19733ipcc CA Vol2 Cp4

4
OVERHEADS
BASIC CONCEPTS AND FORMULAE

Basic Concepts
1. Overheads: Overheads represent expenses that have been incurred in providing
certain ancillary facilities or services which facilitate or make possible the carrying
out of the production process; by themselves these services are not of any use.
2. Types of the Overheads on the basis of function:
• Factory or Manufacturing Overheads
• Office and Administration Overheads
• Selling and Distribution Overheads
• Research and Development Overheads
3. Types of the Overheads on the basis of nature:
• Fixed Overhead- Expenses that are not affected by any variation in the volume
of activity.
• Variable- Expenses that change in proportion to the change in the volume of
activity.
• Semi variable- The expenses that do not change when there is a small change
in the level of activity but change whenever there is a slightly big change or
change in the same direction as change in the level of activity but not in the
same proportion.
4. Cost allocation- The term ‘allocation’ refers to assignment or allotment of an entire
item of cost to a particular cost center or cost unit.
5. Cost apportionment- Apportionment implies the allotment of proportions of items of
cost to cost centres or departments.
6. Re-apportionment- The process of assigning service department overheads to
production departments is called reassignment or re-apportionment.
7. Absorption- The process of recovering overheads of a department or any other cost
center from its output is called recovery or absorption.
8. Methods used for re-apportionment of service department expenses over the
© The Institute of Chartered Accountants of India

4.2 Cost Accounting
production departments:
• Direct re-distribution method- Under this method service department costs are
apportioned over the production departments only, ignoring the services
rendered by one service department to the other.
• Step Method or Non-reciprocal method- This method gives cognizance to the
service rendered by service department to another service department. The
sequence here begins with the department that renders service to the
maximum number of other service departments.
• Reciprocal Service Method- These methods are used when different service
departments render services to each other, in addition to rendering services to
production departments. In such cases various service departments have to
share overheads of each other. The methods available for dealing with
reciprocal services are
(a) Simultaneous equation method;
(b) Repeated distribution method;
(c) Trial and error method.
9. Methods for the Computation of the Overheads Rate :
a) Percentage of direct materials method: Under this method, the cost of direct
material consumed is the base for calculating the amount of overhead
absorbed.
b) Percentage of prime cost method This method is based on the fact that both
materials as well as labour contribute in raising factory overheads. Hence, the
total of the two i.e. Prime cost should be taken as base for absorbing the
factory overhead.
c) Percentage of direct labour cost : This method also fails to give full
recognition to the element of the time which is of prime importance in the
accounting for and treatment of manufacturing overhead expenses except in so
far as the amount of wages is a product of the rate factor multiplied by the time
factor.
d) Labour hour rate Method: This method is an improvement on the percentage
of direct wage basis, as it fully recognises the significance of the element of
time in the incurring and absorption of manufacturing overhead expenses.
e) Machine hour rate method: By the machine hour rate method, manufacturing
overhead expenses are charged to production on the basis of number of hours
machines are used on jobs or work orders.
10. Types of Overhead Rates
a) Normal rate: This rate is calculated by dividing the actual overheads by actual
base. It is also known as actual rate.

Overheads 4.3
b) Pre-determined overhead rate: This rate is determined in advance by

estimating the amount of the overhead for the period in which it is to be used.
c) Blanket overhead rates- Blanket overhead rate refers to the computation of
one single overhead rate for the whole factory. It is to be distinguished from the
departmental overhead rate which refers to a separater
d) Departmental overhead rate: Where the product lines are varied or machinery
is used to a varying degree in the different departments, that is, where
conditions throughout the factory are not uniform, the use of departmental rates
is to be preferred. ate for each individual cost centre or department.
11. Methods of accounting of administrative overheads
• Apportioning Administrative Overheads between Production and Sales
Departments.
• Charging to Costing Profit and Loss Account.
• Treating Administrative Overheads as a separate addition to Cost of
Production/Sales
• The basis which are generally used for apportionment are :
(i) Works cost
(ii) Sales value or quantity
(iii) Gross profit on sales
(iv) Quantity produced
(v) Conversion cost, etc.
Basic Formulas
1. Overhead Absorption Rate or Overhead Recovery Rate =
Amount of overhead incurred
Basis for absorption
Budgeted overhead for the period

2. Predetermined Overhead Rate =
Budgeted basis for the period
3. Blanket Overhead Rate =

Overhead cos t for the entire factory for the period
Base for the period (Total labour hours, total machine hours, etc.
Overhead allocated / apportioned to each Deptt.

4. Multiple Overhead Rate =
Corresponding base

4.4 Cost Accounting
Change in amount of exp ense

5. Variable portion in Semi-variable Overhead =
Change in activity or quantity
6. Direct cost of service departments should be apportioned to production departments,

as it is also indirect cost for production departments.
Question 1
What is blanket overhead rate? In which situations, blanket rate is to be used and why?
Answer
Blanket overhead rate is one single overhead absorption rate for the whole factory. It may be
computed by using the following formulae:
Overhead cos ts for the whole factory
Blanket overhead rate =
* Total units of the selected base
* The selected base can be the total output; total labour hours; machine hours etc.
Situation for using blanket rate:
The use of blanket rate may be considered appropriate for factories which produce only one
major product on a continuous basis. It may also be used in those units in which all products
utilise same amount of time in each department. If such conditions do not exist, the use of
blanket rate will give misleading results in the determination of the production cost , specially
when such a cost ascertainment is carried out for giving quotations and tenders.
Question 2
Discuss the step method and reciprocal service method of secondary distribution of
overheads.
Answer
Step method and Reciprocal Service method of secondary distribution of overheads
Step method: This method gives cognisance to the service rendered by service department to
another service department, thus sequence of apportionments has to be selected. The
sequence here begins with the department that renders service to the max number of other
service department. After this, the cost of service dep't serving the next largest number of
department is apportioned.
Reciprocal service method: This method recognises the fact that where there are two or more
service department, they may render service to each other and, therefore, these inter
department services are to be given due weight while re-distributing the expense of service
department. The methods available for dealing with reciprocal servicing are:

Overheads 4.5
Simultaneous equation method

Repeated distribution method
Trial and error method
Question 3
Discuss the treatment of under absorbed and over-absorbed factory overheads in Cost
Accounting.
Answer
Treatment of under absorbed and over absorbed factory overheads in cost accounting.
Factory overheads are usually applied to production on the basis pre-determined rate
Estimated normal overheads for the period
=
Budgeted No. of units during the period
The possible options for treating under / over absorbed overheads are
Use supplementary rate in the case of substantial amount of under / over absorption
Write it off to the costing profit & loss account in the event of insignificant amount / or
abnormal reasons.
Carry toward to accounting period if operating cycle exceeds one year.
Question 4
Discuss the problems of controlling the selling and distribution overheads
Answer
Problems of controlling the selling & distribution overheads are
(i) The incidence of selling & distribution overheads depends on external factors such as
distance of market, nature of competition etc. which are beyond the control of
management.
(ii) They are dependent upon customers' behaviour, liking etc.
(iii) These expenses are of the nature of policy costs and hence not amenable to control.
The above problems of controlling selling & distribution overheads can be tackled by
adopting the following steps:
(a) Comparing the figures of selling & distribution overhead with the figures of previous
period.
(b) Selling & distribution overhead budgets may be used to control such overhead
expenses by making a comparison of budgetary figures with actual figures of
overhead expenses, ascertaining variances and finally taking suitable actions,

4.6 Cost Accounting
(c) Standards of selling & distribution expenses may be set up for salesmen, territories,
products etc. The laid down standards on comparison with actual overhead
expenses will reveal variances, which can be controlled by suitable action.
Question 5
Distinguish between cost allocation and cost absorption
Answer
Cost allocation and Cost absorption:
Cost allocation is the allotment of whole item of cost to a cost centre or a cost unit. In other
words, it is the process of identifying, assigning or allowing cost to a cost centre or a cost,
unit.
Cost absorption is the process of absorbing all indirect costs or overhead costs allocated to
apportioned over particular cost center or production department by the units produced.
Question 6
Discuss in brief three main methods of allocating support departments costs to operating
departments. Out of these three, which method is conceptually preferable.
Answer
The three main methods of allocating support departments costs to operating departments
are:
(i) Direct re-distribution method: Under this method, support department costs are directly
apportioned to various production departments only. This method does not consider the
service provided by one support department to another support department.
(ii) Step method: Under this method the cost of the support departments that serves the
maximum numbers of departments is first apportioned to other support departments and
production departments. After this the cost of support department serving the next largest
number of departments is apportioned. In this manner we finally arrive on the cost of
production departments only.
(iii) Reciprocal service method: This method recognises the fact that where there are two or
more support departments they may render services to each other and, therefore, these
inter-departmental services are to be given due weight while re-distributing the expenses
of the support departments. The methods available for dealing with reciprocal services
are:
(a) Simultaneous equation method
(b) Repeated distribution method
(c) Trial and error method.

Overheads 4.7
The reciprocal service method is conceptually preferable. This method is widely used
even if the number of service departments are more than two because due to the
availability of computer software it is not difficult to solve sets of simultaneous equations.
Question 7
Explain Single and Multiple Overhead Rates.
Answer
Single and Multiple Overhead Rates:
Single overhead rate: It is one single overhead absorption rate for the whole factory.
It may be computed as follows:
Overhead costs for the entire factory

Single overhead rate =
Total quantity of the base selected
The base can be total output, total labour hours, total machine hours, etc.
The single overhead rate may be applied in factories which produces only one major product
on a continuous basis. It may also be used in factories where the work performed in each
department is fairly uniform and standardized.
Multiple overhead rate: It involves computation of separate rates for each production
department, service department, cost center and each product for both fixed and variable
overheads. It may be computed as follows:
Multiple overhead rate

Overhead allocated/appportioned to each department/cost centre or product
=
Corresponding base
Under multiple overhead rates, jobs or products are charged with varying amount of factory
overheads depending on the type and number of departments through which they pass.
However, the number of overhead rates which a firm may compute would depend upon two
opposing factors viz. the degree of accuracy desired and the clerical cost involved.
Question 8
How do you deal with the following in cost accounts?
(i) Fringe benefits
(ii) Bad debts.

4.8 Cost Accounting
Answer
Treatment of Cost Accounts
(i) Fringe benefits: the benefits paid to workers in every organisation in addition to their
normal wage or salary are known as fringe benefits. They include – Housing facility,
children education allowance, holiday pay, leave pay, leave travel concession to home
town or any place in India, etc.
Expenditure incurred on fringe benefits in respect of factory workers should be
apportioned among all the production and service departments on the basis of the
number of workers in each department.
(ii) Bad debts: There is no unanimity among various authors about the treatment of bad
debts. Some authors believe that bad debts are financial losses and therefore should not
be included in the cost of a particular product or job. Another view is that, bad debts are
a part of selling and distribution overhead, especially where they arise in the normal
course of trading. Therefore they should be treated in cost accounts in the same way as
any other selling and distribution expense.
Question 9
Distinguish between fixed and variable overheads.
Answer
Fixed and Variable Overheads: Fixed overhead expenses do not vary with the volume of
production within certain limits. In other words, the amount of fixed overhead tends to remain
constant for volumes of production within the installed capacity of plant. For example, rent of
office, salary of works manger, etc.
Variable overhead cost varies in direct proportion to the volume of production. It increases or
decreases in direct relation to any increase or decrease in output.
Question 10
How would you treat the idle capacity costs in Cost Accounts?
Answer
Treatment of idle capacity cost in Cost Accounts:
It is that part of the capacity of a plant, machine or equipment which cannot be effectively
utilised in production. The idle capacity may arise due to lack of product demand, no
availability of raw-material, shortage of skilled labour, shortage of power, etc. Costs
associated with idle capacity are mostly fixed in nature. These costs remain unabsorbed or
unrecovered due to under-utilisation of plant and service capacity. Idle capacity costs are
treated in the following ways in Cost Accounts.

Overheads 4.9
(i) If the idle capacity cost is due to unavoidable reasons - a supplementary overhead rate
may be used to recover the idle capacity cost. In this case, the costs are charged to the
production capacity utilised.
(ii) If the idle capacity cost is due to avoidable reasons - such as faulty planning, etc. the
cost should be charged to Costing Profit and Loss Account.
(iii) If the idle capacity cost is due to trade depression, etc., - being abnormal in nature the
cost should also be charged to the Costing Profit and Loss Account.
Question 11
Select a suitable unit of cost to be used in the following:
(i) Hospital
(ii) City Bus Transport
(iii) Hotels providing lodging facilities
Answer
Industry of Product Unit of cost
(i) Hospital – Patient bed / day
(ii) City Bus Transport – Passenger – km.
(iii) Hotels providing lodging facilities – Room / day
Question 12
Discuss the treatment in cost accounts of the cost of small tools of short effective life.
Answer
Small tools are mechanical appliances used for various operations on a work place, specially
in engineering industries. Such tools include drill bits, chisels, screw cutter, files etc.
Treatment of cost of small tools of short effective life:
(i) Small tools purchased may be capitalized and depreciated over life if their life is
ascertainable. Revaluation method of depreciation may be used in respect of very small
tools of short effective life. Depreciation of small tools may be charged to:
Factory overheads
Overheads of the department using the small tool.
(ii) Cost of small tools should be charged fully to the departments to which they have been
issued, if their life is not ascertainable.

4.10 Cost Accounting
Question 13
E-books is an online book retailer. The Company has four departments. The two sales
departments are Corporate Sales and Consumer Sales. The two support – departments are
Administrative (Human Resources Accounting) and Information Systems each of the sales
departments conducts merchandising and marketing operations independently.
The following data are available for October, 2003:
Departments Revenues Number of Processing
Employees Time used
(in minutes)
Corporate Sales R` 16,67,750 42 2,400
Consumer Sales ` 8,33,875 28 2,000
Administrative -- 14 400
Information system -- 21 1,400
Cost incurred in each of four departments for October, 2003 are as follow:
Corporate Sales ` 12,97,751
Consumer Sales ` 6,36,818
Administrative ` 94,510
Information systems ` 3,04,720
The company uses number of employees as a basis to allocate Administrative costs and
processing time as a basis to allocate Information systems costs.
Required:
(i) Allocate the support department costs to the sales departments using the direct method.
(ii) Rank the support departments based on percentage of their services rendered to other
support departments. Use this ranking to allocate support costs based on the step-down
allocation method.
(iii) How could you have ranked the support departments differently?
(iv) Allocate the support department costs to two sales departments using the reciprocal
allocation method.

Overheads 4.11
Answer
(i) Statement showing the allocation of support
department costs to the sales departments
(using the direct method)
Sales department Support department
Particulars Basis of Corporate Consumer Administrative Information
allocation sales sales systems
` ` ` `
Cost incurred 12,97,751 6,36,818 94,510 3,04,720
Re-allocation of cost Number of 56,706 37,804 (94,510)
of administrative employees
department (6:4:–:–)
Re-allocation of Processing 1,66,211 1,38,509 (3,04,720)
costs of information time
systems department (6:5:–:–) ________ ________
Total 15,20,668 8,13,131
(ii) Ranking of support departments based on

percentage of their services rendered to other
support departments
⎛ 21×100 ⎞
Administration support department provides 23.077% ⎜⎜ ⎟⎟ of its services
⎝ 42 + 28 + 21 ⎠
to information systems support department. Thus 23.077% of `94,510 =
`21,810.
⎛ 400 ⎞
Information system support department provides 8.33% ⎜⎜ ×100 ⎟⎟
⎝ 2,400 + 2,000 + 400 ⎠
of its services to Administration support department. Thus 8.33% of `3,04,720 =
`25,383.
Statement showing allocation of support costs
(By using step-down allocation method)

Sales department Support department
Particulars Basis of Corporate Consumer Administrative Information
allocation sales sales systems.
` ` ` `
Cost incurred 12,97,751 6,36,818 94,510 3,04,720
Re-allocation of Number of 43,620 29,080 (94,510) 21,810
cost of employees

administrative (6:4:–:–3) 3,26,530

department
Re-allocation of Processing 1,78,107 1,48,423 (3,26,530)
costs of information time
systems department (6:5:–:–:–) ________ ________
Total 15,19,478 8,14,321
(iii) An alternative ranking is based on the rupee amount of services rendered to other
service departments, using the rupee figures obtained under requirement (ii) This
approach would use the following sequence of ranking.
Allocation of information systems overheads as first (` 25,383 provided to
administrative).
Allocated administrative overheads as second (`21,810 provided to information
systems).
(iv) Working notes:
(1) Percentage of services provided by each service department to other service
department and sales departments.
Service departments Sale departments
Particulars Administrative Information Corporate Consumer
system Sales Sales
Administrative – 23.07% 46.16% 30.77%
Information systems 8.33% – 50% 41.67%
(2) Total cost of the support department: (By using simultaneous equation method).
Let AD and IS be the total costs of support departments Administrative and
Information systems respectively. These costs can be determined by using the
following simultaneous equations:
AD = 94,510 + 0.0833 IS
IS = 3,04,720 + 0.2307 AD
or AD = 94,510 + 0.0833 {3,04,720 + 0.2307 AD}
or AD = 94,510 + 25,383 + 0.01922 AD
or 0.98078AD = 1,19,893
or AD = `1,22,243
and IS = `3,32,922

Overheads 4.13
Statement showing the allocation of support

department costs to the sales departments
(Using reciprocal allocation method)
Sales department
Particulars Corporate sales Consumer sales
` `
Costs incurred 12,97,571 6,36,818
Re-allocation of cost administrative 56,427 37,614
department
(46.16% and 30.77% of `1,22,243)
Re-allocation of costs of information systems 1,66,461 1,38,729
department
(50% and 41.67% of `3,32,922) ________ _______
Total 15,20,639 8,13,161
Question 14
Explain what do you mean by Chargeable Expenses and state its treatment in Cost Accounts.
Answer
Chargeable expenses: All expenses, other than direct materials and direct labour cost which
are specifically and solely incurred on production, process or job are treated as chargeable or
direct expenses. These expenses in cost accounting are treated as part of prime cost,
Examples of chargeable expenses include - Rental of a machine or plant hired for specific job,
royalty, cost of making a specific pattern, design, drawing or making tools for a job.
Question 15
A company manufacturing two products furnishes the following data for a year.
Product Annual Total Total number Total number
output (Units) Machine of purchase of set-ups
hours orders
A 5,000 20,000 160 20
B 60,000 1,20,000 384 44
The annual overheads are as under:
`
Volume related activity costs 5,50,000
Set up related costs 8,20,000
Purchase related costs 6,18,000
You are required to calculate the cost per unit of each Product A and B based on :
(i) Traditional method of charging overheads

(ii) Activity based costing method.
Answer
Working notes:
Total annual overheads
1. Machine hour rate =
Total machine hours
` 19,88,000
= = `14.20 per hour
1,40,000 hours
2. Machine hour rate = Total annual overhead cost
for volume related activities
=
Total machine hours
` 5,50,000
= = `3.93 (approx.)
1,40,000 hours
Total cos ts related to set − ups
3. Cost of one set-up =
Total number of set − ups
` 8,20,000
= = `12,812.50
64 set − ups
Total cos ts related to purchases
4. Cost of a purchase order =
Total number of purchase order
` 6,18,000
= = `1,136.03
544 orders
(i) Statement showing overhead cost per unit
(based on traditional method of charging overheads)
Products Annual Total Overhead cost Overhead cost
output machine component (Refer per unit
(units) hours to W, Note 1) `
`
A 5,000 20,000 2,84,000 56.80
(20,000 hrs. × (`2,84,000 / 5,000 units)
`14.20)
B 60,000 1,20,000 17,04,000 28.40
(1,20,000 (`17,04,000/60,000 units)
hrs.×`14.20)

Overheads 4.15
(ii) Statement showing overhead cost per unit

(based on activity based costing method)
Products Annual Total Cost Cost Cost Total cost Cost
output Machine related to related to related to per
units Hours volume purchases set-ups unit
activities
` ` ` ` `
(a) (b) (c) (d) (e) (f) = [(c) + (g) =
(d) + (e)] (f)/(a)
A 5,000 20,000 78,600 1,81,764.80 2,56,250 5,16,614.80 103.32
(20,000 (160 orders (20 set ups
hrs × × ×
`3.93) `1136.03) `12,812.50)
B 60,000 1,20,000 4,71,600 4,36,235.52 5,63,750 14,71,585.52 24.53
(1,20,000 (384 orders (44 set ups
hrs × × ×
`3.93) `1136.03) `12,812.50)
Note: Refer to working notes 2, 3 and 4 for computing costs related to volume
activities, set-ups and purchases respectively.
Question 16
In the current quarter, a company has undertaken two jobs. The data relating to these jobs are
as under:
Job 1102 Job 1108
Selling price `1,07,325 `1,57,920
Profit as percentage on cost 8% 12%
Direct Materials `37,500 `54,000
Direct Wages `30,000 `42,000
It is the policy of the company to charge Factory overheads as percentage on direct wages
and Selling and Administration overheads as percentage on Factory cost.
The company has received a new order for manufacturing of a similar job. The estimate of
direct materials and direct wages relating to the new order are `64,000 and `50,000
respectively. A profit of 20% on sales is required.
You are required to compute
(i) The rates of Factory overheads and Selling and Administration overheads to be charged.
(ii) The Selling price of the new order

Answer
Working notes
1. Computation of total cost of jobs
Total cost of Job 1102 when 8% is the profit on cost ` 1,07,325
= × 100
108
= `99,375
Total cost of job 1108 when 12% is the profit on cost ` 1,57,920
= × 100
112
= `1,41,000
2. Factory overheads = F% of direct wages
Selling & Administrative overheads = A% of factory cost
(i) Computation of rates of factory overheads and selling and administration
overheads to be charged.
Jobs Cost Sheet
Job 1102 Job 1108
` `
Direct materials 37,500 54,000
Direct wages 30,000 42,000
Prime cost 67,500 96,000
Add: Factory overheads 30,000F 42,000F
Factory cost (67,500 + 30,000 F) (96,000 + 42,000 F)
(Refer to Working note 2)
Add: Selling and Administration (67,500 + 30,000 F) A (96,000 + 42,000 F) A
Overheads
(Refer to Working note 2)
Total cost (67,500 + 30,000 F)(1 + (96,000 + 42,000
A) F)(1+A)
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 (Refer to working note 1)
(67,500 + 30,000 F) (1 + A) = 99,375 (1)
(96,000 + 42,000 F) (1 + A) = 1,41,000 (2)
or 67,500 + 30,000 F + 67,500 A + 30,000 FA = 99,375

Overheads 4.17
96,000 + 42,000 F + 96,000 A + 42,000 FA = 1,41,000

or 30,000 F + 67,500 A + 30,000 FA = 31,875 (3)
42,000 F + 96,000 A + 42,000 FA = 45,000 (4)
On solving (3) and (4) we get : A = 0.25 and F = 0.40
Hence A = 25% and F = 40%
(ii) Selling price of the new order:
`
Direct materials 64,000
Direct wages 50,000
Prime cost 1,14,000
Factory overheads 20,000
(40% × `50,000)
Factory cost 1,34,000
Selling & Admn. Overheads 33,500
(25% × `1,34,000)
Total cost 1,67,500
If selling price of new order is `100 then Profit is `20 and Cost is `80
`1,67,500
Hence selling price of the new order = × 100 = ` 2,09,375
80
Question 17
PQR Ltd has its own power plant, which has two users, Cutting Department and Welding
Department. When the plans were prepared for the power plant, top management decided that
its practical capacity should be 1,50.000 machine hours. Annual budgeted practical capacity
fixed costs are Rs.9,00,000 and budgeted variable costs are Rs.4 per machine-hour. The
following data are available:
Cutting Welding Total
Department Department
Actual Usage in 2002-03 Machine hours) 60,000 40,000 1,00,000
Practical capacity for each department (machine hours) 90,000 60,000 1,50,000
Required
(i) Allocate the power plant's cost to the cutting and the welding department using a single
rate method in which the budgeted rate is calculated using practical capacity and costs
are allocated based on actual usage.

(ii) Allocate the power plant's cost to the cutting and welding departments, using the dual -
rate method in which fixed costs are allocated based on practical capacity and variable
costs are allocated based on actual usage,
(iii) Allocate the power plant's cost to the cutting and welding departments using the dual-rate
method in which the fixed-cost rate is calculated using practical capacity, but fixed costs
are allocated to the cutting and welding department based on actual usage. Variable
costs are allocated based on actual usage.
(iv) Comment on your results in requirements (i), (ii) and (iii).
Answer
Working notes:
1. Fixed practical capacity cost per machine hour:
Practical capacity (machine hours) 1,50,000
Practical capacity fixed costs (Rs.) 9,00,000
Fixed practical capacity cost per machine hour `6
(`9,00,000 / 1,50,000 hours)
2. Budgeted rate per machine hour (using practical capacity):
= Fixed practical capacity cost per machine hour + Budgeted variable cost per
machine hour
= `6 + `4 = `10
(i) Statement showing Power Plant's cost allocation to the Cutting & Welding
departments by using single rate method on actual usage of machine hours.
` ` `
Power plants cost allocation by using 6,00,000 4,00,000 10,00,000
actual usage (machine hours) (60,000 hours (40,000 hours
(Refer to working note 2) × `10) × `10)
(ii) Statement showing Power Plant's cost allocation to the Cutting & Welding
departments by using dual rate method.
` ` `
Fixed Cost 5,40,000 3,60,000 9,00,000
(Allocated on practical capacity ⎛ ` 9,00,000 × 3 ⎞ ⎛ ` 9,00,000 × 2 ⎞
for each department i.e.): ⎜ ⎟ ⎜ ⎟
⎝ 5 ⎠ ⎝ 5 ⎠
(90,000 hours : 60,000 hours)

Overheads 4.19
Variable cost 2,40,000 1,60,000 4,00,000

(Based on actual usage of (60,000 hours (40,000 hours
machine hours) × `4) × `4)
Total cost 7,80,000 5,20,000 13,00,000
(iii) Statement showing Power Plant's cost allocation to the Cutting & Welding
Departments using dual rate method
` ` `
Fixed Cost 3,60,000 2,40,000 6,00,000
Allocation of fixed cost on (60,000 hours (40,000 hours
actual usage basis (Refer to × `6) × `6)
working note 1)
Variable cost 2,40,000 1,60,000 4,00,000
(Based on actual usage) (60,000 hours (40,000 hours
× `4) × `4)
Total cost 6,00,000 4,00,000 10,00,000
(iv) Comments:
Under dual rate method, under (iii) and single rate method under (i), the allocation
of fixed cost of practical capacity of plant over each department are based on single
rate. The major advantage of this approach is that the user departments are
allocated fixed capacity costs only for the capacity used. The unused capacity cost
`3,00,000 (`9,00,000 – `6,00,000) will not be allocated to the user departments.
This highlights the cost of unused capacity.
Under (ii) fixed cost of capacity are allocated to operating departments on the basis
of practical capacity, so all fixed costs are allocated and there is no unused capacity
identified with the power plant.
Question 18
Define Selling and Distribution Expenses. Discuss the accounting for selling and distribution
expenses.
Answer
Selling expenses: Expenses incurred for the purpose of promoting, marketing and sales of
different products.
Distribution expenses: Expenses relating to delivery and despatch of goods/products to
customers.

Accounting treatment for selling and distribution expenses

Selling and distribution expenses are usually collected under separate cost account numbers.
These expenses may be recovered by using any one of following method of recovery.
1. Percentage on cost of production / cost of goods sold.
2. Percentage on selling price.
3. Rate per unit sold.
Question 19
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 the wages 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:
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.
Answer
(i) Amount of under-absorption of production overheads during the year 1998-99
`
Total production overheads actually incurred during the year 6,00,000
1998-99

Overheads 4.21
Less: 'Written off' obsolete stores `45,000

Wages paid for strike period `30,000 75,000
Net production overheads actually incurred: (A) 5,25,000
Production overheads absorbed by 48,000 machines hours @ 4,80,000
`10 per hour: (B)
Amount of under-absorption of production overheads: [(A)–(B)] 45,000
(ii) Accounting treatment of under absorption of production overheads
It is given in the statement of the question that 20,000 units were completely finished and
8,000 units were 50% complete, one third of the under-absorbed overheads were due to
lack of production planning and the rest were attributable to normal increase in costs.
`
1. (33-1/3% of `45,000) i.e. `15,000 of under – absorbed overheads 15,000
were due to lack of production planning. This being abnormal,
should be debited to the Profit and Loss A/c
2. Balance (66-2/3% of `45,000) i.e. `30,000 of under – absorbed 30,000
overheads should be distributed over work-in-progress, finished
goods and cost of sales by using supplementary rate ______
Total under-absorbed overheads 45,000
Apportionment of unabsorbed overheads of `30,000 over, work-in-progress,
finished goods and cost of sales.
Equivalent Completed units `
Work-in-progress (4,000 units × `1.25) 4,000 5,000
(Refer to working note)
Finished goods 2,000 2,500
(2,000 units × `1.25)
Cost of sales 18,000 22,500
(18,000 units × `1.25)
24,000 30,000
Accounting treatment:
Work-in-progress control A/c Dr. ` 5,000

Finished goods control A/c Dr. ` 2,500
Cost of Sales A/c Dr. `22,500
Profit & Loss A/c Dr. `15,000
To Overhead control A/c 45,000

Working note:
` 30,000
Supplementary overhead absorption rate = = `1.25 per unit
24,000 units
Question 20
In a factory, a machine is considered to work for 208 hours in a month. It includes
maintenance time of 8 hours and set up time of 20 hours.
The expense data relating to the machine are as under:
Cost of the machine is ` 5,00,000. Life 10 years. Estimated scrap value at the end of life
is `20,000.
`
– Repairs and maintenance per annum 60,480
– Consumable stores per annum 47,520
– Rent of building per annum (The machine under reference 72,000
occupies 1/6 of the area)
– Supervisor's salary per month (Common to three machines) 6,000
– Wages of operator per month per machine 2,500
– General lighting charges per month allocated to the machine 1,000
– Power 25 units per hour at `2 per unit
Power is required for productive purposes only. Set up time, though productive, does not
require power. The Supervisor and Operator are permanent. Repairs and maintenance
and consumable stores vary with the running of the machine.
Required
Calculate a two-tier machine hour rate for (a) set up time, and (b) running time
Answer
Working notes:
1. (i) Effective hours for standing charges 200
(208 hours – 8 hours)
(ii) Effective hours for variable costs 180
(208 hours – 28 hours)
2. Standing charges per hour
Per month Per hour
` `
Supervisor's salary (`6,000 / 3 machines) 2,000

Overheads 4.23
General Lighting 1,000

1 1,000
Rent (`72,000 / 6 × )
12
Total standing charges 4,000
Standing charges per hour (`4,000 / 200 hours) 20
3. Machine expenses per hour
Per month Per hour
` `
Depreciation 4,000 20
(5,00,000 − 20,000) 1 (`4,000 / 200
× hours
10 12
Repairs & maintenance 5,040 28
`60,480 / 12 months) (`5,040 / 180
hours)
Consumable stores 3,960 22
(`47,520 / 12 months) (`3,960 / 180
hours)
Power 9,000 50
(25 units × `2 × 180 hours) (`9,000 / 180
hours)
Wages 2,500 12.50
(`2,500 / 200
______ hours)
Total machine expenses 24,500 132.50
Computation of Two – tier machine hour rate
Set up time rate Running time rate
per machine hour per machine hour
` `
Standing Charges 20.00 20.00
(Refer to working note 2)
Machine expenses:
(Refer to working note 3)
Depreciation 20.00 20.00
Repair and maintenance – 28.00
Consumable stores – 22.00
Power – 50.00

Machine hour rate of overheads 40.00 140.00

Wages 12.50 12.50
Comprehensive machine hour rate 92.50 152.50
Question 21
What is idle time? Explain the causes leading to idle time and its treatment in cost accounts?
Answer
Idle time : It refer to the labour time paid for but not utilized on production .In other words it
represents the time for which wages are paid, but during which no output is given out by the
workers .This is the period during which workers remain idle . Idle time may be normal or
abnormal . Normal idle time is the time, which cannot be avoided or reduced, in normal course
of business. Abnormal idle time is the time, which arises on account of abnormal causes. Such
idle time is uncontrollable.
Causes leading to idle time: The major causes, which account for idle time may be grouped
under the following two heads:
Normal causes: The main causes, which lead to the occurrence of normal idle time, are as
follow
1. Time taken by workers to travel the distance between the main gate of factory and the
place pf their work.
2. Time lost between the finish of one job and starting of next job.
3. Time spent to overcome fatigue.
4. Time spent to meet their personal needs like taking lunch, tea etc.
Abnormal causes: The main causes, which account for the occurrence of abnormal idle time,
are:
1. Machine breakdown, power failure, non-availability of raw materials, tools or waiting for
jobs due to defective planning.
2. Conscious management policy decision to stop work for some time.
3. In the case of seasonal goods producing units may not be possible for them to produce
evenly throughout the year. Such a factor too, it result in the generation of abnormal idle time.
Treatment of Idle time in Cost Accounts:
Normal idle time: The cost of normal idle time should be charged to the cost of production.
This is done by inflating the labour rate. It may be transferred to factory overheads for
absorption, by adopting a factory overhead absorption rate.
Abnormal Idle time: The cost of abnormal idle time due to any reason should be charged to
Costing Profit & Loss Account.

Overheads 4.25
Question 22
Indicate the base or bases that you would recommend to apportion overhead costs to
production department:
(i) Supplies (ii) Repairs
(iii) Maintenance of building (iv) Executive salaries
(v) Rent (vi) Power and light
(vii) Fire insurance (vii) Indirect labour.
Answer
Item Bases of apportionment
(i) Supplies Actual supplies made to different departments
(ii) Repair Direct labour hours; Machine hours; Direct
labour wages; Plant value.
(iii) Maintenance of building Floor area occupied by each department
(iv) Executive salaries Actual basis; Number of workers.
(v) Rent Floor area
(vi) Power and light K W hours or H P (power)
Number of light points; Floor space; Meter
readings (light)
(vii) Fire insurance Capital cost of plant and building; Value of stock
(viii) Indirect labour Direct labour cost.
Question 23
Your company uses a historical cost system and applies overheads on the basis of “pre-
determined” rates. The following are the figure from the Trial Balance as at 30-9-83:-
Manufacturing overheads ` 4,26,544 Dr.
Manufacturing overheads applied ` 3,65,904 Cr.
Work-in-progress ` 1,41,480 Dr.
Finished goods stocks ` 2,30,732 Dr.
Cost of goods sold ` 8,40,588 Dr.
Give two methods for the disposal of the unabsorbed overheads and show the profit
implications of each method.

Answer
Actual overheads ` 4,26,544
Overhead recovered ` 3,65,904
Under absorbed Overhead ` 60,640
The two methods for the disposal of the under-absorbed overheads in this problem may be:-
(1) Write off the under – absorbed overhead to Costing Profit & Loss Account.
(2) Use supplementary rate, to recover the under-absorbed overhead.
According to first method, the total unabsorbed overhead amount of `60,640 will be written off
to Costing Profit & Loss Account. The use of this method will reduce the profits of the concern
by `60,640 for the period.
According to second method, a supplementary rate may be used to adjust the overhead cost
of each cost unit. The under-absorbed amount in total may, at the end of the accounting
period, be apportioned on ratio basis to the three control accounts, viz, work-in-progress,
finished goods stock and cost of goods sold account. Apportioning of under-absorbed
overhead can be carried out by using direct labour hours/machine hours/the value of the
balances in each of these accounts, as the basis. Prorated figures of under-absorbed
overhead over work-in-progress, finished goods stock and cost of goods sold in this question
on the basis of values, of the balances in each of these accounts are as follows:-
Additional Overhead
(Under-absorbed) Total
` ` `
Work-in-progress 1,41,480 7,074* 1,48,554
Finished Goods Stock 2,30,732 11,537** 2,42,269
Cost of Goods Sold 8,40,588 42,029*** 8,82,617
12,12,800 60,640 12,73,440
By using this method, the profit for the period will be reduced by `42,029 and the value of
stock will increase by `18,611. The latter will affect the profit of the subsequent period.
Working Notes
The apportionment of under-absorbed overhead over work-in-progress, finished goods stock
and cost of goods sold on the basis of their value in the respective account is as follows:-
*Overhead to be absorbed by work-in-progress ` 60,640
= × 1,41,480 = `7,074
12,12,800
**Overhead to be absorbed by finished goods ` 60,640
= × 2,30,732 = `11,537
12,12,800

Overheads 4.27
***Overhead to be absorbed by cost of goods sold ` 60,640

= × 8,40,588 = `42,029
12,12,800
Question 24
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 `420 per week plus 15% fringe benefits.
(v) Electricity used by the machine during the production is 16 units per hour at a cost of `3
per unit. No current 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.
Answer
Computation of Machine hour Rate
Per year Per hour Per hour
(unproductive) (productive)
Standing charges
Operators wages
4× 420 × 54 90,720
Add: Fringe Benefits 15% 13,608
1,04,328
Departmental and general overhead
(50,000 + 5,000) 55,000
Total Std. Charging for 8 machines 1,59,328
Cost per Machine 1,59,328/8 19,916
Cost per Machine hour 19,916/2,200 9.05
19,916/2,292 8.69

Machine hours:
Setting time unproductive (2,592-300-92) = 2200
Setting time productive (2,592-300) = 2,292
Machine expenses
Depreciation (12,70,000 -70,000)/(12 × 2,200) 45.45
(12,70,000-70,000)/(12 × 2,292) 43.63
Electricity (16 × 3) 48.00
(16×3×2,200)/2,292) 46.07
Special chemical solution (400 × 54)/2,200,/ 2,292 9.82 9.42
Maintenance (25,000/2,200) 11.36
(25,000/2,292) 10.91
Machine Hour Rate 123.68 118.72
Question 25
From the details furnished below you are required to compute a comprehensive machine-hour
rate:
Original purchase price of the machine (subject to `3,24,000
depreciation at 10% per annum on original cost)
Normal working hours for the month
(The machine works to only 75% of capacity) 200 hours
Wages of Machineman `125 per day (of
8 hours)
Wages for Helper (machine attendant) `75 per day
(of 8 hours)
Power cost for the month for the time worked `15,000
Supervision charges apportioned for the machine
centre for the month `3,000
Electricity & Lighting for the month `7,500
Repairs & maintenance (machine) including
Consumable stores per month `17,500
Insurance of Plant & Building (apportioned)
for the year `16,250
Other general expense 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 33.33% of basic wages and dearness

Overheads 4.29
allowance. Add 10% of the basic wage and dearness allowance against leave wages and
holidays with pay to arrive at a comprehensive labour-wage for debit to production.
Answer
Computation of Comprehensive Machine Hour Rate
Per month(`) Per hour(`)
Fixed cost
Supervision charges 3,000
Electricity and lighting 7,500
Insurance of Plant and building (16,250×1/12) 1,354.17
Other General Expenses (27,500×1/12) 2,291.67
Depreciation (32,400×1/12) 2,700
16,845.84 112.31
Variable Cost
Repairs and maintenance 17,500 116.67
Power 15,000 100.00
Wages of machine man 44.91
Wages of Helper 32.97
Machine Hour rate (Comprehensive) 406.86
Effective machine working hour’s p.m.
200 hrs. × 75% = 150 hrs.
Wages per machine hour
Machine man Helper
Wages for 200 hours
(`125× 25) `3,125
(`75× 25) `1,875
D.A. `1,575 `1,575
`4,700 `3,450
Production bonus (1/3 of above) 1,567 1,150
6,267 4,600
Leave wages (10%) 470 345
6,737 4,945
Effective wage rate per machine hour (150 hrs in all) `44.91 `32.97

Question 26
ABC Ltd. has three production departments P1, P2 and P3 and two service departments S1 and
S2. The following data are extracted from the records of the Company for the month of
October, 2007:
`
Rent and rates 62,500
General lighting 7,500
Indirect Wages 18,750
Power 25,000
Depreciation on machinery 50,000
Insurance of machinery 20,000
Other Information:
P1 P2 P3 S1 S2
Direct wages (Rs.) 37,500 25,000 37,500 18,750 6,250
Horse Power of
Machines used 60 30 50 10 −
Cost of machinery 3,00,000 4,00,000 5,00,000 25,000 25,000
(Rs.)
Floor space (Sq. ft) 2,000 2,500 3,000 2,000 500
Number of light 10 15 20 10 5
points
Production hours
worked 6,225 4,050 4,100 − −
Expenses of the service departments S1 and S2 are reapportioned as below:
P1 P2 P3 S1 S2
S1 20% 30% 40% − 10%
S2 40% 20% 30% 10% −
Required:
(i) Compute overhead absorption rate per production hour of each production department.
(ii) Determine the total cost of product X which is processed for manufacture in department
P1, P2 and P3 for 5 hours, 3 hours and 4 hours respectively, given that its direct material
cost is `625 and direct labour cost is `375.

Overheads 4.31
Answer
Primary Distribution Summary
Item of cost Basis of Total P1 P2 P3 S1 S2
apportionment
(` (`) (`) (`) (`) (`)
Rent and Floor area 62,500 12,500 15,625 18,750 12,500 3,125
Rates 4:5:6:4:1
General Light points 7,500 1,250 1,875 2,500 1,250 625
lighting 2:3:4:2:1
Indirect wages Direct wages 18,750 5,625 3,750 5,625 2812.5 937.5
6:4:6:3:1
Power Horse Power of 25,000 10,000 5,000 8,333 1,667 −
machines used
6:3:5:1
Depreciation of Value of 50,000 12,000 16,000 20,000 1,000 1,000
machinery machinery
12 : 16 : 20 : 1 :
1
Insurance of Value of 20,000 4,800 6,400 8,000 400 400
machinery machinery
12 : 16 : 20 : 1 : _______ ______ ______ ______ ______ _____
1
1,83,750 46,175 48,650 63,208 19,630 6,088
Overheads of service cost centres Let S1 be the overhead of service cost centre S1 and S2 be
the overhead of service cost centre S2.
S1 = 19,630 + 0.10 S2
S2 = 6,088 + 0.10 S1
Substituting the value of S2 in S1 we get
S1 = 19,630 + 0.10 (6,088 + 0.10 S1)
S1 = 19,630 + 608.8 + 0.01 S1
0.99 S1 = 20,238.8
∴S1 = `20,443.
∴S2 = 6,088 + 0.10 × 20,443.
= `8,132.

Secondary Distribution Summary

Particulars Total P1 P2 P3
` ` ` `
Allocated and Apportioned over- 1,58,033 46,175 48,650 63,208
heads as per primary
distribution
S1 20,443 4,089 6,133 8,177
S2 8,132 3,253 1,626 2,440
53,517 56,409 73,825
Overhead rate per hour
P1 P2 P3
Total overheads cost `53,517 `56,409 `73,825
Production hours worked 6,225 4,050 4,100
Rate per hour (`) `8.60 `13.93 `18.01
Cost of Product X
Direct material ` 625
Direct labour ` 375
Prime cost `1,000
Production on overheads
P1 5 hours × `8.60 = 43
P2 3 hours × `13.93 = 41.79
P3 4 hours × `18.01 = 72.04 `156.83
Factory cost ` 1,157
Question 27
PQR manufacturers – a small scale enterprise produces a single product and has adopted a
policy to recover the production overheads of the factory by adopting a single blanket rate
based on machine hours. The budgeted production overheads of the factory are `10,08,000
and budgeted machine hours are 96,000.
For a period of first six months of the financial year 2007−2008, following information were
extracted from the books:
Actual production overheads `6,79,000
Amount included in the production overheads:
Paid as per court’s order `45,000

Overheads 4.33
Expenses of previous year booked in current year `10,000

Paid to workers for strike period under an award `42,000
Obsolete stores written off `18,000
Production and sales data of the concern for the first six months are as under:
Production:
Works-in-progress
(50% complete in every respect) 16,000 units
Sale:
The actual machine hours worked during the period were 48,000 hours. It is revealed from the
analysis of information that ¼ of the under-absorption was due to defective production policies
and the balance was attributable to increase in costs.
You are required:
(i) to determine the amount of under absorption of production overheads for the period,
(ii) to show the accounting treatment of under-absorption of production overheads, and
(iii) to apportion the unabsorbed overheads over the items.
Answer
(i) Amount of under absorption of production overheads during the period of first six months
of the year 2007-2008:
Amount
(`
Total production overheads actually incurred 6,79,000
during the period
Less: Amount paid to worker as per 45,000
Expenses of previous year booked 10,000
Wages paid for the strike period 42,000
Obsolete material written off 18,000 1,15,000
5,64,000
Less: Production overheads absorbed (48,000 hours *
`10.50) 5,04,000
Amount of under absorbed production overheads 60,000

` 10,08,000
Budgeted Machine hour rate = = ` 10.50 per hour
96,000 hours
(ii) Accounting treatment of under absorbed production overheads:
As, one fourth of the under absorbed overheads were due to defective production
policies, this being abnormal, hence should be debited to Profit and Loss Account.
Amount to be debited to Profit and Loss Account = (60,000 * ¼) ` 15,000.
Balance of under absorbed production overheads should be distributed over Works in
progress, finished goods and cost of sales by applying supplementary rate*.
Amount to be distributed = (60,000 * ¾) `45,000.
` 45,000
Supplementary rate = = ` 1.50 per unit
30,000 units
(iii) Apportionment of under absorbed production overheads over WIP, finished goods and
cost of sales:
Equivalent Amount
completed units (in `)
Work-in-Progress (16,000 units *50%*1.50) 8,000 12,000
Finished goods (4,000 units *1.50) 4,000 6,000
Cost of sales (18,000 units *1.50) 18,000 27,000
Total 30,000 45,000
Question 28
In a manufacturing company factory overheads are charged as fixed percentage basis on
direct labour and office overheads are charged on the basis of percentage of factory cost.
The following informations are available related to the year ending 31st March, 2008 :
Product A Product B
Direct Materials `19,000 `15,000
Direct Labour `15,000 `25,000
Sales `60,000 `80,000
Profit 25% on cost 25% on sales price
You are required to find out:
(i) The percentage of factory overheads on direct labour.
(ii) The percentage of office overheads on factory cost (November 2008 )
Answer
Let, the percentage of factory overheads on direct labour is ‘x’ and the percentage of office

Overheads 4.35
overheads on factory cost is ‘y’, then the total cost of product A and product B will be as
follows:
Product A Product B
(`) (`)
Direct Materials 19,000 15,000
Direct labour 15,000 25,000
Prime Cost 34,000 40,000
Factory overheads (Direct labour × x) 150 x 250 x
Factory cost (i) 34,000 + 150 x 40,000 + 250 x
Office overheads (Factory cost × y) (ii) 340 y + 1.5 x y 400 y + 2.5 x y
Total Cost [(i) + (ii)] 34,000 + 150 x 40,000 + 250 x
+ 340 y + 1.5 x y +400 y + 2.5 x y
Total cost on the basis of sales is:
Product A Product B
(`) (`)
Sales 60,000 80,000
Less: Profit
Product A – 25% on cost or 20% on Sales 12,000
Product B – 25% on sales ______ 20,000
Total Cost 48,000 60,000
Thus,
Total Cost of A is 34,000 + 150x + 340y + 1.5 xy = 48,000
or 150x + 340y + 1.5 xy = 14,000…………………….(i)
Total Cost of B is 40,000 + 250x + 400y + 2.5 xy = 60,000
or 250x + 400y + 2.5 xy = 20,000…………………….(ii)
Equation (ii) multiplied by 0.6 and after deducting from equation (i), we get
150x + 340y + 1.5xy = 14,000………………………….(i)
_150x ± 240y ± 1.5xy = _12,000…………..….....………(ii)
100y = 2,000
or y = 20
Putting value of y in equation (i), we get
150x + 340 × 20 + 1.5x × 20 = 14,000

or 150x + 30x = 14,000 – 6,800

or 180x = 7,200
or x = 40.
Hence, (i) the percentage of factory overheads on direct labour = 40 and
(ii) the percentage of office overheads on factory cost = 20.
Question 29
Maximum production capacity of JK Ltd. is 5,20,000 units per annum. Details of estimated cost
of production are as follows:
Direct material `15 per unit.
Direct wages `9 per unit (subject to a minimum of `2,50,000 per month).
Fixed overheads `9,60,000 per annum.
Variable overheads `8 per unit.
Semi-variable overheads are `5,60,000 per annum up to 50 per cent capacity and
additional `1,50,000 per annum for every 25 per cent increase in capacity or a part of it.
JK Ltd. worked at 60 per cent capacity for the first three months during the year 2008, but it is
expected to work at 90 per cent capacity for the remaining nine months.
The selling price per unit was `44 during the first three months.
You are required, what selling price per unit should be fixed for the remaining nine months to
yield a total profit of `15,62,500 for the whole year.
Answer Statement of Cost and Sales for the year 2008
Maximum production capacity = 5,20,000 units per annum

Particulars First 3 months Next 9 months Total
Capacity utilized 60% 90%
Production 5,20,000 × 3 × 60% 5,20,000 × 9 × 90%
12 12
= 78,000 units = 3,51,000 units 4,29,000 units
` ` `
Direct materials @ `15 per unit 11,70,000 52,65,000 64,35,000
Direct wages @ 9 per unit or `2,50,000 7,50,000 31,59,000 39,09,000
per month which ever is higher
Prime cost (A) 19,20,000 84,24,000 1,03,44,000
Overheads
Fixed 2,40,000 7,20,000 9,60,000

Overheads 4.37
Variable @ `8 per unit 6,24,000 28,08,000 34,32,000

Semi Variable 1,77,500 6,45,000 8,22,500
Total overheads (B) 10,41,500 41,73,000 52,14,500
Total Cost (C) [(A + B)] 29,61,500 1,25,97,000 1,55,58,500
Profit during first 3 months (Bal. figure) 4,70,500
Sales @ `44 per unit (78,000 x ` 44) 34,32,000
Desired profit during next 9 months
(`15,62,500 – `4,70,500) (D) 10,92,000
Sales required for next 9 months (E) [(C + D)] 1,36,89,000
Total profit 15,62,500
Total Sales 1,71,21,000
Total sales required for last 9 months
Required selling price per unit for last 9 months =
Units produced during last 9 months
1,36,89,000
= ` = ` 39 per unit.
3,51,000
Workings:
(1) Semi-variable overheads:
(a) For first 3 months at 60% capacity = `(5,60,000 + `1,50,000) × 3/12
= `7,10,000 × 3/12
= `1,77,500.
(b) For remaining 9 months at 90% capacity = `(5,60,000 + `3,00,000) × 9/12
= `8,60,000 × 9/12
= ` 6,45,000
Question 30
Calculate machine hour rate for recovery of overheads for a machine from the following
information:
Cost of machine is `25, 00,000 and estimated salvage value is `1,00,000. Estimated working
life of the machine is 10 years. Annual working hours are 3,000 in the factory. The machine is
required 400 hours per annum for repairs and maintenance. Setting-up time of the machine is
156 hours per annum to be treated as productive time. Cost of repairs and maintenance for
whole working life of the machine is `3,50,000. Power used 15 units per hour at a cost of `5
per unit. No power is consumed during maintenance and setting-up time. A chemical
required for operating the machine is `9,880 per annum. Wages of an operator is `4,000 per

month. The operator, devoted one-third of his time to the machine. Annual insurance charges
2 per cent of cost of machine.
Light charges for the department is `2,500 per month, having 48 points in all, out of which
only 8 points are used at this machine. Other indirect expenses are chargeable to the
machine are `6,500 per month.
Answers
Computation of Machine Hour Rate
Running Hours (3,000 – 400) = 2,600 per annum

Particulars Total Amount Rate per hour
` `
Fixed Charges (Standing Charges):
Rs` 4,000 × 12 16,000
Operator’s wages:
3
Insurance: 2% of `25,00,000 50,000
` 2,500 × 12 × 8 5,000
Light charges :
48
Other indirect expenses: `6,500 × 12 78,000
Total Standing charges 1,49,000
s` 1,49,000 57.31
Hourly rate for fixed charges :
2,600
Variable Expenses (Machine Expenses) per hour
` 25,00,000 − ` 1,00,000 92.31
Depreciation :
10 × 2,600
` 3,50,000 13.46
Repairs and Maintenance :
10 × 2,600
Rs` 5 × 15 × 2,444 70.50
Power:
2,600
Rs` 9,880 3.80
Chemical :
2,600
Machine Hour Rate 237.38

Overheads 4.39
Question 31
Explain briefly the conditions when supplementary rates are used.
Answer
When the amount of under absorbed and over absorbed overhead is significant or large, because
of differences due to wrong estimation, then the cost of product needs to be adjusted by using
supplementary rates (under and over absorption/actual overhead) to avoid misleading impression.
Question 32
A company has three production departments (M1, M2 and A1) and three service department,
one of which Engineering service department, servicing the M1 and M2 only. The relevant
informations 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
The annual budgeted overhead cost 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 deptt. is
located in a building owned by the
company. It is valued at `6,000
and is charged into cost at

notional value of 8% per annum.

This cost is additional to the rent
shown above)
− The value of issues of materials to the production departments are in the same
proportion as shown above for the Consumable supplies.
The following data are also available:
Department Book value Area Effective Production Capacity
Machinery (Sq. ft.) H.P. hours % Direct Machine
(`) Labour hour
hour
M1 1,20,000 5,000 50 2,00,000 40,000
M2 90,000 6,000 35 1,50,000 50,000
A1 30,000 8,000 05 3,00,000
Stores 12,000 2,000 −
Engg. Service 36,000 2,500 10
General Service 12,000 1,500 −
Required:
(i) Prepare a overhead analysis sheet, showing the bases of apportionment of overhead to
departments.
(ii) Allocate service department overheads to production department ignoring the
apportionment of service department costs among service departments.
(iii) Calculate suitable overhead absorption rate for the production departments.
(iv) Calculate the overheads to be absorbed by two products, X and Y.
Answer
(i) Summary of Apportionment of Overheads
(`)
Basis of Total Production Deptt. Service Deptt.
Items Apportionment Amount M1 M2 A1 Store Engineering General
Service Service Service
Indirect Allocation 1,25,140 46,520 41,340 16,220 8,200 5,340 7,520
wages given
Consumable Allocation 45,200 12,600 18,200 4,200 2,800 4,200 3,200
stores given
Depreciation Capital value 39,600 15,840 11,880 3,960 1,584 4,752 1,584
of machine

Overheads 4.41
Insurance of Capital value 7,200 2,880 2,160 720 288 864 288
Machine of machine
Insurance 1 3,240 1,080 648 864 216 270 162
on Building to MI
3
Balance area
basis
Power HP Hr% 6,480 3,240 2,268 324 − 648 −
Light Area 5,400 1,080 1,296 1,728 432 540 324
Rent Area 12,675 2,535 3,042 4,056 1,014 1,268 760
Rent of Direct 8% of 480 − − − − − 480
general 6,000
service
_______ ______ ______ ______ ______ ______ ______
Total 2,45,415 85,775 80,834 32,072 14,534 17,882 14,318
(ii) Allocation of service departments overheads

Basis of Production Deptt. Service Deptt.
Service Apportionment M1 M2 A1 Store Engineering General
Deptt. Service Service Service
Store Ratio of
consumable value 5,232 7,558 1,744 (14,534) − −
(126 :182 : 42)
Engineering In Machine hours
service Ratio of M1 and 7,948 9,934 (17,882)
− − −
M2 (4 : 5)
General LHR Basis
service (20 : 15 : 30) 4,406 3,304 6,608 (14,318)
− −
Production
Department
allocated in
(i) _______ 85,775 80,834 32,072
Total 2,45,415 1,03,361 1,01,630 40,424
(iii) Overhead Absorption rate
M1 M2 A1
Total overhead allocated 1,03,361 1,01,630 40,424
Machine hours 40,000 50,000 −
Labour hours − − 3,00,000
Rate per MHR 2.584 2.033
Rate per Direct labour − − 0.135

(iv) Statement showing overhead absorption for Product X and Y

Machine Deptt. Absorption Rate Product X Product Y
Hours Hours
M1 2.584 10 25.84 6 15.50
M2 2.033 4 8.13 14 28.46
A1 0.135 14 1.89 18 2.43
35.86 46.39
Question 33
Explain Blanket overhead rate.
Answer
Blanket overhead rate refers to the computation of one single overhead rate for the entire
factory. This is also known as plantwise or the single overhead rate for the entire factory. It is
determined as follows:
Overhead cost for the entire factory for the period
Blanket overhead rate =
Base for the period (Labour Hours, Machine Hours)
It is useful in companies producing the main product in continue process, e.g. chemical plant,
glass plant etc.
Question 34
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 fortyeight
hours in a week which includes 4 hours set up time. The work is jointly done by operators.
The operators are paid fully for the forty eight hours. In additions they are paid a bonus of 10
per cent of productive time. Costs are reported for this company on the basis of thirteen four-
weekly period.
The company for the purpose of computing machine hour rate includes the direct wages of the
operator and also recoups the factory overheads allocated to the machines. The following
details of factory overheads applicable to the cost centre are available:
Depreciation 10% per annum on original cost of the machine. Original cost of the each
machine is `52,000.
Maintenance and repairs per week per machine is `60.
Consumable stores per week per machine are `75.
Power : 20 units per hour per machine at the rate of 80 paise per unit.
Apportionment to the cost centre : Rent per annum `5,400, Heat and Light per annum
`9,720, and foreman’s salary per annum `12,960.

Overheads 4.43
Required:
(i) Calculate the cost of running one machine for a four week period.
(ii) Calculate machine hour rate.
Answer
Computation of cost of running one machine for a four week period
`
Standing charges Per annum
Rent 5,400
Heat and light 9,720
Forman’s salary 12,960
28,080
`
28,080 × 4 2,880
Total expenses for one machine for four week period =
3 × 13
Wages: Hours per week = 48 and hours for 4 weeks = 48 × 4 = 192
Wages 192 × 20 3,840
Bonus (192 − 16) = 176 × 20 × .10 352
(i) Total standing charges 7,072
Machine Expenses:
`
⎛ 4 ⎞ 1,600
Depreciation = ⎜ 52,000 × 10% × ⎟
⎝ 13 ⎠
Repairs and maintenance = (60 × 4) 240
Consumable stores (75 × 4) 300
Power (192 − 16) = 176 × 20 × .80 2,816
(ii) Total machine expenses 4,956
Total expenses (i) + (ii) 12,028
12,028
Machine hour rate = = 68.34.
176
Question 35
Explain the cost accounting treatment of unsuccessful Research and Development cost.

Answer
Cost of unsuccessful research is treated as factory overhead, provided the expenditure is
normal and is provided in the budget. If it is not budgeted, it is written off to the profit and loss
account. If the research is extended for long time, some failure cost is spread over to
successful research.
Question 36
Discuss the difference between allocation and apportionment of overhead.
Answer
The following are the differences between allocation and apportionment.
1. Allocation costs are directly allocated to cost centre. Overhead which cannot be directly
allocated are apportioned on some suitable basis.
2. Allocation allots whole amount of cost to cost centre or cost unit where as apportionment
allots part of cost to cost centre or cost unit.
3. No basis required for allocation. Apportionment is made on the basis of area, assets
value, number of workers etc.
Question 37
A machinery was purchased from a manufacturer who claimed that his machine could produce
36.5 tonnes in a year consisting of 365 days. Holidays, break-down, etc., were normally
allowed in the factory for 65 days. Sales were expected to be 25 tonnes during the year and
the plant actually produced 25.2 tonnes during the year. You are required to state the
following figures:
(a) rated capacity
(b) practical capacity
(c) normal capacity
(d) actual capacity
Answer
(a) Rated capacity 36.5 tonnes
(Refers to the capacity of a machine
or a plant as indicated by its manufacturer)
(b) Practical capacity 30 tonnes
[Defined as actually utilised capacity of a plant

Overheads 4.45
36.5
i.e. × (365 − 65) tonnes ]
365
(c) Normal capacity 25 tonnes
(It is the capacity of a plant utilized based
on sales expectancy)
(d) Actual capacity 25.2 tonnes
(Refers to the capacity actually achieved)
Question 38
Following information is available for the first and second quarter of the year 2008-09 of ABC
Limited:
Production (in units) Semi-variable cost (`)
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000
You are required to segregate the semi-variable cost and calculate :
(a) Variable cost per unit; and
(b) Total fixed cost.
Answer
Production (Units) Semi Variable Cost (`.)
Quarter I 36,000 2,80,000
Quarter II 42,000 3,10,000
Difference 6,000 30,000
Change in Semi Variable Cost ` 30,000
Variable Cost per Unit = = = ` 5 per units
Change in Pr oduction 6,000 units
Total Fixed Cost = Semi Veriable Cost – (Production x Variable Cost per Unit)
Total fixed cost in Quarter I :
= 2,80,000 – (36,000 × 5)
= 2,80,000 – 1,80,000
= 1,00,000
Total fixed cost in Quarter II :
= 3,10,000 – (42,000 × 5)
= 3,10,000 – 2,10,000 = 1,00,000

Question 39
Distinguish between Fixed overheads and Variable overhead.
Answer
Fixed Overheads v/s Variable Overheads
Fixed overheads are not affected by any variation in the volume of activity, e.g., managerial
remuneration, rent etc. These remain the same from one period to another except when they
are deliberately changed. Fixed overheads are generally variable per unit of output or activity.
On other hand the variable overheads that change in proportion to the change in the volume of
activity or output, e.g., power consumed, consumable stores etc. The variable overheads are
generally constant per unit of output or activity.
Question 40
Explain the treatment of over and under absorption of Overheads in Cost accounting.
Answer
Treatment of over and under absorption of overheads are:-
(i) Writing off to costing P&L A/c:– Small difference between the actual and absorbed amount
should simply be transferred to costing P&L A/c, if difference is large then investigate the
causes and after that abnormal loss shall be transferred to costing P&L A/c.
(ii) Use of supplementary Rate: Under this method the balance of under and over absorbed
overheads may be charged to cost of W.I.P. , finished stock and cost of sales
proportionately with the help of supplementary rate of overhead.
(iii) Carry Forward to Subsequent Year: Difference should be carried forward in the
expectation that next year the position will be automatically corrected. This would really
mean that costing data of two years would be wrong.
Question 41
Write short notes on treatment of under-absorbed and over-absorbed overheads in Cost
Accounting.
Answer
Treatment of Under-absorbed & Over-absorbed Overheads in Cost Accounting
Overheads are usually applied to production on the basis of a pre-determined rate. The actual
overhead rate will rarely coincide with the pre-determined overhead rate due to different
spending pattern and activity level.
Such over or under absorption as arrived at under different situations may also be termed as
overhead variance. The amount of over-absorption being represented by a credit balance in

Overheads 4.47
the account and conversely, the amount of under absorption, being a debit balance. If such
balances are small, they should be transferred to costing Profit & Loss A/c.
Where, however the difference is large and due to wrong estimation, it would be desirable to
adjust the cost of products manufactured, as otherwise the cost figures would convey a
misleading impression. Such adjustments usually take the form of supplementary rates.
Question 42
What are the methods of re-apportionment of service department expenses over the
production departments? Discuss.
Answer
Methods of re-apportionment of service department expenses over the production
departments
(i) Direct re-distribution method.
(ii) Step method or non-reciprocal method.
(iii) Reciprocal Service method
Direct re-distribution Method: Service department costs under this method are apportioned
over the production departments only, ignoring services rendered by one service department
to another. The basis of apportionment could be no. of workers. H.P of machines.
Step Method or Non-Reciprocal Method
This method gives cognizance to the service rendered by service department to another
service department. Therefore, as compared to previous method, this method is more
complicated because a sequence of apportionments has to be selected here. The sequence
here begins with the department that renders service to the maximum number of other service
departments.
Production Department Service Department
P1 P P3 S1 S2 S3
Reciprocal Service Method

This method recognises the fact that where there are two or more service departments they
may render service to each other and, there these inter-departmental services are to be given
due weight while re-distributing the expenses of service department.
The methods available for dealing with reciprocal services are:
• Simultaneous equation method

• Repeated distribution method

• Trial & Error method.
Question 43
You are given the following information of the three machines of a manufacturing department
of X Ltd.:
Preliminary estimates of expenses
(per annum)
Total
Machines
A B C
(`) (`) (`) (`)
Depreciation 20,000 7,500 7,500 5,000
Spare parts 10,000 4,000 4,000 2,000
Power 40,000
Consumable stores 8,000 3,000 2,500 2,500
Insurance of machinery 8,000
Indirect labour 20,000
Building maintenance expenses 20,000
Annual interest on capital outlay 50,000 20,000 20,000 10,000
Monthly charge for rent and rates 10,000
Salary of foreman (per month) 20,000
Salary of Attendant (per month) 5,000
(The foreman and the attendant control all the three machines and spend equal time on them.)
The following additional information is also available:
Machines
A B C
Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000
Ratio of K.W. Rating 3 2 3
Floor space (sq. ft.) 40,000 40,000 20,000
There are 12 holidays besides Sundays in the year, of which two were on Saturdays. The
manufacturing department works 8 hours in a day but Saturdays are half days. All machines
work at 90% capacity throughout the year and 2% is reasonable for breakdown.

Overheads 4.49
You are required to :

Calculate predetermined machine hour rates for the above machines after taking into
consideration the following factors:
• An increase of 15% in the price of spare parts.
• An increase of 25% in the consumption of spare parts for machine ‘B’ & ‘C’ only.
20% general increase in wages rates.
Answer
(a) Computation of Machine Hour Rate
Machines
Basis of Total
A B C
apportionment
` ` ` `
(A) Standing
Charges
Insurance Depreciation 8,000 3,000 3,000 2,000
Basis
Indirect Labour Direct Labour 24,000 6,000 9,000 9,000
Building Floor Space 20,000 8,000 8,000 4,000
Maintenance
expenses
Rent and Rates Floor Space 1,20,000 48,000 48,000 24,000
Salary of Equal 2,40,000 80,000 80,000 80,000
foreman
Salary of Equal 60,000 20,000 20,000 20,000
attendant
Total standing 4,72,000 1,65,000 1,68,000 1,39,000
charges
Hourly rate for 84.75 86.29 71.40
standing
charges
(B) Machine
Expenses:
Depreciation Direct 20,000 7,500 7,500 5,000
Spare parts Final 13,225 4,600 5,750 2,875
estimates
Power K.W. rating 40,000 15,000 10,000 15,000
Consumable Direct 8,000 3,000 2,500 2,500
Stores

Total Machine expenses 81,225 30,100 25,750 25,375

Hourly Rate for Machine expenses 15.46 13.23 13.03
Total (A + B) 553,225 1,95,100 1,93,750 1,64,375
Machine Hour rate 100.21 99.52 84.43
Working Notes:
(i) Calculation of effective working hours:
No. of holidays 52 (Sundays) + 12 (other holidays) = 64
Saturday (52 – 2) = 50
No. of days (Work full time) = 365 – 64 – 50 = 251
Hours
Full days work 251 × 8 = 2,008
Half days work 50 × 4 = 200
2,208
Hours
Effective capacity 90% of 2,208 1,987 (Rounded off)
Less: Normal loss of time (Breakdown) 2% 40 (Rounded off)
Effective running hour 1,947
(ii) Amount of spare parts is calculated as under:
A B C
` ` `
Preliminary estimates 4,000 4,000 2,000
Add: Increase in price @ 15% 600 600 300
4,600 4,600 2,300
Add: Increase in consumption @ 25% − 1,150 575
Estimated cost 4,600 5,750 2,875
(iii) Amount of Indirect Labour is calculated as under:
`
Preliminary estimates 20,000
Add: Increase in wages @ 20% 4,000
24,000
(iv) Interest on capital outlay is a financial matter and, therefore it has been excluded
from the cost accounts.

Overheads 4.51
Question 44
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 balance were attributable to increase in overhead cost.
How would unabsorbed overheads be treated in cost accounts?
Answer
(a) Absorbed overheads = Actual Man days x Rate
= 1,50,000 x 50
= ` 75,00,000
Under absorption of overheads = Actual overheads – Absorbed overheads
= 79,00,000 – 75,00,000
= ` 4,00,000
Reasons for under – absorption:
1. Defective Planning 4,00,000 x 60% = `2,40,000
2. Increase in overhead cost 4,00,000 x 40% = `1,60,000
Treatment in Cost Accounts:
(i). The unabsorbed overheads of ` 2,40,000 on account of defective planning to
be treated as abnormal and thus be charged to costing profit & loss account.
(ii) The balance of unabsorbed overheads i.e. ` 1,60,000 be charged as below on
the basis of supplementary overhead absorption rate
Supplementary Rate = ` 1,60,000/(30,000+5,000+50% of 10,000)
= ` 4 per unit
(a) To cost of sales Account = 30,000 x4 = ` 1,20,000
(b) To finished stock account = 5,000 x 4 = ` 20,000
(c) To WIP account = 50% of 10,000 x 4 = ` 20,000
` 1,60,000

EXERCISE
1 (a) Explain with illustrative examples the concept of fixed cost and variable cost.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.

(b) The following are the Maintenance costs incurred in a machine shop per six months with
corresponding machine hours:
Maintenance Costs
Month Machine Hours
Rs.
January 2,000 300
February 2,200 320
March 1,700 270
April 2,400 340
May 1,800 280
June 1,900 290
Total 12,000 1,800
Analyse the Maintenance cost which is semi-variable into fixed and variable element.
Answer Fixed cost (Rs.) 100
2 (a) Explain how departmental overhead rates are arrived at.
(b) Selfhelp Ltd. has gensets and produces its own power. Data for power costs are as follows:-
Horse power Hours Production deptts. Service deptts.

A B X Y
Needed capacity production 10,000 20,000 12,000 8,000
Used during the month of May 8,000 13,000 7,000 6,000
During the month of May costs for generating power amounted to `9,300: of this
`2,500 was considered to be fixed cost. Service Deptt. X renders service to A, B and Y in the ratio
13:6:1, while Y renders service to A and B in the ratio 31:3. Given that the direct labour hours in
Deptts. A and B are 1650 hours and 2175 hours respectively, find the Power Cost per labour hour in
each of these two Deptts.
Answer A B
Power Cost per labour labour (Rs.) 3.00 2.00
3 The level of production activity fluctuates widely in your company from month to month. Because of this, the
incidence of depreciation on unit cost varies considerably. The management decides that you should find
out a suitable method to correct this.
4 What is an idle capacity? What are the costs associated with it? How are these treated in product costs?

Overheads 4.53
5 Explain what is meant by Cost Apportionment and Cost Absorption. Illustrate each with two examples.
Discuss the methods of cost absorption and state which method do you consider to be the best and why
6 State the objectives of codification of overheads. Enumerate with examples the different methods of coding
and suggest a suitable method for a large organization.
7 Explain what do you understand by the terms stores overheads. Cite three example of stores overheads.
Discuss the methods of treatment of stores overhead in cost accounts and state the method which you
consider to be good.
8 In a manufacturing company where costing is done with a view to fix prices, state whether and, if so, to what
extent the following items are includible in cost .
(i) Interest on borrowing
(ii) Bonus and gratuity
(iii) Depreciation on plant and machinery.
9 (a) What do you understand by codification of overheads?
(b) What are the objectives of codification?
(c) List down the various methods of codification (you need not elaborate).

10 How would you deal the following items in the cost accounts of a manufacturing concern?
(a) Research and Development cost
(b) Packing Expenses
(c) Fringe Benefits
Expenses on Removal and Re-erection of Machinery.

11 What do you understand by the term ‘pre-determined rate of recovery of overheads’? What are the bases
that are usually advocated for such pre-determination? How do over –absorption and under-absorption of
overheads arise and how are they disposed off in Cost Accounts?
12 (a) What do you mean by the term under/over absorption of production overhead? How does it arise? How is it
treated in cost account?


(b) In a factory, overhead of a particular department are recovered on the basis of `5 per machine hour.
The total expenses incurred and the actual machine hours for the department for the month of August
were `80,000 and 10,000 hours respectively. Of the amount of `80,000, `15,000 became payable
due to an award of the Labour Court and `5,000 was in respect of expenses of the previous year
booked in the current month (August). Actual production was 40,000 units of which 30,000 units were
sold. On analysing the reasons, it was found that 60% of the under absorbed overhead was due to
defective planning and the rest was attributed to normal cost increase. How would you treat the under
absorbed overhead in the cost accounts?
Answer
1. 60 percent of under absorbed overhead is due to defective planning. This being abnormal, should be
debited to Profit and Loss A/c (60% of `10,000) (`) 6,000
2. Balance 40 percent of under-absorbed overhead should be distributed over, Finished Goods and Cost of
Sales by supplementary rate (40% of `10,000) (`) 4,000
13 (a) Distinguish between allocation, apportionment and absorption of overheads.

(b) A departmental store has several departments. What bases would you recommend for apportioning
the following items of expense to its departments
(1) Fire insurance of Building.
(2) Rent
(3) Delivery Expenses.
(4) Purchase Department Expenses.
(5) Credit Department Expenses.
(6) General Administration Expenses.
(7) Advertisement.
(8) Sales Assistants Salaries.
(9) Personal Department expenses.
(10) Sales Commission
14 Define administration overheads and state briefly the treatment of such overheads in Cost Accounts.
15 Enumerate the arguments for the inclusion of interest on capital in cost accounts.

Overheads 4.55

16 What is ‘Idle Capacity ‘? How should this be treated in cost accounts?
17 Write short notes on Chargeable Expenses
18 What is notional rent of a factory building? Give one reason why it may be included in cost accounts.
19 How would you treat the following in Cost Accounts?
(i) Employee welfare costs
(ii) Research and development costs
(iii) Depreciation
20 Write a note on 'classification', 'allocation' and 'absorption' of overheads. How does it help in controlling
overheads?
21 Explain, how under absorption and over-absorption of overheads are treated in Cost Accounts.
22 X Ltd. having fifteen different types of automatic machines furnishes information as under for 1996-97
(i) Overhead expenses: Factory rent `96,000 (Floor area 80,000 sq.ft.), Heat and gas `45,000 and
supervision `1,20,000.
(ii) Wages of the operator are `48 per day of 8 hours . He attends to one machine when it is under set up
and two machines while they are under operation.
In respect of machine B (one of the above machines) the following particulars are furnished:
(i) Cost of machine Rs 45,000, Life of machine- 10 years and scrap value at the end of its life `5,000
(ii) Annual expenses on special equipment attached to the machine are estimated as `3,000
(iii) Estimated operation time of the machine is 3,600 hours while set up time is 400 hours per annum
(iv) The machine occupies 5,000 sq.ft. of floor area.
(v) Power costs `2 per hour while machine is in operation.
Find out the comprehensive machine hour rate of machine B . Also find out machine costs to be absorbed in
respect of use of machine B on the following two work- orders
Work – order 31 Work order – 32
Machine set up time (Hours) 10 20

Machine operation time (Hours) 90 180

Answer Set up rate Per hour Operational rate Per hour
Comprehensive machine
hour rate per hr. (Rs.) 12 11
Work – order 31 Work order – 32
Total cost (Rs.) 1,110 2,220
243 "The more kilometers you travel with your own vehicle, the cheaper it becomes." Comment briefly on this
statement.
24 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:
Direct Director
Materials Direct Wages Factory Machine
Department Labour
` Overheads ` Hours
` Hour
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 Wages Director Labour Machine Hours

Rs. ` Hour
Machining 1,200 240 60 180

Assembly 600 360 120 30
Packing 300 60 40 –
The factory adds 30% on the factory cost to cover administration and selling overheads and profit.
Required:
(i) Calculate the overhead absorption rate as per the current policy of the company and determine the
selling price of the Job No. CW 7083.
(ii) Suggest any suitable alternative method(s) of absorption of the factory overheads and calculate the
overhead recovery rates based on the method(s) so recommended by you.

Overheads 4.57
(iii) Determine the selling price of Job CW 7083 based on the overhead application rates calculated in (ii)
above.
(iv) Calculate the departmentwise and total under or over recovery of overheads based on the company's
current policy and the method(s) recommended by you.
Answer (i) Overhead absorption rate = 125% of Direct wages
(ii) Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material.
(iii) Selling Price(Rs.) 4,989.40
25 (a) Why is the use of an overhead absorption rate based on direct labour hours generally preferable to a direct
wages percentage rate for a labour intensive operation?
(b) B & Co. has recorded the following data in the two most recent periods:
Total cost of production Volume of production

` (Units)
14,600 800
19,400 1,200
What is the best estimate of the firm's fixed costs per period?
Answer Fixed cost = `5,000

(c) In a manufacturing unit overhead was recovered at a pre-determined rate of Rs.20 per labour-hour.
The total factory overhead incurred and the labour-hours actually worked were Rs.45,00,000 and
2,00,000 labour-hours respectively. During this period 30,000 units were sold. At the end of the period
5,000 units were held in stock while there was no opening stock of finished goods. Similarly, though
there was no stock of uncompleted units at the beginning of the period, at the end of the period there
were 10,000 uncompleted units which may be reckoned at 50% complete.
On analysing the reasons, it was found that 60% of the unabsorbed over-heads were due to defective
planning and rest were attributable to increase in overhead costs.
How would unabsorbed overheads be treated in cost accounts?
Answer Balance of unabsorbed overheads due to increase in overhead costs.
(Rs.) 2,00,000
Supplementary overhead absorption rate `5/- per unit
26 A company is making a study of the relative profitability of the two products – A and B. In addition to direct
costs, indirect selling and distribution costs to be allocated between the two products are as under:
`
Insurance charges for inventory (finished) 78,000
Storage costs 1,40,000

Packing and forwarding charges 7,20,000

Salesmen salaries 8,50,000
Invoicing costs 4,50,000
Other details are
Product A Product B
Selling price per unit (`) 500 1,000
Cost per unit (exclusive of indirect selling and distribution costs) (`) 300 600
Annual sales in units 10,000 8,000
Average inventory (units) 1,000 800
Number of invoices 2,500 2,000
One unit of product A requires a storage space twice as much as product B. The cost to packing and
forwarding one unit is the same for both the products. Salesmen are paid salary plus commission @ 5% on
sales and equal amount of efforts are put forth on the sales of each of the product.
Required
(i) Set-up a schedule showing the apportionment of the indirect selling and distribution costs between
the two products.
(ii) Prepare a statement showing the relative profitability of the two products
Answer
Products A. B
` `
Profit 5,45,000 17,67,000
27 SWEAT DREAMS Ltd. uses a historical cost system and absorbs overheads on the basis of predetermined
rate. The following data are available for the year ended 31st March, 1997.
`
Manufacturing overheads
Amount actually spent 1,70,000
Amount absorbed 1,50,000
Cost of goods sold 3,36,000
Stock of finished goods 96,000
Works-in-progress 48,000
Using two methods of disposal of under-absorbed overheads show the implication on the profits of the
company under each method.
Answer According to first method, the total unabsorbed overhead amount of `20,000 will be written off to
Costing Profit & Loss Account. The use of this method will reduce the profits of the concern by `20,000 for
the period.
According to second method, a supplementary rate may be used to adjust the overhead cost of each cost
unit. The use of this method would reduce the profit of the concern by `14,000.

Overheads 4.59
28 A company has three production departments and two service departments. Distribution summary of
overheads is as follows:
Production Departments
A `13,600
B `14,700
C `12,800
Service Departments
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
X Deptt. 40% 30% 20% – 10%
Y Deptt. 30% 30% 20% 20% –
Apportion the cost of Service Departments by using the Repeated Distribution method.
Answer Production Departments
A B C
` ` `
Total of the apportionment Statement 18,712 18,833 15,555
29 A factory manufactures only one product in one quality and size. The owner of the factory states that he has
a sound system of financial accounting which can provide him with unit cost information and as such he
does not need a cost accounting system. State your arguments to convince him the need to introduce a cost
accounting system.
Answer Refer to ‘Chapter No. 4.i.e. Overheads’ of Study Material.
30 Ventilators Ltd. wants to stabilize its production throughout the year. The approaches recommended are:
(a) Maintain production at an even pace throughout the year, and get the off-season production stored on
the premises.
(b) Maintain production at an even pace but offer dealers a special discount for off-season purchases.
(c) Extend special terms to dealers, but maintain prices at levels that will enable regular movement of
goods throughout the year.
Discuss the relative merits and disadvantages of above proposals.
31 Treatment of Interest paid in Cost Account.
32 Soloproducts Ltd. Manufactures and sells a single product and has estimated a sales revenue of `126 lakhs
this year based on a 20% profit on selling price. Each unit of the product requires 3 lbs of material P and 1½

lbs of material Q for manufacture as well as a processing time of 7 hours in the Machine Shop and 2½
hours in the Assembly Section. Overheads are absorbed at a blanket rate of 33-1/3% on Direct Labour. The
factory works 5 days of 8 hours a week in a normal 52 weeks a year. On an average statutory holidays,
leave and absenteeism and idle time amount to 96 hours, 80 hours and 64 hours respectively, in a year.
The other details are as under
Purchase price Material P `6 per lb
Material Q `4 per lb
Comprehensive
Labour rate Machine shop `4 per hour
Assembly `3.20 per hour
No. of Employees Machine shop 600
Assembly 180
Finished Goods Material P Material Q
Opening stock 20,000 units 54,000 lbs 33,000 lbs
Closing stock (Estimated) 25,000 units 30,000 lbs 66,000 lbs
You are required to calculate:
(a) The number of units of the product proposed to be sold.
(b) Purchased to be made of materials P and Q during the year in Rupees.
(c) Capacity utilization of machine shop and Assembly section, along with your comments.
Answer (a) Number of units of the product proposed to be sold 1,40,000 Units
(b) P (Rs.) 24,66,000
Q (Rs.) 10,02,000
(c) Machine shop Assembly Section
Capacity utilization 91.94% 109.45%
33 In a factory following the job costing Method, an abstract from the work in process as at 30th September was
prepared as under:
Job No. Material Director Labour Factory overheads Applied
` ` `
115 1,325 400 hours 800 640
118 810 250 hours 500 400
120 765 300 hours 475 380
2,900 1,775 1,420
Material used in October were as follows :
Material requisition Job Cost
No. No. `
54 118 300

Overheads 4.61
55 118 425
56 118 515
57 120 665
58 121 910
59 124 720
3,535
A summary of Labour Hours deployed during October is as under:
Job no Number of Hours
Shop A Shop B
115 25 25
118 90 30
120 75 10
121 65 —
124 20 10
275 75
Indirect Labour:
Waiting for material 20 10
Machine Breakdown 10 5
Indle time 5 6
Overtime Premium 6 5
316 101
A shop credit slip was issued in October that material issued under Requisition No. 54 was returned back to
stores as being not suitable. A material Transfer Note issued in October indicated that material issued under
requisition No.55 for job 118 was directed to job 124.
The hourly rate in shop A per labour hour is `3 per hour while at shop B, it is `2 per hour. The Factory
Overhead is applied at the same rate as in September. Jobs 115, 118 and 120 were completed in October.
You are asked to compute the factory cost of the completed jobs. It is the practice of the management to put
a 10% on the factory cost to cover administration and selling overheads and invoice the job to the customer
on a total cost plus 20% basis. What would be the invoice price of these three jobs?
Answer Job No. 115 118 120
Factory cost (`) 2,990 ,819 2,726
Invoice price (`) 3,946.80 3,721.08 3.598.32
34 Modern manufacturers Ltd. Have three production department P1, P2 and P3 and two Service Departments
S1 and S2 the details pertaining to which are as under:-
P1 P2 P3 S1 S2
Direct Wages (`) 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

HP of Machines 60 30 50 10 –
Light Points 10 15 20 10 5
Floor space (Sq.Ft.) 2,000 2,500 3,000 2,000 500
The following figures extracted from the Accounting records are relevant:
`
Rent and Rates 5,.000
General Lighting 600
Indirect Wages 1,939
Power 1,500
Depreciation on Machines 10,000
Sundries 9,695
The expenses of the service departments are allocated as under:-
P1 P2 P3 S1 S2
S1 20% 30% 40% – 10%
S2 40% 20% 30% 10% –
Find out the total cost of product X which is processed for manufacture in Departments P1, P2 and P3 for
4,5 and 3 hours respectively, given that its Direct Material cost in `50 Direct Labour cost Rs.30.
Answer P1 P2 P3
Total (`) 8,787.16 8,504.87 11,441.79
Cost of the product 'X' ` 115.13
35 PH Ltd. is a manufacturing company having three production departments, ‘A’ ‘B’ and ‘C’ and two service
departments ‘X’ and ‘y’. The following is the budget for December 1981:
Total A B C X Y
` ` ` ` ` `
Direct Material 1,000 2,000 4,000 2,000 1,000
Direct Wages 5,000 2,000 8,000 1,000 2,000
Factory rent 4,000
Power 2,500
Depreciation 1,000
Other overheads 9,000
Additional information
Area( Sq.ft.) 500 250 500 250 500
Capital Value (`Lacs) of assets 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 or the apportionment of expenses of service departments is as under:

Overheads 4.63
A B C X Y
% % % %. %
Service Dept. ‘X’ 45 15 30 - 10
Service Dept. ‘Y’ 60 35 - 5 -
Required:
(i) A statement showing distribution of overheads to various departments.
(ii) A statement showing re-distribution of service departments expenses to production departments.
Machine hours rates of the production departments ‘A’, ‘B’ and ‘C’.
Answer A B C
Machine hour rate (Rs.) 8.48 3.25 1.88
36 Explain how under and over absorption of overheads are treated in cost accounts.
Answer Refer to ‘Chapter No. 4 i.e. Overheads’ of Study Material
37 A machine shop has 8 identical Drilling Machines manned by 6 operators. The machines cannot be worked
without an operator wholly engaged on it. The original cost of all these 8 machines works out to `8 lakhs.
These particulars are furnished for a 6 month period:-
Normal available hours per month 208
Absenteeism (without pay)- hours 18
Leave (with pay)-hours 20
Normal idle time unavoidable-hours 10
Average rate of wages per day of 8 hours Rs.20
Production Bonus estimated 15% on wages
Value of Power consumed Rs.8,050
Supervision and Indirect Labour `3,300
Lighting and Electricity `1,200
These particulars are for a year:
Repairs and maintenance including consumables 3% on the value of machines.
Insurance `40,000.
Depreciation 10% on original cost.
Other Sundry works expenses `12,000
General Management expenses allocated `54,530
You are required to work out a comprehensive machine hour rate for the Machine Shop.
Answer Machine Hour Rate = `23.87

38 Gemini Enterprises undertakes three different jobs A,B and C.All of them require, the use of a special
machine and also the use of a computer. The computer is hired and the hire charges work out to
`4,20,000/- per annum. The expenses regarding the machine are estimated as follows.
`
Rent for the quarter 17,500
Depreciation per annum 2,00,000
Indirect charges per annum 1,50,000
During the first month of operation the following details were taken from the job register :
Job A B C
Number of hours the machine was used :
(a) Without the use of computer 600 900 –
(b) With the use of the computer 400 600 1,000
You are required to compute the machine hour rate:-
(a) For the firm as a whole for the month when the computer was used and when the computer was not
used.
(b) For the individual jobs A, B and C.
Answer (a) Machine Hour Rate of Gemini Enterprises for the firm as a whole, for a month
(1) When the computer was used `27.50 per hour.
(2) When the computer was not used Rs.10 per hour.
(b) Machine hour rate for the individual jobs.
Job A B C
Machine hour rate `17 `17 `27.50
39 Deccan Manufacturing Ltd. have three departments which are regarded as production departments. Service
departments’ costs are distributed to these production departments using the “Step Ladder Method” of
distribution. Estimates of factory overhead costs to be incurred by each department in the forthcoming year
are as follows. Data required for distribution is also shown against each department:
Department Factory overhead Direct Labour No.of Employees Area in sq. m.
` Hours
Productions
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
Services
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

Overheads 4.65
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 meters
S _ Direct Labour Hours
(a) prepare a schedule showing the distribution of overhead costs of the four service departments to the
three production departments; and
(b) calculate the overhead recovery rate per direct labour hour for each of the three production
departments.
Answer X Y Z
Overhead recovery rate per hour: `75/- Rs.45/- Rs.40/-
40 A Ltd. manufactures two products A and B. The manufacturing division consists of two production
departments P1and P2 and two services S1 and S2.
Budgeted overhead rates are used in the production departments to absorb factory overheads to the
products. The rate of Department P1 is based on direct machine hours, while the rate of Department P2 is
based on direct labour hours. In applying overheads, the pre-determined rates are multiplied by actual
hours.
For allocating the service department costs to production departments, the basis adopted is as follow:
(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 2:1 respectively.
The following budgeted and actual data are available:
Annual profit plan data:
Factory overhead budgeted for the year:
Rs. Rs.
Departments P1 25,50,000 S1 6,00,000
P2 21,75,000 S2 4,50,000
Budgeted output in units:
Product A– 50,000; B – 30,000.
Budgeted raw material cost per unit:
Product A – `120 ; Product B –`150.
Budgeted time required for production per unit:
Department P1: Product A: 1.5 machine hours

Product B: 1.0 machine hour

Department P2: Product A: 2 Direct labour hours
Product B: 2.5 Direct labour hours
Average wage rates budgeted in Department P2 are: Product A –Rs72 per hour
and Product B – `75 per hour.
All materials are used in Department P1 only.
Actual data (for the month of July,1993)
Units actually produced: Product A: 4,000 units
Product B: 3,000 units
– Actual direct machine hours worked in Department P1
On product A – 6,100 hours, Product B-4,150 hours.
– Actual direct labour hours worked in Department P2
On product A – 8,200 hours, Product B-7,400 hours.
Cost actually incurred:
Product A Product B
Raw materials: `4,89,000 `4,56,000
Wages: `5,91,900 `5,52,000
` `
Overheads: Department P1 `231,000 S1 `60,000
P2 `2,04,000 S2 `48,000
(i) Compute the predetermined overhead rate for each production department.
(ii) Prepare a performance report for July. 1993 that will reflect the budgeted costs and actual costs.
Answer P1 P2
Budgeted machine hour rate `30 `15
41 In a manufacturing unit, factory overhead was recovered at a pre- determined rate of
`25 per man – day. The total factory overhead expenses incurred and the man-days actually worked were
`41.50 lakhs and 1.5 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 Accounts?
Answer Treatment of Unabsorbed Overheads in Cost Accounts

Overheads 4.67
(i) The unabsorbed overheads of `2,40,000 due to defective planning to be treated as abnormal and
therefore be charged to Costing Profit and Loss Accounts.
(ii) The balance unabsorbed overheads of `1,60,000 be charged to production i.e. 40,000 units at the
supplementary overhead absorption rate i.e. `4/- per unit .
42 A company has two production departments and two service departments. The data relating to a period are as
under:
Production Department Service Department

PD1 PD2 SD1 SD2
Direct materials (`) 80,000 40,000 10,000 20,000
Direct wages (`) 95,000 50,000 20,000 10,000
Overheads (`) 80,000 50,000 30,000 20,000
Power requirement at normal capacity operations (Kwh) 20,000 35,000 12,500 17,500
During Power Consumption during the period (Kwh) 13,000 23,000 10,250 10,000
The power requirement of these departments are met by a power generation plant. The said plant incurred
an expenditure, which is not included above of `1,21,875 out of which a sum of `84,375 was variable and
the rest fixed.
After apportionment of power generation plant costs to the four departments, the service department
overheads are to be redistributed on the following bases:
PD1 PD2 SD1 SD2
SD1 (`) 50% 40% --- 10%
SD2 (`) 60% 20% 20% ---
(i) Apportion the power generation plant costs to the four departments.
(ii) Re-apportion service department cost to production departments.
(iii) Calculate the overhead rates per direct labour hour of production departments, given that the direct
wage rates of PD1 and PD2 are `5 and `4 per hour respectively.
Answer PD1 PD2
Overhead rate per 10.87 12.43
Direct labour hour (`)
43 A machine was purchased January 1,1990, for 5 lakhs. The total cost of all machinery inclusive of the new
machine was `75 lakhs. The following further particulars are available:
Expected life of the machine 10 years.
Scrap value at the end of ten years `5,000.
Repairs and maintenance for the machine during the year `2,000 Expected number of working hours of the
machine per year, 4,000 hours Insurance premium annually for all the machines `4,500

Electricity consumption for the machine per hour (@ 75 paise per unit) 25 units.
Area occupied by the machine 100 sq.ft.
Area occupied by other machine 1,500 sq.ft.
Rent per month of the department `800.
Lighting charges for 20 points for the whole department, out of which three points are for the machine `120
per month.
Compute the machine hour rate for the new machine on the basis of the data given above.
Machine hour rate (`) 31.904
44 An engine manufacturing company has two production departments: (i) Snow mobile engine and (ii) Boat
engine and two service departments: (i) Maintenance and (ii) Factory office. Budgeted cost data and
relevant cost drivers are as follows:
Departmental costs: `
Snow mobile engine 6,00,000
Boat engine 17,00,000
Factory office 3,00,000
Maintenance 2,40,000
Cost drivers:
Factory office department: No. of employees
Snow mobile engine department 1,080 employees
Boat engine department 270 employees
Maintenance department 150 employees
1,500 employees
Maintenance department: No. of work orders
Snow mobile engine department 570 orders
Boat engine department 190 orders
Factory office department 40 orders
800 orders
Required:
(i) Compute the cost driver allocation percentage and then use these percentage to allocate the service
department costs by using direct method.
(ii) Compute the cost driver allocation percentage and then use these percentage to allocate the service
department costs by using non-reciprocal method/step method.
Answer
(i) Cost Driver Allocation percentage Percent used
Factory office dept.:
Snowmobile engine 80%

Overheads 4.69
Boat engine 20%

Maintenance dept:
Boat engine 25%
(ii) Cost Driver Allocation percentage Percent used
Factory office dept.:
Boat engine 18%
Maintenance dept 10%
Maintenance dept:
Boat engine 25%
45 RST Ltd. has two production departments: Machining and Finishing. There are three service departments:
Human Resource (HR), Maintenance and Design. The budgeted costs in these service departments are as
follows:
HR Maintenance Design
` ` `
Variable 1,00,000 1,60,000 1,00,000
Fixed 4,00,000 3,00,000 6,00,000
5,00,000 4,60,000 7,00,000
The usage of these Service Departments’ output during the year just completed is as follows:
Provision of Service Output (in hours of service)
Providers of Service
Users of Service HR Maintenance Design
HR − − −
Maintenance 500 − −
Design 500 500 −
Machining 4,000 3,500 4,500
Finishing 5,000 4,000 1,500
Total 10,000 8,000 6,000
Required:
(i) Use the direct method to re-apportion RST Ltd.’s service department cost to its production
departments.
(ii) Determine the proper sequence to use in re-apportioning the firm’s service department cost by step-
down method.
(iii) Use the step-down method to reapportion the firm’s service department cost.
Answer The proper sequence for apportionment of service department overheads is

First HR
Second Maintenance
Third Design
The sequence has been laid down based on service provided.
46 Two service departments, A and B, show expenses of `5,000 and `8,000 respectively. 1/10 expenses of
department A are chargeable to department B, whereas 1/4 of the expenses of the latter are chargeable to
department A. Ascertain the overheads of the departments to be apportioned to production departments of
the two departments.
Answer `7,180 and `8,718
47 Three machines A, B and C are in use, involving the undermentioned expenditure for a period:
A `639; B `697; C `951.
The machines sometimes require the use of a crane also for which `570 has to be spent. The number of
hours for the machines are:
A B C
With the use of crane 160 130 480
Without the use of crane 428 577
Calculate the rates for recovery of overheads.
Answer `1.09, ` 0.99, `1.98 plus ` 0.74 when crane is used.
48 The actual figures relating to production for a period in a factory were as follows:
Material used `5,00,000
Direct labour (Total 1,20,000) `4,00,000
Factory expenses `3,00,000
Machine hours totaled 1,00,000
A job requires `20,000 in material, and 4,000 hours of labour @ `3 per hour (on the average) of which
2,800 were machine hours. Ascertain the cost of the job using different methods of absorbing overheads.
Answer `44,000, `41,000, `42,667, `42,000 and `40,400 respectively on the basis of materials, labour,
prime cost, productive labour hours and machine hours.
49 Suppose in the factory mentioned in Question 3, administrative expenses total `2,50,000 and assume 1/5 of
goods produced remained unsold. What is the value that should be put on inventory with alternative
treatments of administrative expenses?
Answer `2,90,000 and `2,40,000.
50 The products of a factory pass through two departments, though the output emerging from the first
department is also saleable. The direct labour in the two processes per period is `60,000 and `40,000 and
the indirect expenses are `45,000 and `40,000. The rate for recovery of the overheads is 85%. Do you
think the method followed is proper?
Answer There should be separate rates for the two departments.

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4

BASIC CONCEPTS AND FORMULAE

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© The Institute of Chartered Accountants of India

b) Pre-determined overhead rate: This rate is determined in advance by

Budgeted overhead for the period

3. Blanket Overhead Rate =

Overhead allocated / apportioned to each Deptt.

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Change in amount of exp ense

6. Direct cost of service departments should be apportioned to production departments,

© The Institute of Chartered Accountants of India

Simultaneous equation method

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© The Institute of Chartered Accountants of India

Overhead costs for the entire factory

Multiple overhead rate

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

(ii) Ranking of support departments based on

(By using step-down allocation method)

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administrative (6:4:–:–3) 3,26,530

© The Institute of Chartered Accountants of India

Statement showing the allocation of support

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(ii) Activity based costing method.

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(ii) Statement showing overhead cost per unit

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

96,000 + 42,000 F + 96,000 A + 42,000 FA = 1,41,000

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Variable cost 2,40,000 1,60,000 4,00,000

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Accounting treatment for selling and distribution expenses

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Less: 'Written off' obsolete stores `45,000

Work-in-progress control A/c Dr. ` 5,000

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© The Institute of Chartered Accountants of India

General Lighting 1,000

© The Institute of Chartered Accountants of India

Machine hour rate of overheads 40.00 140.00

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

***Overhead to be absorbed by cost of goods sold ` 60,640

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Secondary Distribution Summary

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Expenses of previous year booked in current year `10,000

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© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

or 150x + 30x = 14,000 – 6,800

Maximum production capacity = 5,20,000 units per annum