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Accounting for Overhead | Direct Distribution Method | Problems and Solutions

Arjun EP

Published on: January 11, 2022

Accounting for Overhead | Direct Distribution Method | Secondary Distribution

Secondary Distribution

The process of redistributing the cost of service departments among production departments is known as secondary distribution.

Here, the cost of service department means the apportioned overheads plus direct materials plus direct labour and direct expenses of concerned service department.

Allocation of Overhead | Direct Distribution Method

Under this method, the costs of service department are NOT distributed or apportioned to production department.

Overcharge and under charge is ignored in this method.

According to this method, the rate of overhead equals the total costs of the enterprise expressed as a fraction of the direct material costs.

Rate of overhead = Total overhead costs ÷ Total direct material cost

This method has the serious drawback that values of materials used in different items of manufacture may vary widely.

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

PROBLEM: 1A

CK Corporation has following extracted data for the current year:

Fuel	$80,000	Lighting expenses	$40,000
Repair of plant	$75,000	General overhead	$50,000
Rant and tax	$60,000	Supervision	$30,000
Cafeteria	$25,000	Depreciation (building)	$70,000

Additional information:

Activities	Production		Service
	X	Y	P	Q
DLH	40,000	30,000	10,000	20,000
Machine capacity (Kw)	8	5	3	4
Value of plant ($)	600,000	400,000	200,000	300,000
Space (square meter)	4,000	3,000	2,000	1,000
Light point (No.)	50	30	10	10
No. of workers	40	30	20	10

Required: Overhead distribution sheet

[Answer: Total overhead: X = $176,000; Y = $122,500;

P = $68,000; Q = $63,500]

SOLUTION:

Allocation of Overhead Direct Distribution Sheet

Activities	Base and ratio		Total	Production		Service
				X	Y	P	Q
Fuel	Kw	8:5:3:4 = 20	80,000	32,000	20,000	12,000	16,000
Repair of plant	Value of plant	6:4:2:3 = 15	75,000	30,000	20,000	10,000	15,000
Rant and tax	Space	4:3:2:1 = 10	60,000	24,000	18,000	12,000	6,000
Cafeteria	No. of workers	4:3:2:1 = 10	25,000	10,000	7,500	5,000	2,500
Lighting expenses	Light point	5:3:1:1 = 10	40,000	20,000	12,000	4,000	4,000
General overhead	DLH	4:3:1:2 = 10	50,000	20,000	15,000	5,000	10,000
Supervision	No. of workers	4:3:2:1 = 10	30,000	12,000	9,000	6,000	3,000
Depreciation	Space	4:3:2:1 = 10	70,000	28,000	21,000	14,000	7,000
Total overhead			430,000	176,000	122,500	68,000	63,500

Fuel is distributed in kilowatt

Allocated amount	= Amount x (Ratio ÷ Sum of ratio)
Production X	= $80,000 x 8 ÷ 20	= $32,000
Production Y	= $80,000 x 5 ÷ 20	= $20,000
Service P	= $80,000 x 3 ÷ 20	= $12,000
Service Q	= $80,000 x 4 ÷ 20	= $16,000

Note: The entire amounts related to overhead or ratios are allocated as above method.

Keep in Mind (KIM)

Direct materials and direct wages of production are not recorded in production department.

Direct materials and direct wages of service department are recorded in service department.

Direct materials and direct wages of service department become indirect overhead for production department.

When indirect materials and indirect wages given in the question, they should be written in production department as well service department.

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PROBLEM: 1B TU: 2063 modified

The overheads of MN Factory for the previous month are as follows:

Rent	$8,000	General expenses	$10,000
Salaries	$13,500	Depreciation charged	12% p.a.
Diesel	$16,000

Other information:

Particulars	Boiling Section	Filtering Section	Packaging Section
Indirect material ($)	40,000	20,000	25,000
Indirect wages ($)	20,000	20,000	15,000
Cost of machine ($)	800,000	600,000	400,000
Area used (square feet) .	4,000	2,000	2,000
H.P. of machine	40	30	10
Numbers of workers	40	25	25
Labour hours	5,000	4,000	1,000

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

[Answer: Total overhead = $91,000; $61,750; $52,750;

LHR: $18.20; $15.44 and $52.75]

SOLUTION

Primary Distribution of Overhead

Particulars / expenses	Basis and ratio		Total	Boiling	Filtering	Packaging
Indirect materials	Direct	–	85,000	40,000	20,000	25,000
Indirect wages	Direct	–	55,000	20,000	20,000	15,000
Rent	Area/Space	2:1:1 = 4	8,000	4,000	2,000	2,000
Diesel	HP	4:3:1 = 8	16,000	8,000	6,000	2,000
Salaries	No. of workers	8:5:5 = 18	13,500	6,000	3,750	3,750
General expenses	Labour hours	5:4:1 = 10	10,000	5,000	4,000	1,000
Depreciation	Cost @ 1%.	monthly	18,000	8,000	6,000	4,000
Total overhead			205,500	91,000	61,750	52,750
Labour hours			–	5,000	4,000	1,000
LHR = Total overhead ÷ Labour hours			–	18.20	15.44	52.75

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

PROBLEM: 1C TU: 2064 modified

The picture of the three production departments of EP Manufacturing Company the last month are as follows:

Particulars	X	Y	Z
Machine value ($)	400,000	400,000	200,000
Sales value ($)	600,000	400,000	400,000
Machines operating hours	8,000	5,000	5,000
Material consumed (kg)	40,000	30,000	30,000
Number of workers	60	50	50
Depreciation per year	20%	15%	12%

The following expenses were incurred for that month:

Wages office expenses	$32,000	Cafeteria overheads	$24,000
Selling and distribution expenses	$42,000	Power for the machine	$36,000
Store overheads	$20,000

Required: (a) Total overhead; (b) Per machine operating hours

[Answer: Total overhead = $143,000; $105,500; $69,500;

MHR: X =$17.88; Y = $21.10; Z = $13.90]

SOLUTION

Allocation of Overhead Direct Distribution Sheet

Particulars / expenses	Basis and ratio		Total	Departments
				X	Y	Z
Wage office expenses	No. of workers	6:5:5 = 16	32,000	12,000	10,000	10,000
S&D expenses	Sales value	3:2:2 = 7	42,000	18,000	12,000	12,000
Store overhead	Materials consumed	4:3:3 = 10	20,000	8,000	6,000	6,000
Cafeteria overhead	No. of workers	6:5:5 = 16	24,000	9,000	7,500	7,500
Power for machine	MH	8:5:5 = 18	36,000	16,000	10,000	10,000
Depreciation	Given % viz	20%: 15%: 12%	164,000	80,000	60,000	24,000
Total overhead			318,000	143,000	105,500	69,500
Machine hours			–	8,000	5,000	5,000
Machine hour rate = Total overhead ÷ Machine hours			–	17.875	21.10	13.90

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

PROBLEM: 1D TU: 2065 modified

EP Juice Factory incurred the following overhead:

Wages to the store staff	$16,000	Light and heating	$10,000
Canteen foods	$20,000	Insurance premium on machine	$10,000
Rent	$24,000	Diesel	$40,000

The particulars of the operating division of the factory are as follows:

Particulars	Processing	Pressing	Finishing	Store	Canteen
No. of light points	20	15	5	5	5
Space occupied (square meter)	4,000	2,000	1,000	500	500
Machine cost (in thousand $)	100	60	20	10	10
Kilowatt of machine	4	2.5	1.5	1	1
Machine operating hours	1,000	1,000	2,000	1,000	400

Required: (a) Distribution of overhead by using suitable basis; (b) Find out overhead per machine operating hours

[Answer: Total overhead= $37,000; $22,000; $11,000; $23,000; $27,000]

MHR = $37; $22; $5.50; $23; $67.50]

SOLUTION

Allocation of Overhead Direct Distribution Sheet

Activities	Base and ratio		Process	Pressing	Finishing	Store	Canteen
Wages of store staff	Direct	−	–	–	–	16,000	–
Canteen foods	Direct	−	–	–	–	–	20,000
Rent	Space	8:4:2:1:1 = 16	12,000	6,000	3,000	1,500	1,500
Lighting and heating	Points	4:3:1:1:1 = 10	4,000	3,000	1,000	1,000	1,000
Insurance on mach.	Value	10:6:2:1:1 = 20	5,000	3,000	1,000	500	500
Diesel	Kw	4:2.5:1.5:1:1 = 10	16,000	10,000	6,000	4,000	4,000
Total overhead			37,000	22,000	11,000	23,000	27,000
Machine hours			1,000	1,000	2,000	1,000	400
MHR = Total overhead ÷ Machine hour			37	22	5.50	23	67.50

#####

Problems and Answers of Accounting for Overhead

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

PROBLEM: 1A

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

PROBLEM: 1B

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

PROBLEM: 1C

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%