4 Overhead: Absorption

Costing Method
Question 1 (Re-apportionment of overheads using Trial and Error Method):
SA Ltd. has three production (M 1, M2 and A 1) and three service departments (Stores, Engineering services and
General service). Engineering department serves the M1 and M2 only.
The relevant information related with Product X and Y are as follows:
Product X Product Y
M1 10 Machine hours 6 Machine hours
M2 4 Machine hours 14
Machine hours
A1 14 Direct labour hours
18 Direct labour hours
The annual budgeted overhead cost for the year is
Indirect Wages (`) Consumable Supplies(`)
M1 9,30,400 2,52,000
M2 8,26,800 3,64,000
A1 3,24,400 84,000
Stores 1,64,000 56,000
Engineering Service
1,06,800 84,000
General Service
1,50,400 64,000

(`)
− Depreciation on Machinery 7,92,000
− Insurance of Machinery 1,44,000
− Insurance of Building 64,800 (Total building insurance cost for M1 is one third of annual premium)
− Power 1,29,600
− Light 1,08,000
− Rent 2,53,500 (The general service deptt. is located in a © The Institute of Chartered Accountants of
India

Overhead: Absorption costing method 4.2

building owned by the company. It is

valued at `1,20,000 and is charged into
cost at notional value of 8% per annum.
This cost is additional to the rent shown
above)
The value of issues of materials to the production departments are in the same proportion
as shown above for the Consumable supplies.
The following data are also available:
Department Book Area H.P. hours % Capacity Machine
value Machinery (Sq. ft.) Production Direct hour
(`) Effective Labour hour
M1 24,00,000 5,000 50 2,00,000 40,000

M2 18,00,000 6,000 35 1,50,000 50,000

A1 6,00,000 8,000 05 3,00,000 −

Stores 2,40,000 2,000 − − −

Engg. Service 7,20,000 2,500 10 − −

General Service 2,40,000 1,500 − − −

Required:

(i) PREPARE an overhead analysis sheet, showing the bases of apportionment of overhead to
departments.
(ii) PREPARE a statement allocating service department overheads to production department
ignoring the apportionment of service department costs among service departments.
(iii) CALCULATE suitable overhead absorption rate for the production departments. (iv)
CALCULATE the overheads to be absorbed by two products, X and Y. Answer:
(i) Summary of Apportionment of Overheads
(`)
Total Deptt.
Basis of Production Deptt. Service
Items Apportionment M1 M2 A1 Store Service
Amount Enginee ring
 General Service

Service

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4.3 Cost and Management Accounting
Allocation given 25,02,800 9,30,400 8,26,800 3,24,400
1,64,000 1,06,800 1,50,400
Indirect wages

Consumable stores 56,000 84,000 64,000

Allocation given 9,04,000 2,52,000 3,64,000 84,000

Depreciation Capital value of machine 7,92,000 3,16,800 2,37,600 79,200 31,680 95,040 31,680
(20:15:5:2:6:2)

Insurance of Machine (20:15:5:2:6:2) 17,280 5,760

Capital value of machine 1,44,000 57,600 43,200 14,400 5,760

Insurance on Building (-:12:16:4:5:3) 5,400 3,240

1/3rd to M1 Balance area basis 64,800 21,600 12,960 17,280 4,320

Power HP Hr% (10:7:1:-:2:-) 1,29,600 64,800 45,360 6,480 − 12,960 −

Light Area 1,08,000 21,600 25,920 34,560 8,640 10,800 6,480

(10:12:16:4:5:3)
Rent* Area 2,53,500 53,940 64,720 86,300 21,580 26,960 --
(10:12:16:4:5:-)

Total 48,98,700 17,18,740 16,20,560 6,46,620 2,91,980 3,59,240 2,61,560

*Rent to be apportioned among the departments which actually use the rented building. The notional rent
is imputed cost and is not included in the calculation.

(ii) Allocation of service departments overheads

Basis of Deptt.
Production Deptt. Service
Service
Apportionment Service Service
Deptt. M1 M2 A1 Store Engineering General Service
Store Ratio of : 42)
consumable 1,05,120 1,51,820 35,040 (2,91,980) − −
value (126 :182

Engineering service −
In Machine hours Ratio of M1 and 1,59,660 1,99,580 − − (3,59,240)
M2 (4 : 5)
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Overhead: Absorption costing method 4.4

General service
Labour hour Basis 80,480 60,360 1,20,720 − −
(20 : 15 : 30) (2,61,560)

Production Department allocated 17,18,740 16,20,560 6,46,620

in (i)

Total 20,64,000 20,32,320 8,02,380

(iii) Overhead Absorption rate

M1 M2 A1 Total overhead allocated 20,64,000 20,32,320 8,02,380

Machine hours 40,000 50,000 −

Labour hours − − 3,00,000

Rate per machine hour 51.60 40.65 −

 Rate per Direct labour − − 2.67

(iv) Statement showing overhead absorption for Product X and Y

Machine Deptt. Absorption Rate Product X Product Y Hours (`) Hours (`)
M1 51.60 10 516.00 6 309.60
M2 40.65 4 162.60 14 569.10

A1 2.67 14 37.38 18 48.06

715.98 926.76

Question 2 (Re-apportionment of overheads using Repeated distribution method):

DT Ltd. is a manufacturing company having three production departments, ‘A’, ‘B’ and ‘C’
and two service departments ‘X’ and ‘Y’. The following budget is for December 20X8:
Total (`) A (`) B (`) C (`) X (`) Y (`)
Direct 20,00,000 40,00,000 80,00,000 40,00,000
material 20,00,000

Direct wages 1,00,00,000 40,00,000 1,60,00,000 20,00,000 40,00,000

Factory rent 80,00,000

Power 50,00,000
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4.5 Cost and Management Accounting

Depreciation 20,00,000

Other 1,80,00,000
overheads

Additional information:
Area (Sq. ft.) 500 250 500 250 500

Capital value of assets (` lakhs) 400 800 400 200 200

Machine hours 1,000 2,000 4,000 1,000 1,000

Horse power of machines 50 40 20 15 25

A technical assessment of the apportionment of expenses of service departments is as

under:
ABCXY
 Service Dept. ‘X’ (%) 45 15 30 – 10

Service Dept. ‘Y’ (%) 60 35 – 5 –

Required:
(i) PREPARE a statement showing distribution of overheads to various departments. (ii) PREPARE
a statement showing re-distribution of service departments expenses to production departments.
(iii) CALCULATE machine hour rates of the production departments ‘A’, ‘B’ and ‘C’.
Answer:
(i) Overhead Distribution Summary
Basis Total (`) A (`) B (`) C (`) X (`) Y (`)
Direct Direct – – – – 40,00,000 20,00,000
materials

Direct wages Direct – – – – 20,00,000 40,00,000

Factory rent Area 80,00,000 20,00,000 10,00,000 20,00,000 10,00,000 20,00,000

Power H.P. × Machine 50,00,000 10,00,000 16,00,000 16,00,000 3,00,000

Hrs. 5,00,000

Depreciation Capital value 2,00,000

20,00,000 4,00,000 8,00,000 4,00,000 2,00,000

Other Machine hrs. 80,00,000 20,00,000 20,00,000

overheads 1,80,00,000 20,00,000 40,00,000

54,00,000 74,00,000 1,20,00,000 95,00,000 1,07,00,000 © The Institute of Chartered Accountants of India

Overhead: Absorption costing method 4.6

(ii) Redistribution of Service Department’s expenses

A (`) B (`) C (`) X (`) Y (`)
Total overheads 54,00,000 74,00,000 1,20,00,000 95,00,000 1,07,00,000
 Dept. X overhead apportioned in the ratio 42,75,000 14,25,000 28,50,000 (95,00,000)
(45:15:30: —:10) 9,50,000

Dept. Y overhead apportioned in the ratio (60:35: 69,90,000 40,77,500 − 5,82,500 (1,16,50,000)
—:5: —)

Dept. X overhead apportioned in the ratio 2,62,120 87,380 1,74,760 (5,82,500) 58,240
(45:15:30: —:10)

Dept. Y overhead apportioned in the ratio (60:35: 34,940 20,380 − 2,920 (58,240)
—:5: —)

Dept. X overhead apportioned in the ratio 1,300 440 880 (2,920) 300
(45:15:30: —:10)

Dept. Y overhead apportioned in the ratio (60:35: 180 120 - - (300)

—:5: —)

1,69,63,540 1,30,10,820 1,50,25,640 − − (iii) Machine hour rate:

ABC
A Total overheads (`) 1,69,63,540 1,30,10,820 1,50,25,640

B Machine hours 1,000 2,000 4,000

C Machine hour rate (`) [A ÷ B] 16,963.54 6,505.41 3,756.41

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