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Accounting for overhead, TU Solution
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.
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.
(1) 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.
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
(2) 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.
(3) Allocation of Overhead | Step Method
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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Allocation of Overhead | Step Method
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2054, Q: 6
A Manufacturing Company has following departments where working 8 hours a day for 25 working days in a month, reporting department’s total cost, allocation of service department cost:
|
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 /₹/Rs) |
13,000 |
2,000 |
5,000 |
6,000 |
|
Power and lighting |
(Rs /₹/Rs) |
1,000 |
300 |
300 |
400 |
|
Rent |
(Rs /₹/Rs) |
5,000 |
|
|
|
|
Welfare |
(Rs /₹/Rs) |
1,000 |
|
|
|
Required: (a) Total overhead; (b) Labour hour rate
[Answer: Total overhead: Service = Rs 3,500; A = Rs 8,000; B = Rs 12,000;
LHR: A = Rs 2.67; B = Rs 2.40; *TLH = No. of worker x 25 days x 8 hours
SOLUTION
Calculation of Total overhead
|
Expenditure head |
Basis and ratio |
Total |
Service |
Production |
||
|
|
|
|
department |
A |
B |
|
|
Supervisor’s salary |
Direct |
|
13,000 |
2,000 |
5,000 |
6,000 |
|
Power and lighting |
Direct |
|
1,000 |
300 |
300 |
400 |
|
Rent |
Space |
20:20:60 |
5,000 |
1,000 |
1,000 |
3,000 |
|
Welfare |
No. of workers |
10:15:25 |
1,000 |
200 |
300 |
500 |
|
Total |
20,000 |
3,500 |
6,600 |
9,900 |
||
|
Allocation service department to PA and PB in 40:60 |
Nil |
(3,500) |
1,400 |
2,100 |
||
|
Total overhead |
20,000 |
Nil |
8,000 |
12,000 |
||
|
Total hours |
– |
|
3,000 |
5,000 |
||
|
Labour hours rate = Total overhead ÷ Total hours |
|
|
Rs 2.67 |
Rs 2.40 |
||
Given and working note:
|
Total labour hours |
= No. of workers x 8 hours x 25 days |
|
|
Production department A |
= 15 x 8 x 25 |
= 3,000 hours |
|
Production department B |
= 25 x 8 x 25 |
= 5,000 hours |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2060 II, Q: 8
A Manufacturing Company has three production departments A, B and C and one serve department S. The following information is available regarding various expenses:
|
Rent |
Rs 30,000 |
|
Canteen expenses |
Rs 3,000 |
|
Indirect wages |
Rs 11,000 |
|
Depreciation on machinery . |
Rs 20,000 |
|
Power |
Rs 15,000 |
|
Electricity |
Rs 6,000 |
The following further details are available:
|
Departments |
A |
B |
C |
S |
|
Direct wages (Rs) |
20,000 |
15,000 |
15,000 |
5,000 |
|
Floor area (square meter) |
4,000 |
3,000 |
2,000 |
1,000 |
|
Light points |
9 |
7 |
8 |
6 |
|
Cost of machine (Rs) |
100,000 |
50,000 |
40,000 |
10,000 |
|
Horse power ratio |
4 |
3 |
2 |
1 |
|
Number of workers |
50 |
50 |
40 |
10 |
Service rendered by the service department to production department A, B and C is in the ratio of 2:2:1
Required: Statement showing the overhead distribution
[Answer: A = Rs 39,960; B = Rs 29,060; C = Rs 20,980; Service Rs 12,900 in 2:2:1
*Direct wages is written only in service department
SOLUTION
Statement Showing the Overhead Distribution
|
Particulars |
Basis and ratio |
Total |
Productions |
Service |
|||
|
|
|
|
A |
B |
C |
|
|
|
Direct wages |
Direct |
|
5,000 |
– |
– |
– |
5,000 |
|
Rent |
Space/area |
4:3:2:1 = 10 |
30,000 |
12,000 |
9,000 |
6,000 |
3,000 |
|
Indirect wages |
Direct wages |
4:3:3:1 = 11 |
11,000 |
4,000 |
3,000 |
3,000 |
1,000 |
|
Power |
HP |
4:3:2:1 = 10 |
15,000 |
6,000 |
4,500 |
3,000 |
1,500 |
|
Canteen expenses |
No. of workers |
5:5:4:1 = 15 |
3,000 |
1,000 |
1,000 |
800 |
200 |
|
Depn on machine |
Cost of mach. |
10:5:4:1 = 20 |
20,000 |
10,000 |
5,000 |
4,000 |
1,000 |
|
Electricity |
Light point |
9:7:8:6 = 30 |
6,000 |
1,800 |
1,400 |
1,600 |
1,200 |
|
Total overhead |
90,000 |
34,800 |
23,900 |
18,400 |
12,900 |
||
|
Service rendered to production Rs 12,900 in 2:2:1 |
Nil |
5,160 |
5,160 |
2,580 |
(12,900) |
||
|
Total overhead |
90,000 |
39,960 |
29,060 |
20,980 |
Nil |
||
######
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######
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2061, Q: 7
In ABC Manufacturing Company there are two production departments P1 and P2 two service departments S1, and S2 following are the particulars of month of 25 working days of 8 hours each.
|
Departments |
P1 |
P2 |
S1 |
S2 |
|
Direct wages (Rs ) |
40,000 |
30,000 |
20,000 |
10,000 |
|
Value of plant (Rs ) |
200,000 |
150,000 |
100,000 |
50,000 |
|
Area (square meter) |
5,000 |
4,000 |
3,000 |
2,000 |
|
Number of light points |
10 |
8 |
7 |
5 |
|
Horse power of plant |
50 |
40 |
30 |
10 |
|
Number of workers |
20 |
25 |
30 |
15 |
Total expenses of service departments S1 and S2 are apportioned in the ratio of 3:2 to departments P1 and P2 respectively. The expenses for the month were:
|
Indirect wages |
Rs 20,000 |
|
Rent |
Rs 28,000 |
|
Power |
Rs 10,400 |
|
Depreciation on plant |
Rs 5,000 |
|
Lighting |
Rs 6,000 |
|
|
|
Required: (a) Overhead distribution statements; (b) Labour hour rate for each of the production department
[Answer: Service S1 = Rs 38,400 and S2 = Rs 18,300 in 3:2
Total overhead: P1 = Rs 57,860; P2 = Rs 41,540; LHR: P1= Rs 14.47; P2 = Rs 8.31]
SOLUTION:
Note: Direct wages is written only in service department
Statement Showing the Overhead Distribution
|
Particulars |
Basis and ratio |
Total |
Productions |
Service |
|||
|
|
|
|
P1 |
P2 |
S1 |
S2 |
|
|
Direct wages |
Direct |
– |
30,000 |
– |
– |
20,000 |
10,000 |
|
Indirect wages |
Direct wages |
4:3:2:1 = 10 |
20,000 |
8,000 |
6,000 |
4,000 |
2,000 |
|
Lighting |
Light point |
10:8:7:5 = 30 |
6,000 |
2,000 |
1,600 |
1,400 |
1,000 |
|
Power |
Horse Power |
5:4:3:1 = 13 |
10,400 |
4,000 |
3,200 |
2,400 |
800 |
|
Rent |
Area/m2 |
5:4:3:2 = 14 |
28,000 |
10,000 |
8,000 |
6,000 |
4,000 |
|
Depreciation |
Value of mach. |
4:3:2:1 = 10 |
5,000 |
2,000 |
1,500 |
1,000 |
500 |
|
Total |
99,400 |
26,000 |
20,300 |
34,800 |
18,300 |
||
|
Service rendered of S1 to P1 and P2 in 3:2 |
Nil |
20,880 |
13,920 |
(34,800) |
– |
||
|
Service rendered of S2 to P1 and P2 in 3:2 |
Nil |
10,980 |
7,320 |
– |
(18,300) |
||
|
Total overhead |
99,400 |
57,860 |
41,540 |
Nil |
Nil |
||
|
Labour hours |
– |
4,000 |
5,000 |
– |
– |
||
|
LHR = Total overhead ÷ Labour hours |
– |
Rs 14.47 |
Rs 8.31 |
|
|
||
Given and working note:
|
Total labour hours |
= No. of workers x 8 hours x 25 days |
|
|
Production P1 |
= 20 x 8 x 25 |
= 4,000 hours |
|
Production P2 |
= 25 x 8 x 25 |
= 5,000 hours |
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2061, II, Q: 7 Or
The extracts out of the expenditure related to machine are given below (amount in Rs /₹/Rs):
Miscellaneous overhead related to machine Rs 12,000
Maintenance of plant Rs 40,000
Rent Rs 28,000
Power Rs 48,000
The operating positions of assembly finishing and store units are provided below (amount in Rs /₹/Rs):
|
|
Assembly unit |
Finishing unit |
Store unit |
|
Cost of plant in Rs |
400,000 |
300,000 |
100,000 |
|
Machine hour in operation |
32,000 |
20,000 |
8,000 |
|
Space covered in (square meter) |
8,000 |
5,000 |
1,000 |
Required: (1) Primary distribution of overheads
(2) Total overhead after re-apportioning the cost of store in the ratio of 1:1; (3) Overhead per machine hour
[Answer: (1) Primary overhead = Rs 68,000; Rs 45,000 and Rs 15,000;
(2) Total overhead = Rs 75,500 and Rs 52,500; (3) MHR = Rs 2.36 and Rs 2.63]
SOLUTION
Primary Distribution of Overhead
|
Particulars / expenses |
Basis and ratio |
Total |
Assembly |
Finishing |
Store |
|
|
Miscellaneous expenses |
MH |
8:5:2 = 15 |
12,000 |
6,400 |
4,000 |
1,600 |
|
Maintenance of plant |
Cost of plant |
4:3:1 = 8 |
40,000 |
20,000 |
15,000 |
5,000 |
|
Rent |
Space |
8:5:1 = 14 |
28,000 |
16,000 |
10,000 |
2,000 |
|
Power |
MH |
8:5:2 = 15 |
48,000 |
25,600 |
16,000 |
6,400 |
|
Primary distribution of overhead |
128,000 |
68,000 |
45,000 |
15,000 |
||
|
Store’s amount transfer to assembly and finishing in 1:1 |
Nil |
7,500 |
7,500 |
(15,000) |
||
|
Total overhead |
128,000 |
Rs 75,500 |
Rs 52,500 |
Nil |
||
|
Machine hours |
– |
32,000 |
32,000 |
– |
||
|
Machine hours rate = Total overhead ÷ Machine hour |
– |
Rs 2.36 |
Rs 2.63 |
– |
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2062, Q: 7
The expenses of Apparel Garment Factory are given below: (amount in Rs /₹/Rs)
Welfare and cafeteria Rs 60,000
Fuel Rs 75,000
Rent and lighting Rs 30,000
Insurance and tax of properties Rs 25,000
The other necessary particulars are as follows: (amount in Rs /₹/Rs)
|
Particulars |
Processing I |
Processing II |
Service unit |
|
Number of staff |
20 |
15 |
5 |
|
Area used in square meter |
3,500 |
2,000 |
500 |
|
Value of properties |
10,00,000 |
8,00,000 |
2,00,000 |
|
Machine hours |
16,000 |
9,000 |
— |
The service unit has provided service to processing unit I and unit II In the ratio of 3.2
Required: (a) Overhead distribution summary; (b) Overhead per machine hour after apportioning the cost of service unit
[Answer: Total overhead: Service = Rs 12,500 in 3:2;
PI = Rs 115,500 and P II = Rs 74,500; MHR: PI = Rs 7.22 and PII = Rs 8.28]
SOLUTION
Overhead Distribution Summary
|
Particulars / expenses |
Basis and ratio |
Total |
Processing |
Service |
||
|
|
|
|
1 |
2 |
|
|
|
Welfare and cafeteria |
No. of staff |
4:3:1 = 8 |
60,000 |
30,000 |
22,500 |
7,500 |
|
Fuel |
Mach. Hours |
16:9 = 25 |
75,000 |
48,000 |
27,000 |
– |
|
Rent and lighting |
Area/m2 |
7:4:1 = 12 |
30,000 |
17,500 |
10,000 |
2,500 |
|
Interest and tax |
Value of property |
5:4:1 = 10 |
25,000 |
12,500 |
10,000 |
2,500 |
|
Total |
190,000 |
108,000 |
69,500 |
12,500 |
||
|
Service amount transfer to P1 and P2 in 3:2 |
Nil |
7,500 |
5,000 |
(12,500) |
||
|
Total overhead |
Rs 190,000 |
Rs 115,500 |
Rs 74,500 |
Nil |
||
|
Machine hours |
– |
16,000 |
9,000 |
– |
||
|
Machine hours rate = Total overhead ÷ Machine hour |
– |
Rs 7.22 |
Rs 8.28 |
– |
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2069, Q: 8
The expenditures are extracted from the book of A Factory are as under:
|
Motive power |
Rs 20,000 |
Depreciation |
Rs 30,000 |
|
Lighting power |
Rs 7,000 |
Repairs and maintenance |
Rs 6,000 |
|
Amenities to staff |
Rs 20,000 |
Rent |
Rs 32,000 |
The factory has three production departments (PD) and one service department (SD).
The operating positions of three departments are provided below:
|
|
PD1 |
PD2 |
PD3 |
SD |
|
Light points |
10 |
15 |
5 |
5 |
|
No. of employees |
100 |
150 |
100 |
50 |
|
Areas occupied in square meter |
400 |
600 |
500 |
100 |
|
Electricity (kW) |
4,000 |
3,000 |
2,000 |
1,000 |
|
Assets value |
Rs 140,000 |
Rs 60,000 |
Rs 60,000 |
Rs 20,000 |
|
Machine operating hours |
5,000 |
3,000 |
3,500 |
– |
|
Service rendered by service department |
50% |
20% |
30% |
– |
Required: (a) Overhead analyses sheet by showing total overhead rate per hour
[Answer: Total overhead: PD1 = Rs 44,359; PD2 = Rs 39,965; PD3 = Rs 32,676;
Service department = Rs 9,500 rendered in in 50%: 20%: 30%]
SOLUTION:
Statement Showing the Overhead Distribution
|
Particulars |
Basis and ratio |
Total |
Productions Department |
Service |
|||
|
|
|
|
PD1 |
PD2 |
PD3 |
SD |
|
|
Motive power |
kW |
4:3:2:1 = 10 |
20,000 |
8,000 |
6,000 |
4,000 |
2,000 |
|
Lighting power |
Light points |
2:3:1:1 = 7 |
7,000 |
2,000 |
3,000 |
1,000 |
1,000 |
|
Amenities to staff |
No. of employees |
2:3:2:1 = 8 |
20,000 |
5,000 |
7,500 |
5,000 |
2,500 |
|
Depreciation |
Assets value |
14:6:6:2 = 28 |
30,000 |
14,000 |
8,000 |
8,000 |
2,000 |
|
Repairs and maint. |
MH |
50:30:35 = 115 |
6,000 |
2,609 |
1,565 |
1,826 |
0 |
|
Rent |
Areas occupied |
4:6:5:1 = 16 |
32,000 |
8,000 |
12,000 |
10,000 |
2,000 |
|
Total |
115,000 |
39,609 |
38,065 |
29,826 |
9,500 |
||
|
Service rendered of SD to PD1, PD2, PD3 in 50%: 20%: 30% |
0 |
4,750 |
1,900 |
2,850 |
(9,500) |
||
|
Total overhead |
Rs 150,000 |
Rs 44,359 |
Rs 39,965 |
Rs 32,676 |
0 |
||
|
Machine hours |
|
5,000 |
3,000 |
3,500 |
|
||
|
MHR = Total overhead ÷ Machine hours |
|
Rs 8.87 |
Rs 13.32 |
Rs 8.76 |
|
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2072, Old, Q: 8
The overhead expenditures of A Manufacturing Company extracted from its records are given below:
|
Repairs |
Rs 5,000 |
Power |
Rs 4,000 |
|
Supervision |
Rs 10,000 |
Rent |
Rs 12,000 |
|
Light |
Rs 6,000 |
Depreciation |
Rs 15,000 |
The company has three production departments namely X, Y and Z and one service department (SD). The other details of departments are as under:
|
Particulars |
PDX |
PDY |
PDZ |
SD |
|
Assets value |
Rs 20,000 |
Rs 10,000 |
Rs 10,000 |
Rs 10,000 |
|
No. of workers |
10 |
20 |
10 |
10 |
|
Area in square meter |
200 |
100 |
100 |
200 |
|
Horse power (HP) of machine |
500 |
200 |
100 |
200 |
|
Machine operating hours |
4,000 |
2,000 |
2,000 |
– |
|
Service rendered by service department |
40% |
30% |
30% |
– |
Required: (a) Apportionment overhead cost to the department; (b) Overhead rate per machine hour
[Answer: Total: X = Rs 18,000; Y = Rs 11,800; Z = Rs 9,400; S = Rs 12,800;
Total overhead: X = Rs 23,120; Y = Rs 15,640; Z = Rs 13,240;
MHR: X= Rs 5.78; Y = Rs 7.82; Z = Rs 6.62]
SOLUTION:
Statement Showing the Overhead Distribution
|
Particulars |
Basis and ratio |
Total |
Productions Department |
Service |
|||
|
|
|
|
PDX |
PDY |
PDZ |
SD |
|
|
Repairs |
Assets value |
2:1:1:1 |
5,000 |
2,000 |
1,000 |
1,000 |
1,000 |
|
Supervision |
No. of workers |
1:2:1:1 |
10,000 |
2,000 |
4,000 |
2,000 |
2,000 |
|
Light |
Area |
2:1:1:2 |
6,000 |
2,000 |
1,000 |
1,000 |
2,000 |
|
Power |
HP |
5:2:1:2 |
4,000 |
2,000 |
800 |
400 |
800 |
|
Rent |
Area |
2:1:1:2 |
12,000 |
4,000 |
2,000 |
2,000 |
4,000 |
|
Depreciation |
Assets value |
2:1:1:1 |
15,000 |
6,000 |
3,000 |
3,000 |
3,000 |
|
Total |
53,000 |
18,000 |
11,800 |
9,400 |
12,800 |
||
|
Service rendered of SD to PD1, PD2, PD3 in 40%: 30%: 30% |
Nil |
5,120 |
3,840 |
3,840 |
(12,800) |
||
|
Total overhead |
Rs 53,000 |
Rs 23,120 |
Rs 15,640 |
Rs 13,240 |
Nil |
||
|
Machine hours |
|
4,000 |
2,000 |
2,000 |
|
||
|
MHR = Total overhead ÷ Machine hours |
|
Rs 5.78 |
Rs 7.82 |
Rs 6.62 |
|
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2072, Q: 11
XYZ Manufacturing Company having three production departments namely A, B and C and two service departments X and Y. The operating condition of the departments are as given below:
|
Particulars |
Production Departments |
Service Departments |
|||
|
|
A |
B |
C |
X |
Y |
|
Direct materials (Rs) |
2,000 |
3,000 |
4,000 |
2,500 |
1,500 |
|
Direct wages (Rs) |
6,000 |
4,000 |
3,000 |
1,600 |
2,500 |
|
Area in square meter |
400 |
300 |
500 |
300 |
500 |
|
Capital in value of assets (Rs in Lakhs) |
30 |
40 |
15 |
5 |
10 |
|
Light points |
20 |
20 |
30 |
10 |
10 |
|
Service rendered by service departments |
40% |
30% |
30% |
– |
– |
|
Machine hours |
100 |
120 |
110 |
– |
– |
The overhead extracted from the book of the company are as follows:
Building rent Rs 12,000
Depreciation Rs 10,000
Store overhead Rs 26,000
Lighting Rs 2,700
Required: (a) A statement showing overheads distribution to productions and service departments
(b) Machine hour rate of the production departments
[Answer: Total: A = Rs 10,000; B = Rs 12,400; C= Rs 13,400; X = Rs 11,600; Y = Rs 11,300;
Total overhead: A = Rs 19,160; B = Rs 19,270; C= Rs 20,270;
MHR: A= Rs 191.60; B = Rs 160.58; C = Rs 184.27]
SOLUTION:
Statement Showing the Overhead Distribution
|
Particulars |
Basis and ratio |
Total |
Productions Departments |
Services |
||||
|
|
|
|
A |
B |
C |
X |
Y |
|
|
Direct materials |
Direct |
|
4,000 |
|
|
|
2,500 |
1,500 |
|
Direct wages |
Direct |
|
4,100 |
|
|
|
1,600 |
2,500 |
|
Building rent |
Area |
4: 3: 5: 3: 5 |
12,000 |
2,400 |
1,800 |
3,000 |
1,800 |
3,000 |
|
Depreciation |
Value of assets |
30: 40: 15: 5: 10 |
10,000 |
3,000 |
4,000 |
1,500 |
500 |
1,000 |
|
Store overhead |
Direct materials |
2: 3: 4: 2.5: 1.5 |
26,000 |
4,000 |
6,000 |
8,000 |
5,000 |
3,000 |
|
Lighting |
Light points |
2: 2: 3: 1: 1 |
2,700 |
600 |
600 |
900 |
300 |
300 |
|
Total |
58,700 |
10,000 |
12,400 |
13,400 |
11,600 |
11,300 |
||
|
Service rendered in 40%: 30%: 30% |
Nil |
4,640 |
3,480 |
3,480 |
(11,600) |
Nil |
||
|
Service rendered in 40%: 30%: 30% |
Nil |
4,520 |
3,390 |
3,390 |
Nil |
(11,300) |
||
|
Total overhead |
Rs 58,700 |
Rs 19,160 |
Rs 19,270 |
Rs 20,270 |
|
|
||
|
Machine hours |
|
100 |
120 |
110 |
|
|
||
|
MHR = Total overhead ÷ Machine hours |
|
Rs 191.60 |
Rs 160.58 |
Rs 184.27 |
|
|
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2073, Q: 11
Ratna Company Ltd is a factory with three production departments P, Q, R and two service departments X and Y
Overhead for the period are as follows:
|
Electric light |
Rs 6,400 |
Power |
Rs 20,000 |
|
Salary |
Rs 34,000 |
Depreciation |
Rs 26,000 |
|
Factory rent |
Rs 23,000 |
General overhead |
Rs 17,000 |
Other information is available:
|
Particulars |
Production Departments |
Service Departments |
|||
|
|
P |
Q |
R |
X |
Y |
|
Direct materials (Rs) |
60,000 |
40,000 |
30,000 |
20,000 |
20,000 |
|
Direct labour (Rs) |
30,000 |
20,000 |
15,000 |
10,000 |
10,000 |
|
Machine hours |
5,000 |
4,000 |
2,500 |
– |
– |
|
Light points |
10 |
8 |
8 |
4 |
4 |
|
Horse power (HP) |
20 |
12 |
6 |
1 |
1 |
|
Area in square meter |
400 |
300 |
200 |
100 |
150 |
|
Value of plant (Rs in Lakhs) |
6 |
4 |
3 |
– |
– |
|
Service rendered by service departments |
40% |
30% |
30% |
– |
– |
Required: (a) Overheads cost for each production departments; (b) Machine hour rate of the production departments
[Answer: Total: P = Rs 50,000; Q = Rs 33,600; R= Rs 23,200; X = Rs 39,300; Y = Rs 40,300;
Total overhead: P = Rs 81,840; Q = Rs 57,480; R = Rs 47,080;
MHR: P = Rs 16.37; Q = Rs 14.37; R = Rs 23.54]
SOLUTION:
Statement Showing the Overhead Distribution
|
Particulars |
Basis and ratio |
Total |
Productions Departments |
Services |
||||
|
|
|
|
P |
Q |
R |
X |
Y |
|
|
Direct materials |
Direct |
|
40,000 |
– |
– |
– |
20,000 |
20,000 |
|
Direct labour |
Direct |
|
20,000 |
– |
– |
– |
10,000 |
10,000 |
|
Electric light |
Light points |
10: 8: 8: 4: 4 |
6,400 |
2,000 |
1,600 |
1,200 |
800 |
800 |
|
Salary |
Direct labour |
3: 2: 1.5: 1: 1 |
34,000 |
12,000 |
8,000 |
6,000 |
4,000 |
4,000 |
|
Factory rent |
Area |
4: 3: 2: 1: 1.5 |
23,000 |
8,000 |
6,000 |
4,000 |
2,000 |
3,000 |
|
Power |
Horse power |
20: 12: 6: 1: 1 |
20,000 |
10,000 |
6,000 |
3,000 |
500 |
500 |
|
Depreciation |
Value of assets |
6: 4: 3: 0: 0 |
26,000 |
12,000 |
8,000 |
6,000 |
0 |
0 |
|
General overhead |
Direct labour |
3: 2: 1.5: 1: 1 |
17,000 |
6,000 |
4,000 |
3,000 |
2,000 |
2,000 |
|
Total |
186,000 |
50,000 |
33,600 |
23,200 |
39,300 |
40,300 |
||
|
Service rendered in 40%: 30%: 30% |
Nil |
15,720 |
11,790 |
11,790 |
(39,300) |
Nil |
||
|
Service rendered in 40%: 30%: 30% |
Nil |
16,120 |
12,090 |
12,090 |
Nil |
(40,300) |
||
|
Total overhead |
186,000 |
Rs 81,840 |
Rs 57,480 |
Rs 47,080 |
Nil |
Nil |
||
|
Machine hours |
|
5,000 |
4,000 |
2,500 |
|
|
||
|
MHR = Total overhead ÷ Machine hours |
|
Rs 16.37 |
Rs 14.37 |
Rs 23.54 |
|
|
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2075, Q: 11
Pokhara Factory has three production departments and one service department. Other details are as follows:
|
Particulars |
Production Departments |
Service |
||
|
|
A |
B |
C |
S |
|
Direct materials (Rs) |
20,000 |
30,000 |
20,000 |
5,000 |
|
Direct wages (Rs) |
25,000 |
20,000 |
15,000 |
5,000 |
|
Labour hours |
3,000 |
2,000 |
2,000 |
– |
|
Area in square meter |
400 |
300 |
200 |
100 |
|
Light points |
5 |
3 |
2 |
2 |
|
Horse power (HP) |
8 |
3 |
2 |
1 |
|
Fixed assets value of plant (Rs in Lakhs) |
10 |
5 |
3 |
2 |
|
Service rendered by service departments |
50% |
30% |
20% |
– |
Overhead for the period are as follows:
|
Rent |
Rs 10,000 |
Depreciation |
Rs 20,000 |
|
Electric light |
Rs 12,000 |
General overhead |
Rs 13,000 |
|
Power |
Rs 15,000 |
|
|
Required: (a) Total overheads of each production department; (b) Labour hour rate of the production departments
[Answer: Total: A = Rs 31,500; B = Rs 18,750; C= Rs 12,500; S = Rs 17,250;
Total overhead: A = Rs 40,125; B = Rs 23,925; C = Rs 15,950;
MHR: A = Rs 11.38; B = Rs 11.96; C = Rs 7.98]
SOLUTION:
Statement Showing the Overhead Distribution
|
Particulars |
Basis and ratio |
Total |
Productions Department |
Service |
|||
|
|
|
|
A |
B |
C |
S |
|
|
Direct materials |
Direct |
|
5,000 |
– |
– |
– |
5,000 |
|
Direct wages |
Direct |
|
5,000 |
– |
– |
– |
5,000 |
|
Rent |
Area |
4: 3: 2: 1 |
10,000 |
4,000 |
3,000 |
2,000 |
1,000 |
|
Electric light |
Light points |
5: 3: 2: 2 |
12,000 |
5,000 |
3,000 |
2,000 |
2,000 |
|
Power |
HP |
8: 3: 2: 1 |
15,000 |
7,500 |
3,750 |
2,500 |
1,250 |
|
Depreciation |
Assets value |
10: 5: 3: 2 |
20,000 |
10,000 |
5,000 |
3,000 |
2,000 |
|
General overhead |
Direct wages |
25: 20: 15: 5 |
13,000 |
5,000 |
4,000 |
3,000 |
1,000 |
|
Total |
80,000 |
31,500 |
18,750 |
12,500 |
17,250 |
||
|
Service rendered of A, B, C in 50%: 30%: 20% |
Nil |
8,625 |
5,175 |
3,450 |
(17,250) |
||
|
Total overhead |
Rs 80,000 |
Rs 40,125 |
Rs 23,925 |
Rs 15,950 |
Nil |
||
|
Machine hours |
|
3,000 |
2,000 |
2,000 |
|
||
|
MHR = Total overhead ÷ Machine hours |
|
Rs 13.38 |
Rs 11.96 |
Rs 7.98 |
|
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2075, Q: 11
A Manufacturing has three production departments A, B and C and one service department S.
The following information is available regarding various expenses.
|
Rent |
Rs 30,000 |
Canteen expenses |
Rs 4,000 |
|
Power |
Rs 30,000 |
Indirect wages |
Rs 17,000 |
|
Depreciation |
Rs 25,000 |
Electricity |
Rs 8,000 |
The following further details are available:
|
Particulars |
Production Departments |
Service |
||
|
|
A |
B |
C |
S |
|
Direct materials (Rs) |
40,000 |
40,000 |
30,000 |
10,000 |
|
Direct wages (Rs) |
20,000 |
20,000 |
15,000 |
5,000 |
|
Flour area in square meter |
5,000 |
4,000 |
4,000 |
6,000 |
|
Light points |
10 |
8 |
8 |
6 |
|
Cost of machines (Rs) |
100,000 |
80,000 |
60,000 |
30,000 |
|
Horse power (HP) |
5 |
4 |
4 |
2 |
|
No. of workers |
60 |
60 |
50 |
30 |
Required: Total overheads of each production department
[Answer: Total: A = Rs 37,700; B = Rs 29,200; C= Rs 28,000; S = Rs 29,100;
Total overhead: A = Rs 49,340; B = Rs 40,840; C = Rs 33,820]
SOLUTION:
Statement Showing the Overhead Distribution
|
Particulars |
Basis and ratio |
Total |
Productions Department |
Service |
|||
|
|
|
|
A |
B |
C |
S |
|
|
Direct materials |
Direct |
|
10,000 |
– |
– |
– |
10,000 |
|
Direct wages |
Direct |
|
5,000 |
– |
– |
– |
5,000 |
|
Rent |
Area |
5: 4: 4: 2 |
30,000 |
10,000 |
18,000 |
8,000 |
4,000 |
|
Power |
HP |
5: 4: 4: 2 |
30,000 |
10,000 |
18,000 |
8,000 |
4,000 |
|
Depreciation |
Assets value |
10: 6: 6: 3 |
25,000 |
10,000 |
6,000 |
6,000 |
3,000 |
|
Canteen amenities |
No. of workers |
8: 6: 5: 3 |
4,000 |
1,200 |
1,200 |
1,000 |
600 |
|
Indirect wages |
Direct wages |
4: 4: 3: 1 |
12,000 |
4,000 |
4,000 |
3,000 |
1,000 |
|
Electricity |
Light points |
5: 4: 4: 3 |
8,000 |
2,500 |
2,000 |
2,000 |
1,500 |
|
Total |
124,000 |
37,700 |
29,200 |
28,000 |
29,100 |
||
|
Service rendered to A, B, C in 2: 2: 1 |
Nil |
11,640 |
11,640 |
5,820 |
(29,100) |
||
|
Total overhead |
124,000 |
Rs 49,340 |
Rs 40,840 |
Rs 33,820 |
Nil |
||
|
Machine hours |
|
|
|
|
|
||
|
MHR = Total overhead ÷ Machine hours |
|
|
|
|
|
||
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Accounting for overhead, TU Solution
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.
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.
(1) 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.
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
(2) 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.
(3) Allocation of Overhead | Step Method
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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Allocation of Overhead on Direct Method
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2060 I, Q: 4
The details of cost and other information relating to two productions departments are as under:
|
Power |
Rs 3,000 per month |
Labour welfare |
Rs 1,000 per month |
|
Insurance premium on machinery |
Rs 3,500 per month |
Repairs and maintenance |
Rs 500 per month |
|
Rent |
Rs 3,000 per month |
|
|
|
|
|||
|
Other information |
|||
|
|
Department X |
Department Y |
|
|
Indirect cost per month: |
|
|
|
|
Materials (Rs) |
5,000 |
2,500 |
|
|
Labour (Rs) |
2,000 |
2,000 |
|
|
Value of machinery used (Rs) |
100,000 |
75,000 |
|
|
Number of employees |
60 |
40 |
|
|
Horse power of machinery used |
30 |
20 |
|
|
Area occupancy (square meter) |
75 |
25 |
|
|
Operating machine hour per month |
6,000 |
4,000 |
|
|
Depreciation rate per annum |
12% |
12% |
|
Required: Overhead rate per machine hour of the production department X and Y
[Answer: Total overhead (X) = Rs 14,950; (Y) = Rs 9,300;
MHR (X) = Rs 2.49; (Y) = Rs 2.33]
SOLUTION:
Given and working note:
|
|
Department X |
Department Y |
|
Depreciation |
= 100,000 × 12% × 1/12 = 1,000 |
= 75,000 × 12% × 1/12 = 750 |
Statement Showing Apportionment of Overhead
|
Expenses |
Basis and ratio |
Total |
Departments |
||
|
|
|
|
X |
Y |
|
|
Indirect materials |
Direct |
|
7,500 |
5,000 |
2,500 |
|
Indirect labour |
Direct |
|
4,000 |
2,000 |
2,000 |
|
Power |
Horse power |
30: 20 |
3,000 |
1,800 |
1,200 |
|
Insurance premium |
Value of machinery |
100: 75 |
3,500 |
2,000 |
1,500 |
|
Rent |
Area occupancy |
75: 25 |
3,000 |
2,250 |
750 |
|
Labour welfare |
No. of employees |
60: 40 |
1,000 |
600 |
400 |
|
Repairs and maintenance |
Machine hours |
6: 4 |
500 |
300 |
200 |
|
Depreciation |
Value of machinery |
100: 75 |
1,750 |
1,000 |
750 |
|
Total overhead |
Rs 24,250 |
Rs 14,950 |
Rs 9,300 |
||
|
Total machine hours |
|
6,000 hours |
4,000 hours |
||
|
Machine hours rate = Total overhead ÷ Total machine hours |
|
Rs 2.49 |
Rs 2.33 |
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2063, Q: 8 Or
The overheads of a factory for the previous month are as follows: (amount in Rs /₹/Rs)
|
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 (Rs /₹/Rs) |
40,000 |
20,000 |
25,000 |
|
Indirect wages (Rs /₹/Rs) |
20,000 |
20,000 |
15,000 |
|
Cost of machine (Rs /₹/Rs) |
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 = Rs 91,000; Rs 61,750; Rs 52,750;
LHR: Rs 18.20; Rs 15.44 and Rs 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 |
Rs 205,500 |
Rs 91,000 |
Rs 61,750 |
Rs 52,750 |
||
|
Labour hours |
– |
5,000 |
4,000 |
1,000 |
||
|
LHR = Total overhead ÷ Labour hours |
– |
Rs 18.20 |
Rs 15.44 |
Rs 52.75 |
||
######
|
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|
|
Accounting Equation |
|
|
Journal Entries in Nepali |
|
|
Journal Entries |
|
|
Journal Entry and Ledger |
|
|
Ledger |
|
|
Subsidiary Book |
|
|
Cashbook |
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Trial Balance and Adjusted Trial Balance |
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Bank Reconciliation Statement (BRS) |
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Depreciation |
|
|
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|
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Accounting for Long Lived Assets |
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Analysis of Financial Statement |
|
######
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2064, Q: 8 Or
The picture of the three production departments of the last month are as follows:
|
Particulars |
X |
Y |
Z |
|
Machine value (Rs) |
400,000 |
400,000 |
200,000 |
|
Machines operating hours |
8,000 |
5,000 |
5,000 |
|
Sales value (Rs) |
600,000 |
400,000 |
400,000 |
|
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:
|
Overheads |
Amount |
Store overheads |
20,000 |
|
Wages office expenses |
32,000 |
Cafeteria overheads |
24,000 |
|
Selling and distribution expenses |
42,000 |
Power for the machine |
36,000 |
Required: (a) Total overhead; (b) Per machine operating hours
[Answer: Total overhead = Rs 143,000; Rs 105,500; Rs 69,500;
MHR: X =Rs 17.88; Y = Rs 21.10; Z = Rs 13.90]
SOLUTION
Primary Distribution of Overhead
|
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 |
Rs 318,000 |
Rs 143,000 |
Rs 105,500 |
Rs 69,500 |
||
|
Machine hours |
– |
8,000 |
5,000 |
5,000 |
||
|
Machine hour rate = Total overhead ÷ Machine hours |
– |
Rs 17.88 |
Rs 21.10 |
Rs 13.90 |
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2065, Q: 8
Papaya Juice Factory incurred the following overhead:
|
Overhead |
Amount |
|
Overhead |
Amount |
|
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 Rs) |
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= Rs 37,000; Rs 22,000; Rs 11,000; Rs 23,000; Rs 27,000]
MHR = Rs 37; Rs 22; Rs 5.50; Rs 23; Rs 67.50]
SOLUTION
Distribution of Overhead
|
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 |
Rs 37,000 |
Rs 22,000 |
Rs 11,000 |
Rs 23,000 |
Rs 27,000 |
||
|
Machine hours |
1,000 |
1,000 |
2,000 |
1,000 |
400 |
||
|
MHR = Total overhead ÷ Machine hour |
Rs 37.00 |
Rs 22.00 |
Rs 5.50 |
Rs 23.00 |
67.50 |
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2066, Q:
ABC Manufacturing Concern incurred manufacturing overhead cost for three departments on the following cost pools:
|
Overhead |
Amount |
|
|
|
|
Rent |
36,000 |
|
Fuel |
50,000 |
|
Welfare expenses |
20,000 |
|
General overhead |
40,000 |
The bases for apportionment are:
|
Department |
A |
B |
C |
|
No. of staffs |
20 |
10 |
10 |
|
Machine hours |
5,000 |
3,000 |
2,000 |
|
Space occupied (square feet) |
750 |
1,250 |
7,000 |
Required: (a) Apportionment overhead cost to the departments; (b) Overhead rate per machine hours
[Answer: (a) Rs 58,000; Rs 35,000 and Rs 53,000;
(b) Rs 11.60; Rs 11.67 and Rs 26.50]
SOLUTION
Overhead Distribution Sheet
|
Particulars |
Bases and ratio |
Total |
A |
B |
C |
|
|
Rent |
Space |
3:5:28 = 36 |
36,000 |
3,000 |
5,000 |
28,000 |
|
Welfare expenses |
No. of staffs |
2:1:1 = 4 |
20,000 |
10,000 |
5,000 |
5,000 |
|
Fuel |
MH |
5:3:2 = 10 |
50,000 |
25,000 |
15,000 |
10,000 |
|
General overhead |
No. of staffs |
2:1:1 = 4 |
40,000 |
20,000 |
10,000 |
10,000 |
|
Total overhead |
Rs 146,000 |
Rs 58,000 |
Rs 35,000 |
Rs 53,000 |
||
|
Machine hours |
|
5,000 |
3,000 |
2,000 |
||
|
MHR = Total overhead ÷ MH |
|
Rs 11.60 |
Rs 11.67 |
Rs 26.50 |
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2067, Q: 8
A Manufacturing Company having following production department and service department provides you the information as follows:
|
Particulars |
Production Department |
Service |
|
|
|
PA |
PB |
S |
|
Space occupied in square meter |
400 |
600 |
200 |
|
Machine operating hours |
2,000 |
3,000 |
1,000 |
|
No. of employees |
40 |
30 |
10 |
|
Depreciation per year |
10% |
15% |
10% |
|
Light points |
8 |
6 |
2 |
|
Value of machine |
Rs 100,000 |
Rs 150,000 |
Rs 50,000 |
|
Labour hours worked |
1,800 hours |
1,200 hours |
– |
The following expenses were incurred for all departments:
|
Welfare and canteen expenses |
Rs 20,000 |
|
Rent and rates |
Rs 30,000 |
|
Power cost for the machine |
Rs 42,000 |
|
Lighting heating |
Rs 10,000 |
The service department has provided service to production department A and B in the percentage of 60% and 40% respectively.
Required: (a) Statement showing apportionment of overhead
(b) Overhead per labour hour after apportioning the cost of service department.
[Answer: Total before redistribution = Rs 49,000; Rs 69,750; Rs 20,750;
Total overhead: A = Rs 61,450; B = Rs 78,050;
LHR: A = Rs 34.14; B = Rs 65.04;
SOLUTION
Calculation of Total overhead
|
Expenditure head |
Basis and ratio |
Total |
Department |
Service |
||
|
|
|
|
PA |
PB |
S |
|
|
Welfare expenses |
No. of workers |
40:30:10 |
20,000 |
10,000 |
7,500 |
2,500 |
|
Rent and rates |
Space |
4:6:2 |
30,000 |
10,000 |
15,000 |
5,000 |
|
Lighting heating |
Light points |
8:6:2 |
10,000 |
5,000 |
3,750 |
1,250 |
|
Power cost for machine |
MH |
2:3:1 |
42,000 |
14,000 |
21,000 |
7,000 |
|
Depreciation |
Value |
10% |
37,500 |
10,000 |
22,500 |
5,000 |
|
Total |
139,500 |
49,000 |
69,750 |
20,750 |
||
|
Allocation service department to A and B in 60%:40% |
− |
12,450 |
8,300 |
(20,750) |
||
|
Total overhead |
Rs 139,500 |
Rs 61,450 |
Rs 78,050 |
Nil |
||
|
Total labour hours |
|
1,800 |
1,200 |
|
||
|
Labour hours rate = Total overhead ÷ Total hours |
|
Rs 34.14 |
Rs 65.04 |
|
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2068, Q: 8
A Manufacturing Company having two production departments provides actual cost for a period as follows:
|
Rent of building |
Rs 20,000 |
Insurance of stock |
Rs 13,000 |
|
Supervision on workers |
Rs 15,000 |
Power |
Rs 20,000 |
|
Depreciation o plant |
Rs 13,000 |
|
|
The following information is available in respect of two departments:
|
|
Department A |
Department B |
|
Area in square meter |
2,500 |
1,500 |
|
No. of employees |
30 |
20 |
|
Value of plant (Rs) |
75,000 |
25,000 |
|
Value of stock (Rs) |
14,000 |
12,000 |
|
Working hours |
240 |
240 |
Required: (a) Apportionment of overhead cost to production departments A and B; (b) Overhead per hour
[Answer: (a) A = Rs 46,000; B = Rs 32,000; (b) A= Rs 191.67; B = Rs 133.33]
SOLUTION:
Statement Showing Apportionment of Overhead
|
Expenses |
Basis and ratio |
Total |
Departments |
||
|
|
|
|
A |
B |
|
|
Rent of building |
Area in square meter |
25: 15 |
20,000 |
12,500 |
7,500 |
|
Supervision on workers |
No. of employees |
30: 20 |
15,000 |
9,000 |
6,000 |
|
Depreciation o plant |
Value of plant |
75: 25 |
13,000 |
7,500 |
2,500 |
|
Insurance of stock |
Value of stock |
14: 12 |
13,000 |
7,000 |
6,000 |
|
Power |
Working hours |
24: 24 |
20,000 |
10,000 |
10,000 |
|
Total overhead |
Rs 78,000 |
Rs 46,000 |
Rs 32,000 |
||
|
Total hours |
|
240 hours |
240 hours |
||
|
Overhead hours rate = Total overhead ÷ Total hours |
|
Rs 191.67 |
Rs 133.33 |
||
Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = Br = P = Birr = Currency of your country
TU: 2070, 8 Or
The table given below contains the position of processing divisions:
|
|
I |
II |
III |
|
Space used in square meter |
5,000 |
4,000 |
2,000 |
|
Machines cost (Rs) |
500,000 |
300,000 |
200,000 |
|
Number of employees |
30 |
20 |
20 |
|
Horse power (HP) of machine |
50 |
30 |
20 |
|
Direct labour hours (DLH) |
4,000 |
2,500 |
2,500 |
The overhead incurred during the last month are as follows:
|
Fuel consumed |
Rs 20,000 |
Rent and rate |
Rs 22,000 |
|
Lighting and heating expenses |
Rs 16,500 |
Supervision costs |
Rs 14,000 |
|
Miscellaneous expenses |
Rs 18,000 |
|
|
The rate of depreciation applied on the all the machines is 12% p.a.
Required: Overhead per DLH of each processing division
[Answer: Total overhead: I = Rs 46,500; II = Rs 32,000; III = Rs 22,000;
Per DLH: I = Rs 11.63; II = Rs 12.80; III = Rs 8.60]
SOLUTION:
Overhead Distribution Sheet
|
Particulars |
Bases and ratio |
Total |
I |
II |
III |
|
|
Fuel consumed |
HP |
5:3:2 = 10 |
20,000 |
10,000 |
6,000 |
4,000 |
|
Lighting and heating |
Space |
5:4:2 = 11 |
16,500 |
7,500 |
6,000 |
3,000 |
|
Miscellaneous expenses |
DLH |
4:2.5:2.5 = 9 |
18,000 |
8,000 |
5,000 |
5,000 |
|
Rent and rate |
Space |
5:4:2 = 11 |
22,000 |
10,000 |
8,000 |
4,000 |
|
Supervision costs |
No. of employees |
3:2:2 = 7 |
14,000 |
6,000 |
4,000 |
4,000 |
|
Depreciation |
12% given |
Value × 12% |
10,000 |
5,000 |
3,000 |
2,000 |
|
Total overhead |
Rs 100,500 |
Rs 46,500 |
Rs 32,000 |
Rs 22,000 |
||
|
Direct labour hours |
|
4,000 |
2,500 |
2,500 |
||
|
Per DLH = Total overhead ÷ DLH |
|
Rs 11.63 |
Rs 12.80 |
Rs 8.60 |
||
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Accounting for overhead, TU Solution
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.
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.
(1) 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.
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
(2) 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.
(3) Allocation of Overhead | Step Method
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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|
|
Accounting Equation |
|
|
Journal Entries in Nepali |
|
|
Journal Entries |
|
|
Journal Entry and Ledger |
|
|
Ledger |
|
|
Subsidiary Book |
|
|
Cashbook |
|
|
Trial Balance and Adjusted Trial Balance |
|
|
Bank Reconciliation Statement (BRS) |
|
|
Depreciation |
|
|
|
|
|
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|
|
Financial Accounting and Analysis (All videos) |
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|
Accounting Process |
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|
Accounting for Long Lived Assets |
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|
Analysis of Financial Statement |
|
######
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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