OVERHEADS: APPORTIONMENT & ABSORPTIONOVERHEADS: APPORTIONMENT & ABSORPTION

LEARNING OBJECTIVES:LEARNING OBJECTIVES:

AFTER THIS LECTURE, YOU SHOULD BE ABLE TO AFTER THIS LECTURE, YOU SHOULD BE ABLE TO UNDERSTANDUNDERSTAND

Meaning of overheadsMeaning of overheads

Distinction between overheads & direct expensesDistinction between overheads & direct expenses

Collection of overheadsCollection of overheads

Meaning of overhead Allocation, Apportionment & Meaning of overhead Allocation, Apportionment & AbsorptionAbsorption

Basis of overhead ApportionmentBasis of overhead Apportionment

Criteria for overhead Allocation & ApportionmentCriteria for overhead Allocation & Apportionment

Apportionment of service department costsApportionment of service department costs

Methods of overhead AbsorptionMethods of overhead Absorption

Blanket & Departmental Absorption RatesBlanket & Departmental Absorption Rates

Over & Under Absorption of overheadsOver & Under Absorption of overheads

Treatment of Idle Capacity CostTreatment of Idle Capacity Cost

Impact of depreciation on Product Costs Impact of depreciation on Product Costs

CIMA defines overhead cost as ‘the total cost of indirect CIMA defines overhead cost as ‘the total cost of indirect materials, indirect labour & indirect expenses”materials, indirect labour & indirect expenses”

Overheads are the indirect costs which can not be Overheads are the indirect costs which can not be allocated to any specific job, process because they are allocated to any specific job, process because they are not capable of being identify/ depreciation /ed with any not capable of being identify/ depreciation /ed with any specific job or process . Overheads include cost of indirect specific job or process . Overheads include cost of indirect materials, indirect labor & indirect expense which can’t materials, indirect labor & indirect expense which can’t be conveniently charged to any product , process or cost be conveniently charged to any product , process or cost unit etc, costs like rent / rates / supervision / maintenance unit etc, costs like rent / rates / supervision / maintenance expenses / cleaning materials etc.expenses / cleaning materials etc.

DIRECT EXPENSES: are directly allocable to job , process, DIRECT EXPENSES: are directly allocable to job , process, service unit , cost unit or cost centre --- an expense service unit , cost unit or cost centre --- an expense whether a direct or overhead will depend upon the whether a direct or overhead will depend upon the special circumstancesspecial circumstances

ACCOUNTING OF OVERHEADSACCOUNTING OF OVERHEADS

Important steps involved in accounting of overheads are Important steps involved in accounting of overheads are as under:as under:

Classification & codification of overheadsClassification & codification of overheads

Collection of overheadsCollection of overheads

Primary & Secondary distribution of overheadsPrimary & Secondary distribution of overheads

Allocation / Apportionment / AbsorptionAllocation / Apportionment / Absorption

For ascertainment of cost & profitability of each unit of For ascertainment of cost & profitability of each unit of production it is necessary for the effective analysis of production it is necessary for the effective analysis of costs. The direct material & direct labor are easily costs. The direct material & direct labor are easily attributed to cost objects. But charging of overheads to attributed to cost objects. But charging of overheads to cost objects causes a major problem. To overcome this cost objects causes a major problem. To overcome this problem proper codification & classification is necessaryproblem proper codification & classification is necessary

CLASSIFICATION: is the process of arranging items into CLASSIFICATION: is the process of arranging items into groups groups

According to their degree of similarity. Accurate According to their degree of similarity. Accurate classification wil help in cost analysis & control systemclassification wil help in cost analysis & control system

ELEMENTWISE CLASSIFICATIONELEMENTWISE CLASSIFICATION

Indirect Materials: the cost incurred on materials the Indirect Materials: the cost incurred on materials the material required in the production process to further the material required in the production process to further the manufacturing process which can’t be traced into the end manufacturing process which can’t be traced into the end product e.g., gums & threads used in binding books.product e.g., gums & threads used in binding books.

Lubricants, cotton waste, oil, grease, small cost materials Lubricants, cotton waste, oil, grease, small cost materials

INDIRECT LABOR:INDIRECT LABOR:

Consists of all salaries & wages paid to staff for the Consists of all salaries & wages paid to staff for the purpose of carrying out tasks incidental to goods or purpose of carrying out tasks incidental to goods or services provided which will not form part of salaries & services provided which will not form part of salaries & wages in working directly on the product i.e., salaries & wages in working directly on the product i.e., salaries & wages paid to store staff, watch & ward, time keeperswages paid to store staff, watch & ward, time keepers

INDIRECT EXPENSES:INDIRECT EXPENSES:

Are those which are incurred for carrying out their total Are those which are incurred for carrying out their total businessbusiness

& can’t be allocated to job , process , cost centre. These & can’t be allocated to job , process , cost centre. These can be apportioned to cost object & cost centrescan be apportioned to cost object & cost centres

PRODUCTION OVERHEADS: factory rent, rates, lighting & PRODUCTION OVERHEADS: factory rent, rates, lighting & heating,heating,

Insurance of plant & machinery, repairs & maintenaNce, Insurance of plant & machinery, repairs & maintenaNce, office boys , time keepers, carriage inwards, canteen & office boys , time keepers, carriage inwards, canteen & staff welfare consumable stores & material of little value, staff welfare consumable stores & material of little value, factory administration,factory administration,

Printing & stationery, postage & telegram etc.Printing & stationery, postage & telegram etc.

ADMINISTRATION OVERHEAD:ADMINISTRATION OVERHEAD:Office rent, rates & taxes, office lighting & heating, Office rent, rates & taxes, office lighting & heating, salaries of administrative staff, furniture & fittings, salaries of administrative staff, furniture & fittings, printing & stationery, auditprinting & stationery, audit& legal fees, directors remuneration & sitting fees& legal fees, directors remuneration & sitting feesSELLING OVERHEADS: salaries, commission & traveling SELLING OVERHEADS: salaries, commission & traveling expensesexpensesAdvertisement & publicity expenses, discounts & rebates, Advertisement & publicity expenses, discounts & rebates, bad debts & cost of collection of bad debtsbad debts & cost of collection of bad debtsDISTRIBUTION EXPENSES: carriage & freight outwards, DISTRIBUTION EXPENSES: carriage & freight outwards, packing & delivery charges, wages of packers & drivers, packing & delivery charges, wages of packers & drivers, maintenance of vehicles also running expenses of maintenance of vehicles also running expenses of delivery vehiclesdelivery vehiclesCODIFICATION OF OVERHEADS: is a system of assigning CODIFICATION OF OVERHEADS: is a system of assigning code numbers to each head, sub-head & category of code numbers to each head, sub-head & category of expenses to facilitate the systematic & easy recording, expenses to facilitate the systematic & easy recording, accounting, summarization of cost data for ascertainment accounting, summarization of cost data for ascertainment of costs, profitability & managerial decision makingof costs, profitability & managerial decision makingALLOCATION OF OVERHEADS: it is the process by which ALLOCATION OF OVERHEADS: it is the process by which cost items are charged direct to a cost unit or cost centrecost items are charged direct to a cost unit or cost centre

If a cost can be specifically identified with a specific If a cost can be specifically identified with a specific departmentdepartment

That cost is allocated to that departmentThat cost is allocated to that department

DEPARTMENTALISATION OF OVERHEADS: for efficient DEPARTMENTALISATION OF OVERHEADS: for efficient working, and for collection, allocation & absorption of working, and for collection, allocation & absorption of costs an organization is divided into number of costs an organization is divided into number of departments like machining, fabricating, assembling, departments like machining, fabricating, assembling, power , maintenance, tool room , stores , accounts & power , maintenance, tool room , stores , accounts & costing etc., & the overheads are collected allocated or costing etc., & the overheads are collected allocated or apportioned to respective departments this will help in apportioned to respective departments this will help in cost ascertainment of departments & control of expensescost ascertainment of departments & control of expenses

APPORTIONMENT OF OVERHEADS: some costs can not be APPORTIONMENT OF OVERHEADS: some costs can not be identified as arising from the activities of one specific identified as arising from the activities of one specific departmentdepartment

or function. Non-allocable costs, however, must be or function. Non-allocable costs, however, must be apportioned on some logical basis to be divided between apportioned on some logical basis to be divided between the related cost centres e.g., rent, rates & taxes incurred the related cost centres e.g., rent, rates & taxes incurred for the whole factory can’t directly allocated to different for the whole factory can’t directly allocated to different cost centres , but can be apportioned to more than one cost centres , but can be apportioned to more than one cost centre on some equitable basiscost centre on some equitable basis

For benefits received the basis normally used for rent & For benefits received the basis normally used for rent & taxes being – floor area occupied by various cost centrestaxes being – floor area occupied by various cost centres

Lighting--- no of light pointsLighting--- no of light points

Carriage inwards---- value of material issuedCarriage inwards---- value of material issued

Advertising---- sales valueAdvertising---- sales value

Delivery expenses--- weight, volume, tonnes ,salesDelivery expenses--- weight, volume, tonnes ,sales

Selling & distribution expenses---- sales valueSelling & distribution expenses---- sales value

Inspection--- no of jobs inspected, Inspection--- no of jobs inspected,

APPORTIONMENT OF SERVICE COST CENTRE:APPORTIONMENT OF SERVICE COST CENTRE:

Service departments may exist to provide service of Service departments may exist to provide service of various kinds to other departments. For example, various kinds to other departments. For example, personnel, maintenance, boiler house , pump house personnel, maintenance, boiler house , pump house

PRIMARY & SECONDARY DISTRIBUTION:PRIMARY & SECONDARY DISTRIBUTION:

It is common in all organizations the overheads will be It is common in all organizations the overheads will be incurred by both production & service departments. incurred by both production & service departments. Hence in the first step, all the overheads costs should be Hence in the first step, all the overheads costs should be allocated or apportioned to the production & service allocated or apportioned to the production & service departments on some equitable basis. This is called departments on some equitable basis. This is called primary distribution of overheadsprimary distribution of overheads

The service departments render service( benefit) to the The service departments render service( benefit) to the production departments & in ascertainment of production production departments & in ascertainment of production deptt’deptt’

Cost the expenses of service departments are to be Cost the expenses of service departments are to be apportionedapportioned

Among production departments only. The process of Among production departments only. The process of redistribution of service departments cost to production redistribution of service departments cost to production departments is calleddepartments is called

Secondary distribution of overheadsSecondary distribution of overheads

The methods are given below:The methods are given below:

DIRECT METHOD: under this method, the service DIRECT METHOD: under this method, the service departments cost is directly allocated to production departments cost is directly allocated to production departments. The method ignores any service rendered departments. The method ignores any service rendered by service department to other service departmentsby service department to other service departments

ELIMINATION METHOD: this method recognizes the ELIMINATION METHOD: this method recognizes the services provided to other service departments using a services provided to other service departments using a sequence of reallocations in which service departments sequence of reallocations in which service departments costs are allocated in turn to production departments & to costs are allocated in turn to production departments & to other service departments. But no further costs are other service departments. But no further costs are allocated to a service department once its costs have allocated to a service department once its costs have been allocated. This method ignores the concept of been allocated. This method ignores the concept of reciprocal servicesreciprocal services

REPEATED DISTRIBUTION METHOD: this method is also REPEATED DISTRIBUTION METHOD: this method is also known as continuous allotment method known as continuous allotment method

This method takes into account the reciprocal service of This method takes into account the reciprocal service of services departments. After primary allocation the service services departments. After primary allocation the service departments costs are repeatedly allocated in the departments costs are repeatedly allocated in the specified percentages. This process continues until all the specified percentages. This process continues until all the costs of service departments are transferred to production costs of service departments are transferred to production departmentsdepartments

ABSORPTION OF OVERHEADS: refers to charging of ABSORPTION OF OVERHEADS: refers to charging of overheadsoverheads

To individual product or a jobs. It is a process of To individual product or a jobs. It is a process of distribution of overheads rates allotted to a particular distribution of overheads rates allotted to a particular department or cost centre over the units produced. The department or cost centre over the units produced. The absorption of overheads is done by applying overheads absorption of overheads is done by applying overheads absorption ratesabsorption rates

CIMA defines absorption of overheads as ‘the process of CIMA defines absorption of overheads as ‘the process of absorbing all overhead costs allocated or apportioned absorbing all overhead costs allocated or apportioned over a particular cost centre or production department by over a particular cost centre or production department by the units producedthe units produced

METHOD OF OVERHEAD ABSORPTION:METHOD OF OVERHEAD ABSORPTION:

Absorption rate = budgeted or actual overhead Absorption rate = budgeted or actual overhead

----------------------------------------------------------------------------

no. of units produced or budgetedno. of units produced or budgeted

For example, the budgeted overhead is per Rs. 2,00,000 For example, the budgeted overhead is per Rs. 2,00,000 per annum & the budgeted production is 50,000 units p. per annum & the budgeted production is 50,000 units p. a, then thea, then the

absorption rate = 2,00,000 / 50,000 =Rs. 4 per unitabsorption rate = 2,00,000 / 50,000 =Rs. 4 per unit

Advantages ; where the manufacturing methods are Advantages ; where the manufacturing methods are simple & the co. makes only one product the method can simple & the co. makes only one product the method can be usedbe used

It is simple to understand & easy to apply, and if the It is simple to understand & easy to apply, and if the products are more or less identicalproducts are more or less identical

PERCENTAGE OF DIRECT MATERIAL COST METHOD:PERCENTAGE OF DIRECT MATERIAL COST METHOD:

Under this method overhead is absorbed based on actual Under this method overhead is absorbed based on actual or predetermined absorption rate calculated by or predetermined absorption rate calculated by expressing the overhead cost as percentage of direct expressing the overhead cost as percentage of direct materials for the same period. The absorption rate is materials for the same period. The absorption rate is calculated as followscalculated as follows

budgeted or actual overhead budgeted or actual overhead

= ------------------------------------- * 100= ------------------------------------- * 100

budgeted or direct material costbudgeted or direct material cost

For example the budgeted direct material costmple, For example the budgeted direct material costmple, budgeted overhead is 1,00,000 & the budgeted direct budgeted overhead is 1,00,000 & the budgeted direct material cost is 4,00,000 , then overhead absorption rate material cost is 4,00,000 , then overhead absorption rate isis

= Rs. 1,00,000= Rs. 1,00,000

---------------- -- 25% of direct material cost---------------- -- 25% of direct material cost

Rs. 4,00,000Rs. 4,00,000

This method is useful if materials are a major part of the This method is useful if materials are a major part of the cost of units made in the cost centrecost of units made in the cost centre

This method is simple to understand & easy to applyThis method is simple to understand & easy to apply

Disadvantages :Disadvantages :

Cost of material is subject to considerable fluctuations Cost of material is subject to considerable fluctuations which will not be accompanied by similar fluctuations in which will not be accompanied by similar fluctuations in overheadsoverheads

Most of the overhead are attributable to time spent on the Most of the overhead are attributable to time spent on the job or the cost unit & this factor is completely ignored in job or the cost unit & this factor is completely ignored in this methodthis method

PERCENTAGE OF DIRECT LABOUR COST METHOD:PERCENTAGE OF DIRECT LABOUR COST METHOD:

in this method overhead absorption rate is calculated by in this method overhead absorption rate is calculated by expressing the overhead expense to be absorbed as a expressing the overhead expense to be absorbed as a percentage of cost of direct labour for the same period as percentage of cost of direct labour for the same period as shown belowshown below

budgeted or actual overhead costbudgeted or actual overhead cost

------------------------------------------ * 100------------------------------------------ * 100

Budgeted or actual direct labour costBudgeted or actual direct labour cost

For example, the budgeted overhead is Rs. 1,00,000 & For example, the budgeted overhead is Rs. 1,00,000 & the budgeted direct labour cost is Rs. 5,00,000. the the budgeted direct labour cost is Rs. 5,00,000. the absorption rate is calculated as shown belowabsorption rate is calculated as shown below

1,00,000 /5,00,000 = 20% of direct labour cost1,00,000 /5,00,000 = 20% of direct labour cost

Advantages : the method is used where labour cost is an Advantages : the method is used where labour cost is an important part of the total cost important part of the total cost

It is simple to understand & easy to applyIt is simple to understand & easy to apply

It is better than percentage of direct material cost, since It is better than percentage of direct material cost, since labour rates fluctuate less frequently than material costlabour rates fluctuate less frequently than material cost

Disadvantages : it ignores time taken for completion of Disadvantages : it ignores time taken for completion of the jobthe job

Or unit, as job performed by a skilled worker takes lesser Or unit, as job performed by a skilled worker takes lesser time than an unskilled workertime than an unskilled worker

It ignores the work performed by the machine where It ignores the work performed by the machine where labour is mere attendantlabour is mere attendant

There is always the difference between skilled & unskilledThere is always the difference between skilled & unskilled

Labour costLabour cost

PERCENTAGE OF PRIME COST METHOD:PERCENTAGE OF PRIME COST METHOD:

This method is both a combination of direct material cost This method is both a combination of direct material cost & direct labour cost& direct labour cost

budgeted or actual overhead / budgeted prime cost *100budgeted or actual overhead / budgeted prime cost *100

This method suffers from the disadvantages of both the This method suffers from the disadvantages of both the above above

MethodsMethods

DIRECT LABOUR HOUR RATE:DIRECT LABOUR HOUR RATE:

Under this method overhead absorption rate is calculatedUnder this method overhead absorption rate is calculated

By the number of direct labour hoursBy the number of direct labour hours

►Here the overheads are divided by the no. Here the overheads are divided by the no. of machine hours during the periodof machine hours during the period

►Blanket absorption rate or departmentalBlanket absorption rate or departmental

absorption rates: a common absorption rate absorption rates: a common absorption rate used throughout the factory & for all jobs used throughout the factory & for all jobs & units of output irrespective of the & units of output irrespective of the department is called the blanket rate. department is called the blanket rate. Such rate is not appropriates where no. of Such rate is not appropriates where no. of departments are involveddepartments are involved

PREDETERMINED ABSORPTION RATES:PREDETERMINED ABSORPTION RATES:

Sometimes actual data is not available in Sometimes actual data is not available in that case a predetermined overhead that case a predetermined overhead absorption rate is usedabsorption rate is used

Over & Under Absorption of overheads:Over & Under Absorption of overheads:

By application of predetermined overhead absorption By application of predetermined overhead absorption rates, overheads are absorbed into actual production rates, overheads are absorbed into actual production throughout the accounting period. Because the throughout the accounting period. Because the predetermined rates are based on expected overheads to predetermined rates are based on expected overheads to be incurred & the estimated production, generally the be incurred & the estimated production, generally the overheads absorbed into production don’t agree with the overheads absorbed into production don’t agree with the actual overheads incurred for the period. If overheads actual overheads incurred for the period. If overheads absorbed are higher than the actual overheads incurred absorbed are higher than the actual overheads incurred it is called over absorption. If overheads absorbed are it is called over absorption. If overheads absorbed are lower than the actual overheads incurred during the lower than the actual overheads incurred during the accounting period, it is called’ under absorption’accounting period, it is called’ under absorption’

SUMMARY: product costs are built up by using absorption SUMMARY: product costs are built up by using absorption costing by a process of allocation, apportionment & costing by a process of allocation, apportionment & absorptionabsorption

There are two main methods of reapportioning serviceThere are two main methods of reapportioning service

department overheads to production departmentsdepartment overheads to production departments

Direct method (ignores inter-department work) Direct method (ignores inter-department work)

Repeated distribution method ( recognizes inter-service Repeated distribution method ( recognizes inter-service depttdepttWork )Work )In absorption costing it is useful to add overheads into In absorption costing it is useful to add overheads into product costs by applying a predetermined overhead product costs by applying a predetermined overhead absorption rateabsorption rateThe predetermined overhead absorption rate is set in The predetermined overhead absorption rate is set in the annual the annual Budget Budget

The absorption rate is calculated by dividing the budgeted The absorption rate is calculated by dividing the budgeted overhead by the budgeted level of activity. For production overhead by the budgeted level of activity. For production

Overhead the level of activity is often budgeted directOverhead the level of activity is often budgeted direct

Labor hours or budgeted machine hoursLabor hours or budgeted machine hours

Management should try to establish an absorption rate Management should try to establish an absorption rate that provides ‘a reasonably accurate estimate of that provides ‘a reasonably accurate estimate of overhead costsoverhead costs

For jobs , product or services . The rate of overheadFor jobs , product or services . The rate of overheadAbsorption is based onAbsorption is based on estimate ( of both numerator & estimate ( of both numerator &Denominator) & it is quite likely that either one or both Denominator) & it is quite likely that either one or both of these of these Estimates will not agree with what actually occursEstimates will not agree with what actually occurs

Actual overheads incurred will probably be either greater Actual overheads incurred will probably be either greater oror

Than or less than overheads absorbed into the costThan or less than overheads absorbed into the cost

ProductionProduction

-- over absorption means that overhead charged to the -- over absorption means that overhead charged to the cost of production are greater than the overheads actually cost of production are greater than the overheads actually incurredincurred

-- under absorption means that insufficient overheads-- under absorption means that insufficient overheads

Have been included in the cost of productionHave been included in the cost of production

QUIZQUIZ

----- What is allocation----- What is allocation

Match the following overheads with the most appropriateMatch the following overheads with the most appropriate

Basis of apportionmentBasis of apportionment

overheadoverhead Basis of apportionmentBasis of apportionment

Depreciation of Depreciation of equipmentequipment

Direct machine hrs.Direct machine hrs.

Heat & light costsHeat & light costs No. of employeesNo. of employees

CanteenCanteen Book value of Book value of equipmentequipment

Insurance of equipmentInsurance of equipment Floor area Floor area

Whish of the following departments are directly involved Whish of the following departments are directly involved in production?in production?

departmentdepartment

1.1. Finished goods warehouseFinished goods warehouse

2.2. CanteenCanteen

3.3. Machining departmentMachining department

4.4. OfficeOffice

5.5. Assembly departmentAssembly department

In relation to calculating total absorption cost, label the In relation to calculating total absorption cost, label the following description in correct order, step ; 1----5following description in correct order, step ; 1----5

DescriptionDescription

A apportion fixed costs over departmentsA apportion fixed costs over departments

B establish the overhead absorption rateB establish the overhead absorption rate

C choose fair method of absorptionC choose fair method of absorption

D apply the overhead absorption rate to the productsD apply the overhead absorption rate to the products

E reapportion service centre costsE reapportion service centre costs

Q a direct labor hour absorption is most appropriate in Q a direct labor hour absorption is most appropriate in which of the following environments;which of the following environments;

A machine intensiveA machine intensive

B labor intensiveB labor intensive

C when all units produced are identicalC when all units produced are identical

D none of the aboveD none of the above

Why might it be a problem to use a single factory overhead Why might it be a problem to use a single factory overhead absorption rate? What alternative method might be used?absorption rate? What alternative method might be used?

Q does over absorption occur when absorbed overheads Q does over absorption occur when absorbed overheads are greater than or less than actual overheadsare greater than or less than actual overheads

Q the following data pertains to the machine shop of an Q the following data pertains to the machine shop of an engineering company, relating to the year2009. the engineering company, relating to the year2009. the machine shop has three cost centers A,B,C each having machine shop has three cost centers A,B,C each having three distinct machinesthree distinct machines

AA BB CC TOTALTOTAL

1 no of workers1 no of workers 400400 400400 800800 16001600

2 no of machine hours2 no of machine hours 5000050000 50000500006000060000 160000160000

3 percentage of HP3 percentage of HP 4040 2525 3535 100100

4 value of assets( Rs in lakhs)4 value of assets( Rs in lakhs)2020 3535 3030 85.0085.00

5 direct wages(Rs in lakhs)5 direct wages(Rs in lakhs) 1616 2020 2424 60.0060.00

6 indirect wages( // )6 indirect wages( // ) 18.0018.00

7 supervisory salaries //7 supervisory salaries // 7.007.00

8 depreciation // 8 depreciation // 8.508.50

9 insurance // 9 insurance // 4.254.25

10 electricity charges // 10 electricity charges // 12.0012.00

11 welfare expenses //11 welfare expenses // 9.009.00

12 office & other expenses .//12 office & other expenses .// 16.0016.00

Work out a composite machine-hour rate for each cost Work out a composite machine-hour rate for each cost centercenter

,showing the basis of apportionment of expenses amongst ,showing the basis of apportionment of expenses amongst thethe

Cost centersCost centers

Which of the following departments are directly involvedWhich of the following departments are directly involved

In productionIn production

departmentdepartment Involved in Involved in productionproduction

( pls tick( pls tick

Finished goods Finished goods warehousewarehouse

CanteenCanteen

Machining Machining departmentdepartment

OfficesOffices

Assembly depttAssembly deptt

ItemsItems basis basis AA BB CC TOTALTOTAL

of appmntof appmnt

D/wagesD/wages actualactual 6060 1616 2020 6060

Depreciation value of assetsDepreciation value of assets 22 3.53.5 33 8.58.5

Indirect/wagesIndirect/wages d/wagesd/wages 4.84.8 6.006.00 7.27.2 1818

Sup /salarySup /salary no. of workersno. of workers 1.751.75 1.751.75 3.503.50 7.007.00

InsuranceInsurance value of assetsvalue of assets 11 1.751.75 1.51.5 4.254.25

Elec chargesElec charges H.P %ageH.P %age 4.84.8 33 4.24.2 1212

Welfare expsWelfare exps no. of employees no. of employees2.252.25 2.252.25 4.54.5 9.009.00

Office & other expsOffice & other exps m/hrsm/hrs 55 55 66 1616

---- -------- ---- ---------- ----------

totaltotal 37.637.6 43.2543.25 53.953.9 134.75no. 134.75no. Of machine hoursOf machine hours

(lakhs of hours)(lakhs of hours) 0.50.5 0.50.5 0.60.6 1.601.60

m/c hr. ratem/c hr. rate 75.275.2 86.586.5 89.389.3

Jack in the box Ltd. has five cost centersJack in the box Ltd. has five cost centers

1.1. Machining departmentMachining department

2.2. Assembly //Assembly //

3.3. Finishing //Finishing //

4.4. Stores //Stores //

5.5. Building occupancy -cost center is charged with all the Building occupancy -cost center is charged with all the costs relating to the use of the buildingcosts relating to the use of the building

6.6. In the cost accounting treatment of the costs of these In the cost accounting treatment of the costs of these cost centers, the total cost of building occupancy are cost centers, the total cost of building occupancy are apportionedapportioned

Before the stores department costs are apportioned. The Before the stores department costs are apportioned. The costs incurred & data available for period 7 of the costs incurred & data available for period 7 of the current year as follows;current year as follows;

Allocated costs total costsAllocated costs total costs machiningmachining assyassy finishingfinishingstoresstores

Indirect materialIndirect material 28002800 500500 17001700 600600 ------

// wages// wages 4660046600 1100011000 219002190067006700 70007000

Other exps.Other exps. 55005500 37003700 11001100 400400300300

------ ------ ----- ------ ------------- ------ ----- ------ -------

5490054900 15200 24700 7700 7300 15200 24700 7700 7300

Other costsOther costs

RentRent 30003000

RatesRates 800800

Lighting &heatingLighting &heating 200200

Plant & equipment depnPlant & equipment depn 1980019800

Insurance on plant &equipInsurance on plant &equip 19801980

Insurance on buildingInsurance on building 200200

Company pension schemeCompany pension scheme 2800028000

Factory admn.Factory admn. 1250012500

Contract cost of factory bldg.Contract cost of factory bldg. 14001400

Building repairsBuilding repairs 400400

----------------

6820068200

--------------------

General infoGeneral info machiningmachining assy’assy’ finishingfinishing storesstores

Area occupied 3000Area occupied 3000 40004000 20002000 10001000

Plant (000’s)Plant (000’s) 1400 1400 380 380 150150 5050

No. of empl.No. of empl. 100 100 350350 150150 2525

d.lab.hrsd.lab.hrs 24000 24000 8000080000 3500035000

m/c hoursm/c hours 52725 52725 2050020500 1020010200

Direct wagesDirect wages 24000 24000 8940089400 3600036000

No. ofstores No. ofstores

RequisitionsRequisitions 556 556 11641164 270270

Required ;Required ;

a)a) The total of building occupancy costThe total of building occupancy cost

b)b) Find out the machine hr & labour hr. rate of the three Find out the machine hr & labour hr. rate of the three deptts.deptts.

Overhead analysis sheet---first stageOverhead analysis sheet---first stage

Allocated costsAllocated costs totaltotal machmach assy.assy. Fin.Fin. StoresStores

Ind. matInd. mat 28002800 500500 17001700 600600 00

Ind. wagesInd. wages 4660046600 1100011000 2190021900 6700670070007000

Other exps.Other exps. 55005500 37003700 11001100 400400 300300

------ ------ ------ ------ ------------- ------ ------ ------ -------

5490054900 1520015200 2470024700 7700770073007300

ApportionedApportioned

CostsCosts basis basis

Plant depn.Plant depn. 1980019800

Plant ins.Plant ins. 19801980

Pension schemePension scheme 2800028000

Factory admn.Factory admn. 1250012500

Building occpy.Building occpy. 60006000

------- ------- ------- -------------- ------- ------- -------

39400 54180 19650 995039400 54180 19650 9950

Stores cost 2760 5820 1350 (9950)Stores cost 2760 5820 1350 (9950)

------- ------- ------- --------------- ------- ------- --------

42180 60000 21000 042180 60000 21000 0

--------------------------------------------------------------------------

m/c hour rate = 42150 / 52725 = 0.80m/c hour rate = 42150 / 52725 = 0.80

Assembly = 60000 / 80000 = 0.75Assembly = 60000 / 80000 = 0.75

Finishing = 21000 / 35000 = 0.60Finishing = 21000 / 35000 = 0.60

Q a company has 3 production departments A, B & CQ a company has 3 production departments A, B & C

& two service departments X & Y . The following data are & two service departments X & Y . The following data are extracted from the records of the company for a extracted from the records of the company for a particular given periodparticular given period

AA

1.1. rent & ratesrent & rates 2500025000

2.2. General lightingGeneral lighting 30003000

3.3. Indirect wagesIndirect wages 75007500

4.4. PowerPower 75007500

5.5. Depreciation on machineryDepreciation on machinery 5000050000

6.6. SundriesSundries 5000050000

B additional information department-wiseB additional information department-wise

total total AA BB CC XX YY

Direct wagesDirect wages 5000050000 1500015000 1000010000 150001500075007500 25002500

Horse powerHorse power 150150 6060 3030 5050 1010 ----

Cost of m/c(l)12.5Cost of m/c(l)12.5 33 44 55 0.250.25 0.250.25

Production hrs ---Production hrs --- 62266226 40284028 40664066 -------- ------

Floor space 10000Floor space 10000 20002000 25002500 30003000 2000 5002000 500

Lighting pts. 60Lighting pts. 60 1010 1515 2020 1010 55

C service departmentsC service departments

AA BB CC XX YY

XX 20%20% 30%30% 40%40% ------ 10%10%

YY 40%40% 20%20% 30%30% 10%10% --------

You are required to;You are required to;

a) Compute the overhead rate of production departmentsa) Compute the overhead rate of production departments

Using the repeated distribution method, andUsing the repeated distribution method, and

b) Hence determine the total cost of the product whose b) Hence determine the total cost of the product whose direct material & direct labour costs are respectively are Rs direct material & direct labour costs are respectively are Rs 250 & Rs 150 & which would consume 4 hrs ,5 hrs & 3 hrs 250 & Rs 150 & which would consume 4 hrs ,5 hrs & 3 hrs in departments A, B & Cin departments A, B & C

Direct wages Direct wages actualactual

Rent & ratesRent & rates floor spacefloor space

General lightingGeneral lighting lighting points lighting points

Indirect wagesIndirect wages direct wagesdirect wages

PowerPower horse powerhorse power

DepreciationDepreciation cost of machinerycost of machinery

SundriesSundries direct wagesdirect wages

Grand total 163000Grand total 163000 4669746697 4530445304 6099960999------ ----

Production hrsProduction hrs 62266226 40284028 40664066

Overhead rateOverhead rate 7.507.50 11.2511.25 15.0015.00

Total production costTotal production cost 531.25531.25

==============

Are single overhead absorption rates fairAre single overhead absorption rates fair

ABC Ltd has 2 departments, for which the following ABC Ltd has 2 departments, for which the following budgeted information is availablebudgeted information is available

dept 1dept 1 dept 2dept 2 totaltotal

Budgeted o’headsBudgeted o’heads 360000360000 200000200000 560000560000

Budgete D/L HrsBudgete D/L Hrs 200000200000 4000040000 240000240000

Consider two separate productsConsider two separate products

a)a) Product A has a prime cost of Rs. 100, takes 20 hrs in Product A has a prime cost of Rs. 100, takes 20 hrs in dept 1 & 2 hrs. in dept 2dept 1 & 2 hrs. in dept 2

b)b) Product B has a prime cost of Rs 100, takes 28 hrs in Product B has a prime cost of Rs 100, takes 28 hrs in dept 1 & 2 hrs in dept 2 what could be the factory cost dept 1 & 2 hrs in dept 2 what could be the factory cost of the product, using the following rates of o’heads of the product, using the following rates of o’heads recoveryrecovery

c)c) A) a single factory rate of overhead recoveryA) a single factory rate of overhead recovery

d)d) B) separate departmental rates of overhead recovery B) separate departmental rates of overhead recovery

e)e) A) 170, 170 B) 250 , 180.40A) 170, 170 B) 250 , 180.40

f)f) Overhead to which Overhead to which

g)g) Basis appliesBasis applies basisbasis

h)h) 1.Rent,rates,heat &light floor area occupied1.Rent,rates,heat &light floor area occupied

i)i) Repairs , depreciation by each cost centerRepairs , depreciation by each cost center

j)j) Of buildingOf building

k)k) 2. depreciation, insurance cost or book value2. depreciation, insurance cost or book value

l)l) & equipment& equipment of equipment of equipment

m)m) 3. personnel office , canteen no. of employees, 4. 3. personnel office , canteen no. of employees, 4. heating & lighting volume of space occupied heating & lighting volume of space occupied byby

n)n) each cost centereach cost center

Depreciation, insuranceDepreciation, insurance cost or book value of cost or book value of

& equipment& equipment equipment equipment

Personnel office, canteen, Personnel office, canteen, no. of employeesno. of employees

Welfare, wages, cost officeWelfare, wages, cost office labour hours workedlabour hours worked

First-aidFirst-aid in each cost centerin each cost center

Heating & lightingHeating & lighting volume of spacevolume of space

occupied by eachoccupied by each

cost centercost center