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