It contents numerical problems and solution with clear working notes.
There are production departments and service departments in manufacturing company.
Direct materials and direct labour are NOT recorded in production departments.
But, direct materials and direct labour are recorded in service departments.
There are three methods to calculate machine hour rate and labour hour rate.
They are Absorption of overhead, allocation of overhead in direct method and allocation of overhead in step method.
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.
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.
Generally, following methods are applied in absorption:
Production unit method | Cost per unit of output
Percentage of direct materials cost
Percentage of direct labour cost
Percentage of prime cost
Labour hour rate
Machine hour rate
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.
Under step method of secondary distribution, the costs of service department are distributed or apportioned to production department step by step or one by one.
This redistribution may in percentage or ratio.
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Absorption of Overhead
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2054 Cancelled, Q: 6
XYZ Manufacturing Company has following information related to machinery:
Outlay for machine Rs 50,000 with Rs 5,000 residual value.
Total working hours of the machine 20,000
Setting up time (non-productive) 10% of total machine hours
Power consumption Rs 2 per unit per half hour working.
Repair, maintenance and lubricating oil Rs 9,000 effective total machine hour.
Annual (fixed) lighting expenses Rs 3,600
Machine attendant’s annual salary Rs 32,400
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 = Rs 36,000; FCPU = Rs 36,000 ÷ 3,600 MH = Rs 28
Variable cost = Rs 25,200; VCPU = Rs 7; *Depreciation = Rs 2.5 per hour;
* Net MH = 4,000@90% = 3,600 hours; R&M = Re 0.50; Power = Rs 4 per unit]
SOLUTION
Given and working note:
Machine set up is 10% of operating machine hours; net machine operating hours are 90%.
Net machine working life = 20,000 @90% = 18,000
Net machine working hours = 4,000 @90% = 3,600
Depreciation
= [(PV – BSV) ÷ Life
= (50,000 – 5,000) ÷ 18,000 hours
= Rs 2.50 per hour
Depreciation for the year = 3,600 hours × Rs 2.50 = Rs 9,000
Calculation of Machine Hour Rate
Particulars |
|
Amount |
Per hour |
Fixed/standing charge: |
|
|
|
Lighting expenses |
|
3,600 |
|
Machine attendant’s salary |
|
32,400 |
|
Total [Rs 100,800 ÷ 3,600 MH] |
(A) |
36,000 |
28.00 |
Variable/running charge: |
|
|
|
Repairs and maintenance [(Rs 9,000 ÷ 18,000 hours) × 3,600 hours] |
|
1,800 |
0.50 |
Power consumption [(Rs 2 ÷0.5) × 3,600 hours] |
|
14,400 |
4.00 |
Depreciation |
|
9,000 |
2.50 |
|
(B) |
25,200 |
7.00 |
Total expenses (A+B) |
61,200 |
Rs 35.00 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2055, Q: 11
Everest Engineering Factory has following particular data:
Factory overhead for the month |
Rs 60,000 |
|
Estimated labour hour for the year |
12,000 hours |
|
Direct labour hour for the machine job for one month |
1,000 hours |
|
|
||
The factory also uses a machine. The detailed information of the machine is given below: |
||
Cost of machine |
Rs 130,000 |
|
Life |
10 Years |
|
Residual value after 10 years |
Rs 10,000 |
|
Working hours per year (machinery) |
12,000 hours |
|
Repair charge |
50% of depreciation |
|
Electricity charge per month fixed |
Rs 2,000 |
|
Other fixed charges per month |
Rs 5,000 |
|
Supervisor salary per month |
Rs 3,000 |
|
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 = Rs 71,500; LHR = Rs 71.50; MHR = Rs 71.50]
*Depreciation = Rs 1,000]
SOLUTION
Given and working note:
Depreciation per year
= (PV – BSV) ÷ Life
= (130,000 – 10,000) ÷ 10 years
= Rs 12,000
Depreciation for one month
= Rs 12,000 ÷ 12 month
= Rs 1,000
Labour hours per month
= 12,000 hours ÷ 12 months
= 1,000 hours
Calculation of Total overhead
For one month
Particulars |
Amount |
Factory overhead |
60,000 |
Depreciation |
1,000 |
Repairs (50% of depreciation = 1,000@50%) |
500 |
Electricity charge |
2,000 |
Other fixed charge |
5,000 |
Supervisor’s salary |
3,000 |
Total overhead |
Rs 71,500 |
Labour hours rate (Rs 71,500 ÷ 1,000 hours) |
Rs 71.50 |
Machine hour rate (Rs 71,500 ÷ 1,000 hours) |
Rs 71.50 |
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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2056, Q: 10
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 is:
Overheads |
Amount |
Rent, rates and insurance |
12,000 |
Indirect wages and supervisor cost |
15,000 |
Consumable store |
5,000 |
Lighting and heating |
2,000 |
Hourly repairs and maintenance of cost of machine |
1.60 |
Hourly depreciation charges on machine |
1.20 |
Power consumption 5 unit per hour at Re 0.60 per unit |
Required: (a) Total overhead without separating cost; (b) Overhead rate per labour hour; (c) Overhead rate per machine hour
[Answer: Total overhead = Rs 364,750 LHR = Rs 182.38; MHR = Rs 243.17]
SOLUTION
Given and working note:
Labour hours = 250 Days X 8 Hours = 2,000 Hours
Machine hour = 250 Days X 6 Hours = 1,500 Hours
Calculation of Total Overhead
For one year
Particulars |
Amount |
Rent, rates and insurance |
12,000 |
Indirect wages and supervision cost |
15,000 |
Consumable store |
5,000 |
Lighting and heating |
2,000 |
Repairs and maintenance hourly (1,500 machine hours × Rs 1.60) |
2,400 |
Depreciation hourly (1,500 machine hours × Rs 1.20) |
1,800 |
Power consumption (5 units x 1,500 hours x Re 0.60) |
13,500 |
Total |
Rs 51,700 |
Labour hours rate (Rs 51,700 ÷ 2,000 hours) |
Rs 25.85 |
Machine hour rate (Rs 51,700 ÷ 1,500 hours) |
Rs 34.47 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2057, Q: 10
A department of ABC Factory supplied the following information relating to a job requiring:
Details |
Amount and hours |
Direct materials cost for job |
Rs 12,500 |
Direct labour cost for job |
Rs 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 |
Rs 51,200 |
Consumable store |
Rs 18,300 |
Depreciation and power expenses |
Rs 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 = Rs 96,000; LHR = Rs 8; MHR = Rs 12;
Labour cost = Rs 27,000; Mach cost = Rs 28,200]
SOLUTION
Calculation of Total overhead
Particulars |
Amount |
Indirect wages and supervision charge |
51,200 |
Consumable store |
18,300 |
Depreciation and power expenses |
26,500 |
Total overhead |
Rs 96,000 |
Labour hours rate (Total overhead ÷ TLH or Rs 96,000 ÷ 12,000 hours) |
Rs 8 |
Machine hour rate (Total overhead ÷ TMH or Rs 96,000 ÷ 8,000 hours) |
Rs 12 |
Again,
Cost of order under direct labour hour
Direct materials cost |
12,500 |
Direct labour cost |
8,500 |
Direct labour hours (750 hours x Rs 8) |
+ 6,000 |
|
Rs 27,000 |
Cost of a job order under direct materials hours
Direct materials cost |
12,500 |
Direct labour cost |
8,500 |
Direct machine hours (600 hours x Rs 12) |
+ 7,200 |
|
Rs 28,200 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2058, Q: 6 Or
ABC Manufacturing Company having following production departments provides you the information mentioned as follows (Amount in Rs /₹/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 |
Rs 19,000 |
Rs 11,000 |
Rs 8,000 |
Rent and rate |
Rs 27,000 |
— |
— |
Power expenses |
Rs 36,900 |
— |
— |
Welfare and canteen expenses |
Rs 15,600 |
— |
— |
Other overhead cost |
Rs 4,800 |
Rs 2,800 |
Rs 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) = Rs 55,600; (B) = Rs 47,700;
LHR (A) = Rs 34.75; (B) = Rs 39.75]
SOLUTION:
Statement Showing Apportionment of Overhead
Expenses |
Basis and ratio |
Total |
Departments |
||
|
|
|
A |
B |
|
Depreciation |
Direct |
|
19,000 |
11,000 |
8,000 |
Rent and rates |
Space |
400:500 |
27,000 |
12,000 |
15,000 |
Power expenses |
HP |
100:50 |
36,900 |
24,600 |
12,300 |
Welfare and canteen |
Machine of workers |
50:100 |
15,600 |
5,200 |
10,400 |
Other overhead cost |
Direct |
|
4,800 |
2,800 |
2,000 |
Total overhead |
1,03,300 |
55,600 |
47,700 |
||
Labour hours worked |
– |
1,600 |
1,200 |
||
Labour hours rate = Total overhead ÷ Labour hours worked |
– |
Rs 34.75 |
Rs 39.75 |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2059, Q: 10
The following figures have been extracted from the book of a factory for a certain period:
Direct materials consumed Rs 100,000
Direct wages Rs 200,000
Overhead charged on workshop Rs 50,000
Direct labour hours 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 2,500 hours
Required: Overhead on the basis of: (a) Direct materials; (b) Direct labour hours; (c) Prime cost; (d) Labour hour rate
[Answer: DM = Rs 12,500; DLH = Rs 12,500;
PC = Rs 12,500; LHR = Rs 12,500]
SOLUTION:
Given and working note:
Particulars |
Work shop |
Job |
Direct materials |
100,000 |
25,000 |
Direct wages |
200,000 |
50,000 |
Prime cost |
300,000 |
75,000 |
Add: Factory overhead |
50,000 |
Nil |
Cost of production |
Rs 350,000 |
Rs 75,000 |
Labour hours given |
10,000 hours |
2,500 hours |
Now,
Overhead to the job on the basis of direct materials
= Direct materials of the job x (Factory overhead ÷ Factory direct materials)
= Rs 25,000 x (Rs 50,000 ÷ Rs 100,000)
= Rs 12,500
Overhead to the job on the basis of direct labour hours
= Direct labour of the job x (Factory overhead ÷ Factory direct labour hour)
= Rs 50,000 x (Rs 50,000 ÷ Rs 200,000)
= Rs 12,500
Overhead to the job on the basis of prime cost
= Prime cost of the job x (Factory overhead ÷ Factory prime cost)
= Rs 75,000 x (Rs 50,000 ÷ Rs 300,000)
= Rs 12,500
Overhead to the job on the basis of labour hour rate
= Labour hours to the job x (Factory overhead ÷ Direct labour hours)
= 2,500 hours x (Rs 50,000 ÷ 10,000 hours)
= Rs 12,500
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2071, 8 Or
The following information of A Workshop for the current month is given:
Cost of machine (10 years life) |
Rs 110,000 |
Cost of maintenance |
Rs 6,600 |
Installation charge |
Rs 30,000 |
Salary of the supervisor |
Rs 1,500 |
Scrap value after 10 years |
Rs 20,000 |
Cost of consumable |
Rs 4,800 |
Working hours per year |
12,864 hours |
Electricity charge |
Rs 1,440 |
|
|
Other fixed charges |
Rs 6,000 |
Required: Machine hour rate
[Answer: MHR = Rs 20]
SOLUTION:
Given and working note:
Depreciation per year |
Depreciation per month |
= (PV + Installation – Scrap) ÷ Life |
= Rs 12,000 ÷ 12 months |
= (110,000 + 30,000 – 20,000) ÷ 10 years |
= Rs 1,000 |
= Rs 12,000 |
|
|
Working hours per month = 12,864 hours ÷ 12 = 1,072 |
Calculation of Total Overhead
For one month
Particulars |
Amount |
Cost of maintenance |
6,600 |
Salary of the supervisor |
1,500 |
Cost of consumable |
4,800 |
Electricity charge |
1,440 |
Other fixed charges |
6,000 |
Depreciation |
1,000 |
Total overhead |
Rs 21,440 |
Working hours per month |
1,072 hours |
Machine hour rate (Rs 21,440 ÷ 1,072 hours) |
Rs 20 |
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