51,500
(100% + 10%)
`1, 28, 250
For Job 102 = = `1, 06, 875
(100% + 20%)
(ii) Statement of jobs, showing amount of factory overheads, administrative overheads and profit:
Job 101 Job 102
(`) (`)
Direct materials 54,000 37,500
Direct wages 42,000 30,000
Prime cost 96,000 67,500
Factory overheads
60% of direct wages 25,200 18,000
Factory cost 1,21,200 85,500
Administrative overheads
25% of factory cost 30,300 21 ,375
Total cost 1,51,500 1,06,875
Profit (10% & 20% respectively) 15,150 21,375
Selling price 1,66,650 1,28,250
(iii) Selling price of Job 103
(`)
Direct materials 24,000
Direct wages 20,000
Prime cost 44,000
Factory overheads (60% of Direct Wages) 12,000
Factory cost 56,000
Administrative overheads (25% of factory cost) 14,000
Total cost 70,000
Profit margin (balancing figure) 10,000
 Total cost 
Selling price  80,000
 87.5% 

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41. A company which sells four products, some of these are unprofitable. Company proposes to discontinue to sale one
of these products. The following information is available regarding income, costs and activity for the year ended
31st March.
Products
A B C D
Sales (`) 30,00,000 50,00,000 25,00,000 45,00,000
Cost of goods sold (`) 20,00,000 45,00,000 21,00,000 22,50,000
Area of storage (Sq. ft.) 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 and Distribution overheads and the basis of allocation are:
Amount Basis of allocation to
(`) products
Fixed Costs
Rent & Insurance 3,00,000 Area of storage (Sq. ft.)
Depreciation 1,00,000 No. of Parcels sent
Salesmen’s salaries & expenses 6,00,000 Sales Volume
Administrative wages and salaries 5,00,000 No. of in voices sent
Variable Costs:
Packing wages & materials `2 per parcel
Commission 4% of sales
Stationery `1 per invoice
You are required to prepare Costing Profit & Loss Statement, showing the percentage of profit or loss to sales for
each product.
Ans. Statement of Profit or Loss on Various Products during the year ended March 31st.
Products
Total (`)
A (`) B (`) C (`) D (`)
Sales 1,50,00,000 30,00,000 50,00,000 25,00,000 45,00,000
Variable costs:
Cost of goods sold 1,08,50,000 20,00,000 45,00,000 21 ,00,000 22,50,000
Commissions 4% of sales 6,00,000 1,20,000 2,00,000 1,00,000 1,80,000
Packing wages & materials 10,00,000 2,00,000 3,00,000 1,50,000 3,50,000
@ `2 per parcel
Stationery @ ` 1 per Invoice 4,00,000 80,000 1,40,000 60,000 1,20,000
Total variable costs 1,28,50,000 24,00,000 51,40,000 24,10,000 29,00,000
Contribution 21,50,000 6,00,000 (1,40,000) 90,000 16,00,000
(Sales - variable cost)
Fixed Costs:
Rent & Insurance (5:4:8:3) 3,00,000 75,000 60,000 1,20,000 45,000
Depreciation (4:6:3:7) 1,00,000 20,000 30,000 15,000 35,000
Salesmen’s salaries & expenses (6:10:5:9) 6,00,000 1,20,000 2,00,000 1,00,000 1,80,000

Overheads 41
 Products
Total (`)
A (`) B (`) C (`) D (`)
Administrative wages & salaries (4:7:3:6) 5,00,000 1,00,000 1,75,000 75 ,000 1,50,000
Total Fixed costs 15,00,000 3,15,000 4,65,000 3,10,000 4,10,000
Profit or Loss 6,50,000 2,85,000 (6,05,000) (2,20,000) 11,90,000
(Contribution – fixed Costs)
Percentage of profit or Loss on sales (%) 4.33 9.50 (12.10) (8.80) 26.4
42. 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 is `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.
Ans. (i) Computation of rates of factory overheads and selling and administration overheads to be charged:
Let % of factory overheads to direct wages be F and % of selling and administrative overheads to factory cost be A
Jobs Cost Sheet
Particulars Job 1102 Job 1108
Direct materials 37,500 54,000
Direct wages 30,000 42,000
Prime cost 67,500 96,000
Factory overheads 30,000F 42,000F
Factory cost 67,500+30,000F 96,000+42,000F
Selling and Administration OH (67,500+30,000F)A (96,000+42,000F)A
Total cost (67,500+30,000F)(1+A) (96,000+42,000F)(1+A)

*Computation of total cost of jobs:

1,07,325
Total cost of Job 1102 when 8% is the profit on cost = × 100 = `99,375
108%
1,57,920
Total cost of Job 1108 when 12% is the profit on cost = × 100 = `1,41,000
112%
Since the total cost of jobs 1102 and 1108 are equal to `99,375 and `1,41,000 respectively, therefore, we have the
following equations:

(67,500 + 30,000F) (1 + A) = `99,375 (1)

(96,000 + 42,000F) (1 + A) = `1,41,000 (2)
Or
67,500 + 30,000F + 67,500 A + 30,000FA = `99,375
96,000 + 42,000F + 96,000 A + 42,000FA = `1,41,000

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 Or
30,000F + 67,500A + 30,000FA = `31,875 (3)
42,000F + 96,000A + 42,000FA = `45,000 (4)

On solving (3) and (4) we get:
A = 0.25 or 25% on factory cost
F = 0.40 or 40% on direct wages
(ii) Selling price of the new order:
Particulars Amount
Materials 64,000
Productive Wages 50,000
Prime Cost 1,14,000
Factory overheads (40% of 50,000) 20,000
Factory Cost 1,34,000
Selling and Admin overheads (25% of 1,34,000) 33,500
Total Cost 1,67,500
Profit (20% on sales or 25% on cost) 41,875
Sale Price 2,09,375
43. 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 Overheads 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 Materials Direct Direct Machine hours
Wages Labour hours
(`) (`)
Machining 1,200 2400 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) Compute the overhead absorption rate as per the current policy of the company and determine the selling price
of the Job No. CW 7083.

Overheads 43
 (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.
Ans. Computation of overhead absorption rate
(as per the current policy of t he company)
Budgeted Factory Overheads Budgeted Direct Wages
Department
(`) (`)
Machinery 3,60,000 80,000
Assembly 1,40,000 3,50,000
Packing 1,25,000 70,000
Total 6,25,000 5,00,000
Budegted factory overheads

Overhead absorption rate = ×100
Budgeted direct wages
`6, 25, 000

= × 100 = 125% of Direct wages
`5, 00, 00
Selling Price of the Job No. CW-7083
`
Direct materials (`1,200 + `600 + `300) 2,100.00
Direct wages (`240 + `360 + `60) 660.00
Overheads (125% × `660) 825.00
Total factory cost 3,585.00
Add: Mark-up (30% × `3,585) 1,075.50
Selling price 4,660.50

(ii) Methods available for absorbing factory overheads and their overhead recovery rates in different departments
1. Machining Department
In the machining department, the use of machine time is the predominant factor of production. Hence
machine hour rate should be used to recover overheads in this department. The overhead recovery rate
based on machine hours has been calculated as under:
Budgeted factory overheads
Machine hour rate =
Budgeted machines hours
`3,60,000
= = `4 5. 0 per h our
80,000 hours
2. Assembly Department
In th is department direct labour hours is the main factor of production. Hence direct labour hour rate
method should be used to recover overheads in th is department. The overheads recovery rate in this case
is:
Budgeted factory overheads
Direct labour hour rate =
Budgeted direct labour hours
`1,40,000
= = `1.40 per hour
1,00,000 hours

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 3. Packing Department
Labour is the most important factor of production in this department. Hence direct labour hour rate
method should be used to recover overheads in this department.
The overhead recovery rate in this case comes to:
Budgeted factory overhead
Budgeted factory overheads
Direct labour hour rate =
Direct labour hours
`1,25,000
= = `2.50 per hour
50,000 hours
(iii) Selling Price of Job CW-7083 [based on the overhead application rates calculated in (ii) above]
`

Direct materials 2,100.00

Direct wages 660.00
Overheads (Refer to Working note) 1,078.00
Factory cost 3,838.00
Add: Mark up (30% of 3,838) 1,151.40
Selling price 4,989.00

Working note:
Overhead Summary Statement
Dept. Basis Hours Rate Overheads
(`) (`)
Machining Machine hour 180 4.50 810
Assembly Direct labour hour 120 1.40 168
Packing Direct labour hour 40 2.50 100
Total 1,078
(iv) Department-wise statement of total under or overheads
(a) Under current policy
Departments

Machining Assembly Packing Total

(`) (`) (`)
Direct wages (Actual) 96,000 2,70,000 90,000
Overheads recovered @ 1,20,000 3,37,500 1,12,500 5,70,000
125% of Direct wages: (A)
Actual overheads: (B) 3,90,000 84,000 1,35,000 6,09,000
(Under)/Over recovery of
overheads: (A – B) (2,70,000) 2,53 ,500 (22,500) (39,000)

Overheads 45
 (b) As per methods suggested
Basis of overhead recovery
Machine Direct labour Direct labour Total
hours hours hours (`)
Hours worked 96,000 90,000 60,000
Rate/hour (`) 4.50 1.40 2.50
Overhead recovered (`): (A) 4,32,000 1,26,000 1,50,000 7,08,000
Actual overheads (`): (B) 3,90,000 84,000 1,35,000 6,09,000
(Under)/Over recovery: (A – B) 42,000 42,000 15,000 99,000
44. A light engineering factory fabricates machine parts for customers. The factory commenced fabrication of 12 nos.
machine parts as per customers specifications, the expenditure incurred on the job for the week ending 21st August
is as tabulated below:
(`) (`)
Direct materials (all items) 780.00
Direct labour (manual) 20 hours @ `15 per hour 300.00
Machine facilities :
Machine No. I : 4 hours @ `45 180.00
Machine No. II : 6 hours @ `65 390.00 570.00
Total 1,650.00
Overheads @ `8 per hour on 20 manual hours 160.00
Total cost 1,810.00
The overhead rate of `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. I and II 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, 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.
Ans. Fabrication of 12 nos. machine parts Job No. ......)
Date of commencement: 16th August
Date of Completion:
Cost sheet for the week ending, August 21st:
(`) (`)
Direct materials (all items) 780.0
Direct labour (manual) 20 hours @ `15 per hour 300.00
Machine facilities:
Machine No. I : 4 hours @ `45 180.00
Machine No. II : 6 hours @ `65 390.00 570.00
Total
Overheads @ `8 per hour on 20 manual hours 160.00
Total cost 1,810.00
Supplementary Rates
Overheads 20 hours @ `2 per hour (Refer WN-1) 40.00
Machine facilities: (Refer WN-2)
Machine No. I - 4 hours @ `15 60.00
Machine No. II - 6 hours @ `15 90.00 190.00
Cost 2,000.00
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Working notes (WN):
1. Overheads budgeted: 3,000 man-hours × `8 = `24,000
Actual hours: 2,400 man-hours
Actual rate per hour `24,000 ÷ 2,400 hours = `10
Supplementary charge `2 ( `10 – `8) per hour
2. Machine facilities:
Machine No. I Machine No. II
Budgeted `1,800 `2,600
(40 × `45) (40 × `65)
Actual number of hours 30 32.5
Actual rate per hour `60.00 `60.00 `80.00
Supplementary rate per hour `15.00 `15.00
(`60.00 – `45.00) (`80.00 – `65.00)
45. 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.
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 data relating to factory overheads budgeted for the year is available:
Production Departments Service Departments
P1 P2 S1 S2
`25,50,000 `21 ,75,000 ` 6,00,000 `4,50,000
Budgeted output in units:
Product A 50,000; B 30,000.
Budgeted time required for production per unit:
Department P1 : Product A : 1.5 machine hours
Product B : 1.0 machine hour
Department P2 : 2 Direct labour hours
Product B : 2.5 Direct labour hours
You are required to compute the pre-determined overhead rate for both the production departments.
Ans. Computation of predetermined overhead rate for each production departments from budgeted data
Production Department Service Department
P1 P2 S1 S2
Budgeted factory overheads for the 25,50,000 21,75,000 6,00,000 4,50,000
year in (`)
Allocation of service department S1’s 3,00,000 3,00,000 (6,00,000) –
costs to production departments P1
and P2 equally in (`)
Allocation of service department 3,00,000 1,50,000 – (4,50,000)
S2’s costs to production
departments P1 and P2 in the ratio
of 2:1 in (`)
Total 31,50,000 26,25,000 – –

Overheads 47
 Production Department Service Department
P1 P2 S1 S2
Budgeted machine hours in 1,05,000 –
department P2 (working note)
Budgeted labour hours in department – 1,75,000
P2 (working note)
Budgeted machine/labour hour 30.00 15.00
rate (`)

Working note:
Product A Product B Total
Budgeted output (in units) 50,000 30,000
Budgeted machine hours in Dept. P1 75,000 30,000 1,05,000
(50,000 × 1.5 hrs.) (30,00 × 1 hr.)
Budgeted labour hours in Dept. P2 1,00,000 75,000 1,75,000
(50,000 × 2 hrs.) (30,000 × 2.5 hrs.)

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