Accounting for Overhead | Brief Questions | Descriptive Questions | Analytical Questions

 

 

Accounting for Overhead | Brief Questions | Descriptive Questions | Analytical Questions

 Accounting for overhead exercise problems and answers includes Brief Questions, Descriptive Questions and Analytical Questions

  

 

1. Concept of Overhead

All expenses other than direct expenses and production are overhead.

It is an aggregate of all indirect materials, indirect wages and indirect expenses.

Another name for overhead are on cost, burden cost, indirect expenses, non-productive cost, supplementary cost, logistic support cost and loading cost etc.

 

Definition of overhead

According to Institute of Cost and Management Account (ICMA, London), “Overhead is an aggregate of indirect materials, indirect wages and indirect expenses.”

 

Overheads represent fixed costs and relate to general business functions.

These costs still remain if production is shut down for a short period of time.

Some major overheads are:

Administrative overhead

General business overhead

Research overhead

Transportation overhead

Manufacturing overhead

Marketing overhead 

Selling and promotional overhead etc. 

 

 

2. Apportionment of Overhead | Allocation of Overhead

According to given data of the overhead, some overhead are distributed directly, some in ratio, some in percentage, some in based on other overhead etc.

Generally, there are three methods to apportionment of overhead:

Direct distribution method

Under this method, the costs of service department are distributed or apportioned to production department.

Overcharge and under charge is ignored.

 

Step method

Under this method, the costs of service department are distributed or apportioned production department step by step or one by one.

 

Reciprocal method

When overhead of one service department distributed to other service department; then distributed to production department, it is known reciprocal method.

 

 

 

3. Absorption of Overhead

Absorption means charging or sharing overhead to different cost units.

In other words, charging or sharing overhead to specific product or individual units is known absorption.

 

Definition 

According to ICMA, “The allotment of overhead to cost unit is known as overhead absorption.”

 

Methods of absorption

There are different methods of absorption of overhead; they are:

Production unit method | Cost per unit of output

Under this method, overhead absorption rate is calculated by dividing the overhead cost by number of units produced or expected to be produced.

= Actual overhead ÷ No. of units produced

Or

= Budgeted overhead ÷ No. of units budgeted

 

 

Percentage of direct materials cost

Under this method, overhead is absorbed based on the actual or predetermined absorption rate.

It is calculated by expressing the overhead cost as percentage of direct materials for the same period.

= (Actual overhead ÷ Actual direct materials cost) × 100

Or

= (Budgeted overhead ÷ Budgeted direct materials cost) × 100

 

 

Percentage of direct labour cost

Under this method, overhead absorption rate is calculated by expressing the overhead expense to be absorbed as a percentage of cost of direct labour for the same period.

= (Actual overhead ÷ Actual direct labour cost) × 100

Or

= (Budgeted overhead ÷ Budgeted direct labour cost) × 100

 

 

Percentage of prime cost

This method is a combination of both direct material cost and direct labour cost method.

The overhead absorption is calculated as follows:

= (Actual overhead ÷ Budgeted prime cost) × 100

Or

= (Budgeted overhead ÷ Budgeted prime cost) × 100

 

 

Labour hour rate

Where manpower is used, labour hour rate is applied in absorption of overheads.

The budgeted overhead cost to be absorbed is divided by the budgeted labour hours.

= Actual overhead ÷ Actual labour hours during the period

Or

= Budgeted overhead ÷ Budgeted labour hours during the period

 

 

Machine hour rate

Where automatic and semi-automatic machinery is used, machine hour rate is applied in absorption of overheads.

This is the most scientific method of absorption of factory overheads.

The budgeted overhead cost to be absorbed is divided by the budgeted machine hours.

= Actual overhead ÷ Actual machine hours during the period

Or

= Budgeted overhead ÷ Budgeted machine hours during the period

 

 

Brief Questions | Accounting for Overhead

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

BQ: 1

The following extracted information is given by a manufacturing company:

Canteen expenses	Provident fund	Rent
$18,000	$70,000	$180,000

 

Further details:

Particulars	Production
	A	B	C
Numbers of employees	30	20	10
Direct wages (amount)	300,000	200,000	200,000
Floor space in squire feet	4,000	3,000	2,000

Required: Overhead distribution sheet showing total overhead

[Answer: Total overhead: A = $119,000;

B = $86,000; C = $63,000; 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

BQ: 2

The following extracted information is given by a manufacturing company:

          Store keeping   $/₹/Rs 28,000

          Repairs of machine $/₹/Rs 60,000

Further details:

Particulars	Production		Service
	A	B	S
Indirect wages ($/₹/Rs)	60,000	50,000	30,000
Direct material ($/₹/Rs)	80,000	60,000	–
Value of machine ($/₹/Rs)	500,000	300,000	200,000

Required: Overhead distribution sheet showing total overhead

[Answer: Total overhead: A = $106,000; B = $80,000; S = $42,000; 

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

BQ: 3

ABC Manufacturing Company has three production department and two service department. Other information is:

Annual cost data amount in $/₹/Rs:

Rent and rates	Depreciation	General lighting	Power
25,000	58,500	15,300	30,000

 

Further details:

Particulars	Total	Production			Service
		A	B	C	X	Y
Floor space (square foot)	2,500	500	400	700	500	400
Light point (No.)	90	20	10	30	20	10
Machine horse power	900	300	300	300	–	–
Value of plant ($/₹/Rs)	13,00,000	400,000	300,000	500,000	100,000	–

Required: Overhead distribution sheet showing total overhead

[Answer: Total overhead: A = $36,400; B = $29,200; C = $44,600; 

X = $12,900; Y = $5,700]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

BQ: 4

AK Manufacturing Company has following extracted data:

Estimated production overhead  $580,000

Estimated direct labour hours      20,600 hours

Estimated machine hours   18,500 hours

Calculate rates using: (a) Direct labour hours; (b) Machine hour

[Answer:  (a) $28.16; (b) $31.35;

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

BQ: 5

The following extracted information is given to you:

Activities	Production			Service
	A	B	C	S
Overhead in $/₹/Rs	97,500	169,000	101,750	26,250

Total overhead of service is rendered to production department in 30%, 50% and 20%

Required: Total overhead

[Answer: A = $105,375; B = $182,125; C = $107,000]

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

BQ: 6

The following extracted information is given to you:

Activities	Service	Production
	S	P	Q	R
Overhead in $	80,000	140,000	190,000	110,000

Total overhead of service is rendered to production department in 5:3:2

Labour hours for production P, Q and R is 6,000, 8,000 and 4,000 hours respectively.

Required: Labour hour rate

[Answer: Total overhead (P) $180,000; (Q) $214,000; (R) $126,000;

Labour hour rate (P) $30; (Q) $26.75; (R) $31.50]

 

Descriptive Questions | Accounting for Overhead

ABSORPTION OF OVERHEAD

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

DQ: 1

Everest Engineering Factory has following particular data:

Factory overhead for the month	$60,000
Estimated labour hour for the year	12,000 hours
Direct labour hour for the job for one month	1,500 hours

 

The factory also uses a machine. The detailed information of the machine is given below:

Cost of machine	$130,000
Life	10 Years
Residual value after 10 years	$10,000
Working hours per year (machinery)	12,000 hours
Repair charge	50% of depreciation
Electricity charge per month fixed	$2,000
Other fixed charges per month	$5,000
Supervisor salary per month	$13,000

Required:  (a) Total overhead without separating cost; (b) Overhead rate on the basis of labour hour rate

(c) Overhead rate on the basis of machine hour rate

[Answer:  Total overhead = $81,500; LHR = $54.33; MHR = $81.50]

*Depreciation = $1,000]

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

DQ: 2

Following information regarding cost and the operation of XYZ Manufacturing Company:

Working days during the year reached to 250 days. Workers worked 8 hours a day and the machine was operated for 6 hours a day. Information regarding overhead costs are:

Overheads	Amount
Rent, rates and insurance	120,000
Indirect wages and supervisor cost	150,000
Consumable store	5,000
Lighting and heating	2,000
Hourly repairs and maintenance of cost of machine	4.50
Hourly depreciation charges on machine	4.00
Power consumption 5 unit per hour at $10 per unit

Required: (a) Total overhead without separating cost; (b) Overhead rate per labour hour; (c) Overhead rate per machine hour

[Answer:  Total overhead = $364,750 LHR = $182.38; MHR = $243.17]

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

DQ: 3

A department of ABC Factory supplied the following information relating to a job requiring:

Details	Amount and hours
Direct materials cost for job	$12,500
Direct labour cost for job	$8,500
Direct labour hour for job	750 hours
Machine hour for job	600 hours
The total direct labour hours worked reached	12,000 hours
The total machine hours operated	8,000 hours
The total factory overhead charged to the department includes:
Indirect wages and  supervisor charges	$51,200
Consumable store	$18,300
Depreciation and power expenses	$26,500

Required: (a) Total overhead; (b) Overhead rate per direct labour hour

(c) Overhead rate per machine hour; (d) Cost of a job order under direct labour rate

(e) Cost of a job order under machine hour rate

[Answer: Total overhead = $96,000; LHR = $8; MHR = $12;

Labour cost = $27,000; Mach cost = $28,200]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

DQ: 4

The following figures have been extracted from the book of KD Factory for a certain period:

Direct materials consumed	$/₹/Rs 100,000
Direct wages	$/₹/Rs 200,000
Factory or workshop overhead	$/₹/Rs 50,000
Direct labour hours for workshop	10,000 hours

 

On the job carried out in the work shop during the period, the following were the relevant data:

Direct materials used	$/₹/Rs 25,000
Direct wages	$/₹/Rs 50,000
Direct labour hours for job	2,500 hours

Compute overhead on the basis of:

(a) Cost of production; (b) Direct materials; (c) Direct labour hours; (d) Prime cost; (e) Labour hour rate

[Answer: Cost of production: WS = $350,000; Job = $75,000;

DM = $12,500; DLH = $12,500; PC = $12,500; LHR = $12,500]

*See Problem and Solution: 3F]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

DQ: 5

XYZ Manufacturing Company has following information related to machinery:

Outlay for machine $145,000 with $19,000 residual value.

Total working hours of the machine 20,000

Setting up time (non-productive) 10% of total machine hours

Power consumption $5 per unit per half hour working.

Repair, maintenance and lubricating oil $3 per hour.

Annual (fixed) lighting expenses $3,600

Machine attendant’s annual salary $97,200

Calculate: (a) Total operating expenses by making a systematic classification of costs

(b) Machine hour rate operating for 4,000 total hours during a year.

 [Answer: Fixed cost = $100,800; FCPU = $100,800 ÷ 4,000 @90% = $28

 VCPU = $20; MCPH = 28 + 20 = $48] *Depreciation = $7 per hour]

 

 

ALLOCATION OF OVERHEAD

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

DQ: 6

EP Manufacturing Company has following departments where working 8 hours a day for 25 working days in a month:

Activities		Total	Service Dept	Production
			(Workshop)	A	B
No of workers		50	10	15	25
Space occupied in square feet		100	20	20	60
Service received by production departments (in %)		100	—	40	60
Supervisor’s salary	($/₹/Rs)	13,000	2,000	5,000	6,000
Power	($/₹/Rs)	1,000	300	300	400
Rent	($/₹/Rs)	5,000
Welfare	($/₹/Rs)	1,000

Required: (a) Total overhead; (b) Labour hour rate

[Answer: Total overhead: Service = $3,500; A = $8,000; B = $12,000;

LHR: A = $2.67; B = $2.40; *TLH = No. of worker x 25 days x 8 hours

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

DQ: 7

ABC Manufacturing Company having following production departments provides you the information mentioned as follows (Amount in $/₹/Rs):

Departments	Total	A	B
Space occupied in square feet		400	500
No of workers engaged		50	100
H.P. of machine		100	50
Expenses and charges are:
Depreciation	$19,000	$11,000	$8,000
Rent and rate	$27,000	—	—
Power expenses	$36,900	—	—
Welfare and canteen expenses	$15,600	—	—
Other overhead cost	$4,800	$2,800	$2,000
Labour hours worked	2,800 hours	1,600 hours	1,200 hours

Required: (a) Statement showing apportionment of overhead; (b) Overhead rate per direct labour hour

 [Answer: Total overhead (A) = $55,600; (B) = $47,700;

 LHR (A) = $34.75; (B) = $39.75]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

DQ: 8

The details of overheads and other information relating to two production departments are as under for the current month:

Particulars	Amount		Rent	15,000
Power	5,000		Labour welfare	5,000
Insurance premium on machine	17,500		Repair and maintenance	2,625

 

Other information:

Particulars	Departments
	X	Y
Indirect costs per month:
Materials  in rupees	$25,000	$12,500
Labour in rupees	$10,000	$10,000
Value of the machine used in rupees	$100,000	$75,000
Number of employees	60	40
Horse power of machinery used	30	20
Area occupancy (in square meter)	75	25
Operating machine hour per month	1,000 hours	700 hours
Depreciation rate per annum	12%	12%

 Required: Total overhead and overhead rate per month machine hour for production department X and Y

[Answer: Total overhead: X = $75,750; Y = $47,570;

MHR: X = $75.75 and Y = $68.39]

 

 

Analytical Questions | Accounting for Overhead

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

AQ: 1

ABC Manufacturing Company has three manufacturing departments A, B and C and one service department S. The following figures are available for one month of 25 working days of 8 hours each day:

Expenditure		Total	Service		Departments
			Stemsction Depthe workd75, Rs.8)75,Rs. 80, Rs. 70, Rs. 75, Rs.82and 8 hours respectiely.  per 100 pieces and the wages that woul	A	B	C
Direct material	[$/₹/Rs]	28,000	4,000	10,000	8,000	6,000
Direct labour	[$/₹/Rs]	14,000	2,000	5,000	4,000	3,000
Indirect material (50% of direct material)
Indirect labour (100% of indirect material)
Power and lighting	[$/₹/Rs]	22,000	4,800	4,000	6,000	7,200
Supervisor’s salary	[$/₹/Rs]	40,000
Rent	[$/₹/Rs]	10,000
Welfare	[$/₹/Rs]	12,000
Others		24,000	4000	4000	8000	8000
Supervisor’s salary			20%	30%	30%	20%
Number of workers			5	15	20	10
Floor area in square feet			500	600	800	600
Service rendered by service department			–	50%	30%	20%

You are required to calculate: (a) Total overhead; (b) Total labour hours; (c) Labour hour rate

[Answer:  Overhead: Service = $30,000;

Total overhead: A= $51,000; B = 51,000; C = 40,000;

Labour hours: A = 3,000; B = 4,000; C = 2,000;

Labour hour rate: A = $17; B = $12.50; C = $20]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

AQ: 2

Beena Manufacturing Company has following data:

Items	Production			Service Departments		Totals
	A	B	C	Office	Workshop
Direct materials          [$/₹/Rs]	300,000	300,000	400,000	–	–	10,00,000
Direct wages                [$/₹/Rs]	200,000	250,000	300,000	–	–	7,50,000
Indirect materials       [$/₹/Rs]	20,000	30,000	30,000	10,000	20,000	1,10,000
Indirect wages             [$/₹/Rs]	30,000	30,000	40,000	100,000	50,000	2,50,000
Area in squire meters	200	250	300	150	250	1,250
Value of machinery	300,000	350,000	250,000	–	150,000	10,50,000
H.P. of machinery	15	20	25	–	5	65
Machine worked hours	10,000	20,000	15,000	–	5,000	50,000

 

General expenses [$/₹/Rs]:

Rent	115,000	Power	39,000
Insurance	10,500	Light	11,500
Depreciation	10% of value

 

Redistribution of service department’s overhead on the following basis:

Department	Basis of apportionment
Office	Direct wages
Workshop	Machine hours

Required: (a) Total overhead showing details; (b) Machine hour rate

[Answer: (a)   A = $177,950; B = $227,950; C = $235,100]

(b) A = $17.80; B = $11.40; C = $15.67

*Office expenses $126,500 x 3:3:4; Workshop $117,000 x 2:4:3]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

AQ: 3

The extracted data is given below related to labour for current year:

Factory expenses	$250,000
Canteen subsidy	$70,000
Welfare to staff	$60,000
Supervision expenses	$120,000
Accidental Insurance of staff	$150 per staff
General expenses	$140,000

There are 50 workers in the factory. It runs on 8 hours per day for 250 days in a year.

Required: (a) Total overhead; (b) Total labour hours; (c) Labour hour rate

 [Answer: (a) $647,500; (b) 100,000 LH; (c) $6.48]

 

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

AQ: 4

Narayani Saw Mills (P) Ltd has following date:

Purchase value of machine	$500,000
Installation expenses	$50,000
Scrap value after 10 years	$30,000
Area occupied by machine	100 square feet
Annual expenses:
Repair and maintenance	$20,000
Expected working hours	3,000 hours
Insurance premium	$5,000
Electricity consume	5 units @ $10 per unit
Rent (for 500 square feet)	$60,000
Operator salary	$8,000 per month
Supervisor expenses	$60,000

Supervisor devotes 1/6 time for machine rest for other work.

Required: (a) Total overhead; (b) Machine hour rate

 [Answer: (a) TO = $345,000; (b) MHR = $115;

Depn = $52,000; Rent = 60,000 x 100/500 = $12,000]

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country 

AQ: 5

PK Metal Works has following data:

Budgeted figures for rate:
Estimated factory/production overhead for the year	$289,390
Estimated direct labour hour for the year	67,300 hours
Estimated direct labour cost for the year	$490,000
Estimated machine hours for the year	25,250 hours
Data for income statement:
Direct material consumed	$42,000
Direct wages (DLH cost)	$45,000
Direct labour hours	3,000 hours
Machine hours	2,000 hours

Required:      (a) Overhead rate based on labour hours, labour cost and machine hours

(b) Income statement based on labour hours, labour cost and machine hours

 [Answer:  (a) $4.30; 59.06%; $11.46; 

(b) $99,990; $113,577; $109,920]

 

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