Accounting for Overhead | Brief Questions | Descriptive Questions | Analytical Questions
Accounting for overhead exercise problems and answers includes Brief Questions, Descriptive Questions and Analytical Questions
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.
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.
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
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]
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]
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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