g cost of

expected in
to controllability and

titw-ontroliable
overheads are those
0 etheads ate not so
particular department can Se re
—d in a as Fe. example.
costs in the facto. to
Sunthe share of
therefore. controllahle item of The
tal IT,ana.geris concerned- is an
Overheads—General ing to variability
item so •s the

But this be tr•.ae

„ein output-
is substantial these also increase
el is reached. T'ne examples of
coes
tittins,.
SzsSte
overheads. These •etsts change
sene in
of such costs selling commission the output The
overheads-I
ratio in which the changes.
and maintenance ete- In case the such zests are—depreciation, cost of
is free
costs- These are costs It may increase as the of
it-direct andtear.That of depends upon of time
•re neither direct material nor direct N&Zges is due to passage of
time is fixed,
is due to wear and tear is that is
is expense.
it-siSe outside the factors, e.g., foreman' s sale. l. preparation of budget estimates. Distinction
ir They manager's salary is an is to
mhile Tint-ainedfor estimation costs at different of Thus. helps of the
budgets.
2. Effective cost control. If costs are to be controlled, must Q
eosts
CLASSIFICATION OF OVERHEADS „N, can be controlled. Fixed are costs' and are mostly If
function and a number
be exercised, it can be done 0111':' the mar=ement- •arc,
their nature.
classified
C&tolledat lexels-
sum:nuiseedas :
The 3. Decision making. Some important managementdecisionscannot be taken unless
is made between fixed and Fot exzmple.decisions of
According to nature priceduring depression or fot export ot discontinuance of the least ptotltahle ete-
Va:erial. considerationof fixed and oxeåeads separately.
(if) Laseun 4. Preparation of break-even charts. The techniques of relationship
Indirect Expenses
anal»is require separation of fixed and This has been explained detail
Each of these terns has Seen explained in dezin Chapter l.
inthe chapter "Marzinal costing and anal»is".
According to normality i. Marginal costing. Separation of fixed and xariahlecostsis Easie revtement of
costing.This has been dealt later in a separatechapter,

l. Semi-Nariableoverheads are segregated fixedand

such '*hich are e-XF•ectedto be incurred in attaining a Seen discussed later in the chapter on MarginalCosting.
These The} r, frefore, inluded in production costs.
 ENER.AL
OVERHEAD 195
calling of further information, you see that
be followed for charging fix fixed and variable overheads for the three products
methods maydetailed in the next chapter.
or cost. methods been
2010 :
expenditure in (HerheCHs
thefolio"ing
tncurad Figd Variable
SO 32 16 16
15,000 30,000 24 12 12
10,000 26 16 10
_ Fixed roduction of the least
•ariable profitable of the three products so
products. The above put up with a
to discontinue product Z analysis of cost is
50% more
workers. that{ll%ndation with the suggestion
account of workers. agree ? Proceed on the assumption that
on of-employment of new recopo you of the products of X, Y present output is ,OOO.1,500
, increase in output on account d 2,000units remaining products if and Z respectivelyand that there is a scope for doubling the
come down by any one line is
overheads. of the discontinued.
in fixed duction
- & increase of20%come down by 5%. • which
Materials will employed. In order to decide
soldtion product should be
_ ofworkers discontinued,the profitability of each product should
a vary with number
of the manufacturing organisation
the 5udget for 2011. be5 Fixed overheads are 66,000 as calculated below :
2011
BUDGET FOR
product
x (1,000 16) = 16,000
50,000
product (1,500/ 12) 18,000
laterials
17,500
product
z (2,000 16) = 32,000
SSE due to increased output*
67,500
3,375 66,000
30,000
64,125 (a) If product X is discontinued the profit of the organisation will be as under :
: declinein price
15,000
Direct wages 45,000 Materials (3,000 16) 48,000
-u : increase 15,000 z (4,000 12) 48,000
3,000 18,000 (3,000
Factory Overheads—Fixed Labour 10) 30,000
Add : 20% increase 10,ooo z (4,000 6) 24,000
Variable 5,000 15,000 Fixed Overheads for both Y and Z 66,000
33,000
Add : 50% increase VariableOverheads (3,000 12) 36,000
Total z (4,000 10) 40,000
100%
*Output in 2011 Total Cost of Production
IncreaseLabour Sales: (3,000 60)
150% z (4,000 x 50)
Less : 10% declinein efficiency Profit to be realised 88,000
135%
(b) If product Yis discontinued, the profit of the organisation will be as under :
Therefore, there is a net increase of 35% in output.
produces and markets three distinct products, X, y
Illustration4.2.A manufacturing organisation Materials x (2,000 x 20) 40,000
and Z. An analysis of thecostper unit of production of which is given below : z (4,000 12) 48,000
Elements of Cost
Labour x (2,000 x 14) 28,000
z (4,000 x 6) 24,000
Material 20 16 12 Fixed Overheads for both X and Z 66,000
Labour 14 10 6 Variable Overheads (2,000 x 16) 32,000
Overheads 32 24 26 z (4,000 x 10) 40,000
Total Cost 66 50 44
Margin 10 6 TotalCost of Production
Selling Price
90 Sales : x (2,000 x 90)
60 50
Percentage ofprofit on cost (4,000 x 50)
27.5 20 13.64
Profitto be realised
 190

(c) If theproductionof Z is of the

(2.000 20)
16) are co<S which have been •
14) it has corne Of in
(2.000
(3900 10) Loading etc. They are
Fixed farrbothX Y
Vri±le 16)
V) Cog of consumablegores coeon
12)
Cog of stationery used in the oil, for
Cog cf
Salary paid to the Works Managa and
60) 1zoooo to directors devoting otherprizi71
a-emion to of
ralisd for holiday and sick leave.
(if) Pay
It is from is to
to
(N) Contribution any social securityscy—nes
z Empbyee's
to function (s) Contributionto providen fundof
(i) Factory overheads- salary employes.
(i) Administration overheads. (H) Overtime
wages. fern.
(iifi) Selling and disrib=ion (viii) Wagesfor normal idle time if not
is to be raced that it is overhzd thoughwe classify it in different ways to suit Expenses charæå
(c) Indirect
æ-pcse- For example, of is itemof Fztory Overhead.It may also be (i) Rent of factory buildings and land.
Similarly, while classifyingclassif
Fixed Overhead the tectnigueof marginalcostingis used. (if) Irsurance of factor; buildirÄ plantand
"cording their rzture it will putz itemcf indirectexperse- rnzhiær•y Ecks of
methodof classifying overheads (iii) Municipal taxes in respect of factorybuildir..
functionaJ cfcverhzd is conventional Works' canteen and
objective of controlling (W) welfare experses.
zczrzin cost of ech principalfinction with tje ultirrzte
(v) Experimental and researchwork; desiÄing
suhissicn cf income sæzmenz. In fclJ0%ingpages we are, therefore, explaini ng for and drawingoffice expenæs.
in detail Power and fuel.
classificaion and absorption of overheads basis. (vii) Stores expenses incl'Zing salariesof
and otherexpensesincurred in hardling
of stores.
SOURCES OF OVERHEAD INFORMATION
(viii) Cog of training new employees.
Information regarding Efferent itemsof overhzds c:anbe collected from the followi ng (d) Lighting and heating charges of the feory.
source •
(a) Store rquisition:s. T'rzse usedfor issueof indirectmaterials from stores. A stores (x) Carriage inward on materialspurchzed, ify=h
of materials abstract can be preparedto ascertain the amount of total stores issued_ hz been in coÄ0f
(8) InvoZß. Invoices received for scres purchasesare available with the purchase
(E) Works' telephone experses.
hforrnatir.n regrding cost of storesreceivedcan collectedfrom such invoices.
(c) Cash book A scrutiny of thecash bmk helpsin identifyingthe amount of indirect COMMENTS ON CERTAIN ITEMS OF FACTORY OVERHEADS
ire.zrd- They stouJd be properly scrutinisedzod the inforrnationgiven in them should be
—inst standing order number for Efferert depatmerßs. Some items of factory overheads have been discussed below
(d) Wages analysis sheet. This docunertis uzd for analysis of wages paid between direct
ird.rza Tre ir,direct
wages have to be chargedz overheads. of plant and machinery
Depreciation
(e) MisceUaneous reports. The informationregardingdepreciation can be calculated from Depreciation implies decrease in the vall* of an asset due to lapse of tirne, wear and tear and
Register. Sni±iy, information regrdirg scrq, waste,defectives,etc. can be gathered from relev-< gaributor,' causes. In order to find out tie exact cost of manufactureof an article the charge
"preciation must be brought into the cost accounts. It will be better to maintain a separate Plant
("Journal Entrzs. Thejournalerüies forzcruedorcutstandingsalaries, rent, wages, or Mihinery Register in order to secure a greater accuracy in calculating ty•eamount of depreciation
notiorzl
for cr interest can be used fry collecting information about items mentioned above. govi"ng detailed particulars about each machineat one place.
 ENERAL 199

130th these methods have the advantage of charging the same amount of depreciation year after
also because in terms of outputthe machine renders uniform service over its
Illi_sis reasonable to avoid a heavier burden of
198 ofPlant
Register
REGISTER life.gut, in order of repairs and maintenance during the later years
EstimatedLife useful to estimate whole of
specimen life it will be the expected amount of repairs and maintenance for the
Followingis the Cost Price evenly distributing it over
purchase lid then the estimated life of the asset.
Dateof EstimatedScrap Value ..
p iminishing balance method. In case of this method depreciation is charged at a fixed rate
on
Makers Rate of Depreciation balance (i.e., cost less for
Typeof depreciation) every year. For example, if an asset is purchased
Year ending is charged @ 10% p.a. on the diminishing balance, the depreciation for the first
F
be p.a. on 1,000 i.e., 100, for the second year R 90 (10% on 1,000 —R100), for the
Yearending 1.000v.ll
SI ( on 900 — 90) and so on. In case of this method the amount of depreciation will
year after year.
yfiecreasing
comparedto the straight line method, the charge of depreciation under this method is more in
later years. Thus, the cost of the product is escalated in the first few years of
initialyearsand less in
rchaseof the asset simply by application of this method.
evaluation method. Under this method the amount of depreciation is calculated by comparing
thePId) g
11,000 with the value of the asset at the end of the year. The
20,000 30
7,000 Total case of livestock or items of small values such as loose
10.000 c/f 6th where it is very difficult to maintain separate account for each item.
3,000 Total
16,000 cost method. Depreciation is charged on the replacement cost of the asset at a
Total 30,000 40,000 tools
11,000 Total .cularrate. This is done to provide for the market value of the asset on the expiry of its useful life and
for
7.000 20,000 Total
Year partitotakethe current costs of production into account.
and
Total for JIP 111 cost accounts the first two methods are most commonly used because of simplicity
for Year 10,000 5,000 10,000 Other methods such as group depreciation method, annuity method, depreciation fund
4,000 v,enience.
They
Year
4,000 10,000 forwardto the
next year. This enables in
finding have not been discussed here.
willbecarried purchaseto the present date.
date of its s depreciation
fromthe to production is really san, canbe It may happen sometimes that the value of an asset is reduced to nil by charging
incurredon the machine to be charged
ofproviding depreciation. some of because of
out the total expenditure amount methods its effective life, but it still continues to be quite serviceable. This may be due either
ofthe arevarious the
Proper determination product.There excessive depreciationcharged in the past or on account of excellent maintenance. In such a case
for the true cost ofa amount by way of depreciation is be advisable to charge any amount by way of depreciation if the asset is used
methoda fixed blemis whether it will a
method. In case of this is determined by taking inproduction. It seems proper to charge a reasonable amount for depreciation in cost accounts in such
(a) Fixed instalment to be charged expected life. For example otherwise they
depreciation its
year. The amount of estimatedscrapvalue and realise 2,000 as scrap value case alsobecausethis is an abnormality, which in no way should affect the costing results
charged year its
asset, and non-comparable. The amount of depreciation charged from production may be transferred to the
consideration the original cost
ofthe life of 10years :
willbe
account just like any other abnormal profit or loss. In financial accounts, however,
10,000will basis of following formula costingprofit and loss
ifa machine purchased for calculatedon the may be made in such a case.
chargefor depreciation
will 800
the annual charge for depreciation sometimes that a plant might have to be discarded before its expected life on
Estimated Scrap Value It may also happen
Original Cost — value of the
Asset account ofit becoming obsolete prematurely. In such a case the difference between the book
Normal Life of the should also be considered while loss and transferred
obsolescence ofthe asset asetand the value realised on account ofits sale should be considered as an abnormal
risk of case it is expected that only after 8
It is to be noted that the normal if in the above and loss account.
For example, though the machine tocostingprofit
calculating the amount or-depreciation. be taken as 8 years
become obsolete the normallife should obsolescence
years the machine will relevant. provisionfor
technological life is more with the only di fference for obsolescence has been made because it is estimated that possibly the commercial
can be used for 10 years. Thus, similarto thefirstmethod In case provision
This methodis is less than what has been estimated for ascertaining annual depreciation,
(h) Machine-hour rate method. in terms of hours. The total cost minus the
lifeofthe plant or machinery
of the asset is estimated depreciation is Obtained. should be included in the factory overheads.
that in case of this method the life hourly-rate of suchprovisionis like additional depreciation and, therefore,
number ofhours andthe a percautionary measure, it is simply an
estimated scrap value is divided by the areexpectedto be 15,000, the
hourly However,if the provision for obsolescence is only as
of hours for all ten years
If in the above example the total number
appropriation of profits. Hence reserve so created should be excluded from cost accounts.
rate of depreciation will be
Accountancy
8,000
Formore to the chapter "Depreciation, Provisions and Reserves" in Advanced
or 53 paise per hour
- 15,000 Vol.I by Dr. S. N. Maheshwari & Dr. S. K. Maheshwari, published by Vikas.
 p.evenue which i• Wd'tt.enoff o•ver wbwh

job, of
otøl ezpent.C% been incurred the concern as a eZ
be wt•zre
uned only a vanwular job or order, they that particular
rectification be
cost of of their In the f' a dire'* charge,
I of batch,
are numberthould be buildings
of for factory
is an itern of
In overt.ezd•s.In case where factory buildings are CMred by
an abnormal charge f'jr rent Shouldbe made in
isl is also
responsiblefor il in the accounts such charg.eis made
of 0T manuTa.C1ur'JfiZ
considered arc owned and others are rented.
and
facilitiesrncan%idle
ogrefore, idle capital
onis a deal of controversy about the treatment of interest on capital in cost wcounts.
it an element of while otherscontendthat it should be excluded from cost. Arguments
facilities/cøpscitjes inclusion of a charge for interest are given below
the

planningor etc, continue to be incurred inclusionst a production ccj%tSimilar to wages. Wages is the reward for labour, is the
forcapital. True profit% cannot be calculated unless interest is taken into consideration. For
A manufacturing business with a capital of 10,000 which he gets by selling
plan'
rr•chtn.cOf thistirnc giving him yield of 6%. At the end of the year after allowing a reasonable cycargefor
jrgurrcdduring following as rncthod%of profit of 600. A'S,a matter of fact he has earned no profit because 600 could
canbe in machines or machines he makes a also if he had continued his investments. Non-inclusion of interest as a
idle cot'S' reserve overheads. A in a med otherwise
works
in the "naturally give fallacious conclusions.
cornrfarisonof operations, different processes, etc. without due consideration of the interest
of idle is abnormal. give misleading conclusions. 'Ihi%i%particularly true in case of stocks held for maturing such
factorj) thc cot'
to co%tingprofit and whisky,beer etc., which cost more on account of rent and interest.
and bc charged
for •ascertaining idle capacity a timbermerchant,
purchases 1 cft. of timber 10 per cft. and puts it into his godown for
be written are av of capacity
If the classification for seasoning, B, another merchant, purchases seasoned timber in the same quantity @
the Apparently it seems that A has purchased timber at cheaper rates but if we take interest@
a machine ora group ofmachines cf.
onthe capital invested, the cost of timer of A comes to 10,600 while that to B only 10,500
has unnecessarily been locked up for a period of six months.
Mazimumcapøcity. for all practical It becaU%e A 's capital
l. available to question whether hand labour should be replaced by installing expensive machinery
(3) The
is decided without taking the interest factor into consideration.
PracticalCapacity. correctly
term trends are kept
planning that long
capacity exceptdeducting the estimated idle capacity turnple
at by A,a factory owner, proposes to replace SOlabourers getting each 10 per month by a
Capacity. is In it is arrived The expenses of machine are expected to be as follows
3. Normal capacity practical
capacity, "Bing
fixing trend from
in mind 5 workers@ 100 p.m.
long term
as revealed by machinery cannot bc treated as a pan Fuel and Power 250
erection of and, therefore,
removal and of costing profit and account. 100
be debitedto different. If such expense,
Expenses on Insurance
a normal therefore, Depreciation and Repairs 2,500
sw,ld, is quite
of ofwch immediately written off.
of the orders. they are TotalExpenses 3,350
in manufacture, the cost of shifting
of of of the
to take
the shifting
 Ovem•e
•x will result in a (C5.000 11„. When
• jnterest factor is taken 'teeount.The monthlyint or Where lob decisions are to bc
"ill be 2.500. t there will be a is to be included all takes a longperiod taken is to be
Ot urstallationorrhe Ilence it is not loss been paid by in cost accounts to and no
advisableto business but it „,ust are
D. should to
S_, interest on capital is whentrue and Intorost & Finance interest on owned also.
. Charges
articlesofditrerent values 7 and oc interest and
utterest is ofparticularimportan•v are or India. The basicGenerallyAcceptedcost
case varies cons'dcrably has been almost to rest
necessarywhile quoting Charges have or these Accounting Principles by the Institute or
to the interestcharge is nt of interest on capital announcements
though not in cost ot•production. to be included are being summarized
so low as to leavelittle margin othe,n such costs are in cost of
on capital should be charged basisas OPPOrtunity cost t. IV•ed Vise also assigned to as a separate item of
or the purpose or assignment. products bctO,v arriving
on long term Interest charges
tortner is assigned to product (b) Interest on are grouped under
•e*csion and ,nould and dies) in such lines based on working capital tunas
and is in no way connected With invest,nents.it• they exist. pt0duct lines. A portion fixed capital investtnent
of interest is a matter ofintemal finance the
system or finance adoptedby a business
uou/d depend upon the convenien develop an average cost or and excluded or the interest is (including fixed assets
orentiIV1y Withthe Of long tenn tiotn cost of sales. also charged to outside
oradoption. A firm may entirely tunds and apply For this purpose. it is usual to
Inalithesecases J. and Finance charges it to fixed capital
with oneandpartly
with itself will ditrer. investment in each
balanceof profit whichthe tinn canretail holly imputed interest onshall not include imputed
some, ownets tunds in cost. Hence
Evample cost accounting. it is not the practice
A and B both possess e 5.000. starts a manufacturing
business which absorbs Researchcosts
Whole Accordingly to the Chartered Institute
5.000. WhileB starts a similar businesswhollywithForms Ofhis is "the cost or searchingfor new of Management
his private capital in securities yielding p.a. methods." The research may be
or improved Accountants (CIMA). London.
•research
both the businessesor,' and
Dgive similar a,nountS
orprotits
products.new application
At the end orthe
retain the whole or it may be done by a carried out of material or new
before charging interest on capital. will be in a position to orthe profit With specialised research departmentally by
but B will have to pay interestore 450 to the lender.However.he will be getting e 450 as O,)Basic research. It is done agency employed rorthe research staff of the
himself the purpose.
investmentsand, therefore.his net earnings.Otherthingsbeingequal would be the same as intetest stock ofbasic knowledge
to investigate
into the
which interest is to be allowed. that in possibilities
(2) It is very difficult to determine the exact capital on
, and the costs involved are also the know-howot•technical or technological development and
business i.e. fixed
nature. It should. process. The research is ofa general
interest should be allowed on total capital employed in the as well as Theoretically orrecurring
is very difficult because it varies day to day. working. (ii) theretore. be charged as a production
correct ascertainmentof working capital This, Applied research. This is
requites maintainingof accurate tecords giving details orcapitaI invested—both fixed and theret ore or improvement or products,concerned with application
eachdepartmentat leastfrommonthto month. working•
10 above purposes can be identified production tnethods oc basic research knowledge for the
and techniques. The
(3) Determination ora fair rate of interestis yet anotherproblem. The rate or interest charged to such products or with specific product or costs incurred for
adjustedin a vieworthe marketnuctuations.This may make necessary making or numero us mustbe deterredrevenue expenditure. In processes. In processes and therefore
the case the costs are they can be
in cost accounts.Besidesthat rate of interestvaries from person to person. One person may adjustments costsnot wcovered may be charged event of the project providing heavy. they may charged as a
be to costing profit to be a failure. the
position to borrowmoneyat cheapertates than the other because or friends willing to adva in and loss balance of the
nee money a account.
him at low rates etc. to Development costs
(4) Inclusionofintereston capitalserveslittlepurpose when turnover in rapid and the AccolUing to C.I.M.A. London,
unit produced is small. cost or the decision to developtnent cost is
(5) If interestis allovvedon capital which is not borrowed, production cost will methodsand ends with the produce a new or improved the "the process which begins with
be • commencement product or to employ a the
unnecessarilyto that extent.This will mean overvaluationor stock and work-in-progress Developmentcost is therefore of törmal production new or improved
the expenditure of that
sheetpmposes.However,this disadvantagecan be removedifa reserve is created for balance
ror unrealised
practicalcomtnercial basis. It
starts when the incurred for puttingproduct or by that method."
the results of
For example, iftheresearch ends. It is, as a matter of research on a
reseateh and production.
Conclusion.Aller consideringthe arguments both for and against the feasibleto manufacture a particular research reveals that fact, the bridge
inclusion of product according it is scientitically and
clearthatthoughinclusion"interest is theoreticallysound but on the interest, it is design. trial production or to technically
practicaldifiiculfies,it should be excluded from cost accounts.
grounds or expediency that product will a particular manufacturing process and
and the be made to test or
However, due consideration whether manufacturing of a
shouldbe that
204

case they are

quite hea-v-y,they
e—proeuction off revenue
be charged to
Costs costing profit
p t0du•tion-
the
planned
Such development costs account- (i) The expenditure
costs are - incurred
inmaking of large tools as
thetrial
qii) The revaluation
At the end of
sceüinedand may be
Royalties production except those
and patent costs which have been made
royalties and fees
a direct fees are to be paid
expenses they are issued.
and to the product on the basis Alternative
period of time taken
the amountshould
concerned- If they are to or labour hours
be paid on units
Maintenance and repairs Installationcost Of an
in-house
Quite often big
Whenever a new asset is
cost of each factories
the exact inszaiIZdC2Uter
treatmentof such expenditure
maintain their Maintenanceand RepairsDe but
Each Service Order maintenance or repairs work, a series of Service expenses
expenditure in terms of be
labour or other direct be given a distinct number, and will be Order Accounts connections etc. Ail these
layingcables, ofan
repairs and maintenance. Andebited with all expenditureon expenses an
office indirect expenses charges over a reasonable period say
on a addition will also be made for computerand be five yean.
in factory overheads. suitable basis (discussedin the next chapter). charged
included Thetotal be „o
All repairs will be undertaken with the previoussanctionof
In case the repair work Dataprocessing cost
exact cost of repairs and the issamedone by an outside agency there will be no difficultyin The department of data processingis a
service and
will be includedin factory apportioned to the department using the services of this
apportionmentmay be used
departmea-Arc:of
Where incurrence Of expenditure by company's own workmen will give rise to a capital 1. Computer Hours; 2. No. Ofcardspunched:
expenses of materials and labour are debited to a Capital Order Account.A chargeis alsomadeall processed; 5. Man hours; 6.
3.
to pay, 7. Standard
of 4. No. of
•works and office overheads to ascertain the true cost of work performed. All such expenditure' The cost is an overhead cost and any of themethodsoncesed s.

not be debited to works overhead but should be capitalised by passing an appropriateentryin the comparisonscan be made consistently.
Of accounts. Insurance
rnajor repairs are incurred to prolong the life of the asset. Cost of such repairsshould are requiredto Ee incurred vuious cover
Sornetimes In business, insurance costsof in transiuetc.The premiumpad can
to be enjoyed.
be spread over the years during which the benefit is expected
goods and
destruction
Iosses from fire, theft, incurred.Thus.
for which the expense has been
with as per the cause of incomingmaterialsis
inthecostof
Insurance costs
( overt-•.eads-
Fuel and powerhas its own power-house the cost of generating power should be correctlyascertained.
cost
charged as distribution
finished goods. it is premium for protectionof plant and equipment production
I f the factory boiler house and its cost should be ascertainedby adding
Thetotal
(2) Insurance overhead. The costcanbe apportioned
to
will have its own and maintenancecharges. item of manufacturing of go
If it also raises steam, it wages, electricity, depreciation, repairs departments
the varioussupplier,the of machinery. item of manufacturing
the basis Of value of
of fuel consumed, stores, overhead expenses and be apportionedover Insurance
is

be taken as a whole installed. If power is obtained from an outside of distribution

overheads.
vehicles
cost will of machinery worksoverheads. of
of plantand
is
according to the horse powerascertained and will be addedto divisionsas per
and selling profit due to fire
6teakdown
or s
correctly account
exact cost can be (5) Loss ofto costing profit and loss
awju\d tJken production
capitalexpenditure
takenas aoverheads. workers not
oa ps propriate
t of large tools is generallyas factory yncentives to indirect who are par,'C
are those •ded to theseworkers
cost in cost accounts Indirect workers
small tools. The
use is charged
shouldbe prov
(i) large
tools; and (ii) for the monetary incentives
dep-recia•tion
and an
The expenditure inc
three ways .
 it is atN\ASS t.
incentives em•ciettcyand &tter pertörman€e,Of
transportationatto other
standards tor workers engaged in tnaittt€l',atxes tvsutts, it t. the
sineere in this direction can. ever a of time, saus standard is a of
the whole teat" ear tittk the
completine .i•5s by indirectworkerscan fixed the the
t. an
the
the
and itt amensst Seth direct and indirect vsorkets, shouted taken as a part
to and the
the
the monetao compensation to the
erheads patterns and dies
t dies are a Nrti€ularlot'
Leave travel assistance tt•el asistanee as per rules
order,ttNir
Generall>all permanentemployeesare entitledto leave
be taken as a item •t'
the should taken xs an item of
organisation. Hence. the cost ef travel assistancesheutd
Ihe treatmentet- lease assistance cost can treatedas direct er indirv€tcost depending benefits
cost Of travel assistanee t. ittet•as• the
employees to whom this facility is givens cost ot•leave travel a. morale.
in production can be taken as a direct la&ur cost. as housing. medical facilities,children's edpeat..n the grants
directly engaged
pavdu•tion can be taken as an item and other allowances.In easethe either
provided to worker-sor employees not directly engaged in be. these
overheads as the case to as a direct
office and administrationor selling and distribution a
(h. tv taken as of overhea& rate
Carriage and cartage expenses of movement of materials expenses
Carriage and cartage expenses are incurred in the process nail'ing
includes the
treatmentof such expenses would depend upon the purpose in the trainingdepartmentsVlar•tesoe
from one place to another. loss arising pard
explained below : initial
these expenses has• been incurred as
activits and, ther•etOt•.theseexpensesshould
extraspoilageetc, rratmttg a normal
certain raw-materials eau
I. The carriage and cartage expensesspecificallyincurvedfor added
training expneses incurred Ott as a
to the cost of raw-materials and thus taken as a direct charge. selling and
identified with specifie should as •mee and administrationor sellingand distntsutton
In some cases carriage and cartage expenses are not capable of being the ease
t»es of ra"-materials are carried by means of a common transport. N. "these•Netheads then to departmentson the of
materials e.g where employed itt each department.
expense should be taken as works overheads- case in the course ot- training, the trainee
2. Carriage and cartage expensesincurred for indirect materials e.g.. consumable store* to a normal mytket shouldtv chargedto the
a s. part
oil, cotton waste etc. should be taken as works rest
as training costs.
3. Carriage and cartage expenses incurred for distribution of the finished goods should be treated In case era high labour turnover the trainingcosts vsilltv ttN higher In such a exse so
as an item of distribution overheads. Otsthetraining costs Whichis normalshouldtv ehar»d an overheadItemand rest tv taken
4. Carriage and cartage expenses incurred under abnormal circumstances e.g. materials or finished ptÄ'titand loss account.
goods may have to be shifted to another place due to fire etc. in the stores or godown should be
to costing profit & loss account. Labourwelfare expenses
Expenses incurred by the employers the weltire ticilities 0•• . canteen, hospital.
Leave wages separatelybe recorded as WeltitreIkpartntent these then tv to
Leave is a nomal incidentof industrial employnent. Occasionally every worker has to be granted cost eenttvs on the basis Oftotal or the ot men
leave. If on account of contingencies of work, a workercannot be granted an accrued leave. competNtioa
for such leave has to be paid. Thus, wages for leave are a cost of labour. Expenditure in respect of leav. Finesrealised from workers
can be dealt in any of the following tua vvaysin cost accounts— Accotxiingto the lÄvment of Act. tines reatised should creditedto a
separate
Fine to be utilised tOt purposes as expenditure ti•omthes
(i) Leavewages may be debited to factoryoverheadaccount.
(ii) The rate of •a-agesofdirect workers. for adjustment in cost accounts. may be raised appropriately excludedtivm cost accounts
so as to include expenditureon account of leave wages. The amount by which wage rate shouldbe Townshipmaintenance costs
increased can be computed as follows : Ihese are the costs Which are being incutted by an enterprise rural
Estimated total payment on account of leave wages during the year iding residential. communication. marketing and other Its the
facthuessuch as toads. cotnmunicatiotys. tvnkitk,' and the enterpnse
Total number of labour hours during the year costs. I he costs
also Ilence, these costs may be apportioned admuustratne and
In case a worker is not entitled to leave but leave is granted ex-gratia to him (e.g.. when he has relatingto stati weltatv• tuay be charged to departments on the ot
fallen ill). wages paid for the leave period will be an abnormal charge and, theretOre. should be debited ofetnployeesemploya in each department.
to costingprofit and loss account.
 ト3 、に dぐ
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, 0い1はれ
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い 、 に洋
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こ=Fヾミ に 、
E OVERHEADS

op「 、
to 「
01 s にき「p 「
ー s SUPervision

SELLINGANDユSTRおし0 、OVERHEADS

に1をdぐ
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 211
loss account

exhibition expenses
goods - should be treated as selling overheads. In
case the interval between two exh1Ytions
and it is felt that the benefit of the expenditure will
accrue over the whole of the
z costoi expenses may be apportioned like a deferred revenue expenditure over the number of years
tis does to the tenet-Il '*ill be received.
i' quiz heavy as is
selling skill

study of the market conditions and ascertainment of market

in Their consideration _ It is therefore. an item of selling overhead- Tne cost of market research may be apportioned
products on the basis of sales.
research has been done only for a panicula product the cost of such research
a major directly charged to that product only- It '*ill be appropriatein such a case to charge the cost as
i.
izas an expenditure the Fars during vshich the benefitof such research is expected to
FE reasons:
du:
factorsviz
jn ccr=ol of '-he
costs
cuszcners liking zaicle cannot be sold the use of a container,such ink, paste,etc- the cost of the
should be taken as direct matef'.alcost If packaging costs have been incurred for putting a
in ci policy cases and, -n nice looking case or canon, these should be taken as advertising costs and included in
zccnL erhæds- packaging cos= are incurred for safe consignment or delivery of goods to the
to keep the cost should be included in distnyutioncr.zrheads-
in :
/ A ci nay mad: of
tisnunts and rebates
z in such cog also to may be trade discount or cash discount Trade discount is deductedfrom purchases or
case may be. Cash discount is to the customers or received from the creditors for
of cash. It is purely a financial and should be excluded from cost accounts. Off-
measures-
discount or price reduction because of-sale' is in the rzture oftzde discount Hoveever, rebate is
each product* salesman
expenses'*ill help in ascertaining for early penent and is in the natureof cash discount-
remedial measures in
Suiscriptionsand donations
Subscriptions may be to v,zlfare schemes and institutions, or mercantile agencies or technical
COWENTS ON CERTAIN ITEMS OF SELLING AND Subscription to welfare azencies from '*hich the v.orkers deri',e benefit or to technical journals
DISTRIBUTIONOVERHEADS treated as works oxerhezd- Subscription to mercantile agencies vshich help in finding out the
position of prospecti'.e customers or trade subscöptiors should be considered as selling overhead.
Catalogues and Vice lists are charitable in nature generally. These •re to be excluded from cost accounts as they are
ci i".ohes a hzz•.y expenditure and, therefore, zzz:rs of pure finance-
is
z cf The ccrszcf cataloguesand pdce lists should
d±izd
during they are In After-sales
service costs
co=s cf in in '*hich incurred- These costs may be treated as selling 0',erhead item arid charged to different products on the
Bad debts of sales achie•.ed-
z incur if sees mad: cn credit arud,therefore, bad deus
z Expensesof costing department
should be treatedas a selling overheadA-ZY Costing Department is beneficial to uhole business and, therefore, strictly speaking its expenses
sBouJd rot included in cost accounts but written basis of advantage derived
be apportioned among the works, office and selling depanments on
 gsarnple 215
Item
Depreciation
Plant Code Number
Furniture
Building
11
Repairs 12
Plant 2
13
Furniture

Overheads—Distribution
Building 21
Thus, the first digit of the code
number
stands for the
sub-division. main expenditure
for its(ii) Alphabetical and the subsequentdigit
or mnemoric
method. According
to this method,
Zeaæuücø%eeæueo AE — Administrative
Expenses
the alphabetsare used for
RE Repairs
After studying this chapter you should be able to : MC — Maintenance Cost
identify the different stages involvedin distributionof overheads; — Assembly Cost
differentiatebetween the Cost AccountNumberand Standing Order Number and Canteen Expenses
Allocation (iii) Alphabetical cum numerical
Apportionment of C)verheads; aryl
Method. Accordingto
distribute factory overheads, administration overheads and selling and distribution overheads mainexpenditure while the numerical denotesits this method the alphabet denotes the
as per Example sub-division.
the different stages involved in overheads distribution;
differentiate between actual overhead rate and predetermined overhead rate; Item
DepreciationPlant CodeNumber
explain the different methods for disposal of under and over-absorption overheads; and
explain the meaning of certain key terms.
Depreciation of Furniture
Depreciation of Buildtng
Code numbers given to different items of overheadsare
The broad classification of overheadsand the items covered by each classification were listed in a scheduleor manualfor ready
explained reference.No standard list of these
code numberscan be suggestedsince
in the previous chapter. In the present chapter linking of these overheads to different cost units the numberand types under
which the overheads may be grouped depend upon the size of the factory, the nature of industry and the
distribution of overheads is being explained. or degreeof control required.

STAGES OF OVERHEADS-DISTRIBUTION Standing order and cost account numbers

There are three stages involved in the distribution of overheads : The code number given to a factory overhead item is termed as a standing order number and that to
an administration or selling and distribution overhead item as a cost account number. A card is maintained
l. Collection and classification of overheads for every standing order or cost account number, the proforma of such a card is given below :
After the overheads have been classified as factory, office and selling, it will be advisable to group Code No. „
Item
items covered by each category under suitable account headings. For example, depreciation mayrelate Basis of apportionment............... .
to factory buildings, factory plant, factory furniture, etc. It will be appropriate to group all itemsof Departments
depreciation relating to factory assets at one place under a common heading 'Depreciation' with suitable Total
Reference
sub-headings. This grouping of like items with the like is necessary to collect overhead itemsina 2 3 4
convenient and expeditious manner. The guiding principle in selecting such headings must be thatthe
headings are clear and unambiguous •so that these may not be confused with each other. Usually, a code
number is allottedto each headingof expense.
It may be defined as allotment of codes to individual heads of expense is termed as codificationof
overheads a technique of short description of a particular head, which is otherwise lengthy.It also Fig. 5.1
ensures secrecy and ease in classification, accounting and control. Codes are particularly usefulunder purchasesjournal, stores requisitions, petty cash
Entries in the card are made periodically from
computerised system of accounting. Codification may be done according to anyone of the following consumable stores is an item of factory overhead. If the
book, wages analysis book l etc. For example,
methods. depanment direct and
maintainedbesideswages sheet to know for each
(i) Numerical method. According to this method numbers are allotted to each headingandsub- Jl'ages Analysis Book The book is and it will be entered in the relevantcard.
an itemof overheads
_heading of expense. indirect wages separately. Indirect wages is
 OVERHEADS-DISTRIBUr0N 217
216 of overheads
the information will be there in the
directly to the factory, Absorption
3, The term absorption refers to charging of overheads
stores have been purchased and supplied storekeeper and thgn issued, the
received by the source of information information
of a cost centre to different cost units in such
PurchasesJournal. In case stores were first regarding the are entered thateach cost unit bears an appropriate portion of its share
The details ofoverheads. This is done by means of
can be obtained from the stores requisitions. overhead rates. The term 'Overhead Rate' refers to the rate at which
in the referencecolumn. be in the form of a the overheads are to be charged to
cost units. It may
different percentage or a rate per unit. For
instance, if the overheads
2. Departmentalisation of overheads departmentare 10,000, the total wages paid for differentjobs completed the department are
under suitable account headings the next Step involved are in
After collecting and classifying overheads 40.000and the overheads to be charged as a percentage of
of these overheads to different cost centres on a suitable wages to different jobs, the overhead rate
overheaddistribution is the departmentalisation willbe25% of wages. The share of overheads of each job completed
basis. This involves two stages:
in the department will now be
ofcharging the full amount of overhead costs on this basis.
Allocation of overheads. Allocationis the process calculated
of expenses is such that it can be easily
Classificationof Overhead Rates
to a particular cost centre. This is possible when the nature
the salary paid to a foreman ofa particular production
identifiedwith a particular cost centre. For example, overhead rates may be classified into two categories :
with that department and therefore it will be directly charged
departmentcan be directly identified to
l. Single Overhead Rate.
that department.
Apportionment ofoverheads. It is the processofsplitting up an
of
item overhead cost and
charging 2. Multiple Overhead Rate.
l. Single Overhead Rate. It is also known as Blanket Overhead
it to the cost centres on an equitable basis. This is done in case of those overhead items which cannot be Rate. In this case overheads are
wholly allocated to a particular department.For example, the salary paid to the works manager of the absorbed on the basis of one single rate computed for the entire factory. It is applied in case of those
factory cannot be charged wholly to a particular production department but will have to be charged to all. factorieswhich produce only one major product at a continuous basis. It can also be applied in case of
departments of the factory on an equitable basis. thosefactories where the work performance in different departments is fairly uniform and standard.
However, in common parlance no such distinction is observed. The Single overhead Rate may be computed as follows:
The basis of apportionmentand the details ofapportionment are mentioned in the card maintained
for each Standing Order/ Cost Account Number. For example, rent of the factory will be apportioned Overhead cost for the entire factory
over various departments of the factoryaccordingto the area occupied by each department. The amount Single Overhead Rate = Total
quantity of the base selected
of rent which each departmenthas to bear will be mentioned in the standing order number card
allotted 2. Multiple Overhead Rate. In this case overhead rates are calculated for each department or cost
to rent. The same is true for other items.
centreseparately through which a product or a job is to pass. It is used in those cases where a job or a
Overheads distribution summary producthas to pass through a number of departments or cost entries of a varied type. In such a case the
The maintenanceofcards for each typeofoverhead expense considerably helps
in pre-paration of overheadrate for each of the department or cost centre will be calculated independently. The job or a
"overheadsdistribution summary" separatelyfor each major category of overheads productwill be charged at the overhead rate applicable to the respective department or cost centre. In
and selling. A proforma of such a summary :
i.e., factory, office,
anycase,the number of overhead rated used for a firm would depend upon two opposing factors viz. the
OVERHEADS DISTRIBUTION SUMMARY degreeof accuracy desired and the clerical cost involved. As a matter of fact both of them are contrary to
(For Selling and Distribution Overheads) l each other.
Cost Centres/Departments The Multiple Overhead Rate may be calculated as under :
Overhead cost for the cost centre
Multiple Overhead Rate =
Departmental corresponding base
0
Different overhead rates are used for absorption of different categories of overheads. However,
thefollowing factors should be taken into account for determining the rate of overheads absorption :
(i) Adequacy. The rate should be such as would not give rise to large difference between the
amountof recovered overheads and actual overheads, otherwise the cost of jobs or products determined
onsuch basis would not be correct. l
(ii) Convenience. The computation ofoverhead rates should not require unnecessary clerical labour.
Forexample,the apportionment of works manager's salary according to time spent by him on different
jobs would not be of much use. It will be better to distribute it on the basis of wages charged to different
Fig.5.2 jobssince this basis is more convenient, though not more equitable, than the former basis.
J. Similarsummaries
can be preparedfor l. Overheadrates are usually pre-determined. The production is charged at these pre-determined rates, while in
2. Directselling overheads.This has been
centrerefersto the discussed in detail later.
3. Creditandcollection departmentdirectlymaking progress. In case the rates have been carefully determined, the actual overheads will not be much different
refers sales.
detailsplease to thedepartment fromthe overheads recovered from production at the pre-detennined rates. This has been discussed in detail
see-"Distribution of selling concernedwith realisation
and Distribution ofcredit sales. For more laterin this chapter.
Overheads. "
 OvenneAOS.Ots
and rules as the tuqis to applted
of the töltosvittgmethodsmay be • for a?'ortionmcnt of
due or
should to
factor. Expenseswhich directl•swith the departmental
on this basis. e.g. pr.mtum
to for workmen
of the assets Overheads •s compensationtnsurance ex.
tse te
should
of a it will p,lMt
will not be tire insurance premiums on these assets. ete stRh as
method. degreesot'skilt. to Osx•theads as lightin*(unless
on thts
case on an hourly rate should taken ot'while metered separate's rent
Skill factor. rate. the oases of night on the basis,
all withthe to
to should also be t. the of canteen.welfare.
tintekeeping etc. can apportionedon this
Rational
factor. is done mainly by machines. the to hours
in a While in a manax•ement ge•trral
production
as rate the on a hour basis. expenses. cost inter-departmenttransportshould charged to various departments in the
hour should be adopted should departmental h•uts bear to the total factory
labour.the overhead overheadsshould be charged on the same ottictt the direct
is done by
changes it' overhead will not be te technical estipt.tte The ad&iceof technicalhours.
personnelmay also Fe tßet;al on the
No the
is explained in the of certain expenses. eg.. the eost of steam consumed by
fn,m In case the
of the engineer's estimates a particular department can be
stages in the distribution and selling. in at on the basis
table will help the studentsin
distributionof each the conventionalSasis of
in detail.
ith these stages is now explained
OVERHEADS
DISTRIBUTIONOF FACTORY Overhead
Basis Of
three stages : l, Rent
Distribution of factory overheads factoryoverheads. Depreciation Factory Building the
classification ol' Insuranceof Buildings
(i) Collection and
factoryoxerheads
(ii) Deparunentalisationof 2. Heating and I ightit'*, 2. Num&r Ot- Frats
cm•rheads.
(iii) Absorption of tactOI' if re
Depreciation and Insurance of Machine.. VahR •t'
overheads
Collection and classification of factory and classitied under appropriate accounting headings, Electric
collected
All tactoty overheadswould be "ill be given appropriate standing S, Supervision.
depreciation etc. Each heading
c g.. factory rent. insurance.lighting.
Older nuntber. Stot•s overhead. Value ef
Materialhandling
Departmentalisation of factory overheads
retets to the allocation and apportionment ofoverheads
The tenn depanmcntalisationof os.•rheads
departntents. In case of overheads it involves : (iii) Apportionment of service department overheads. After the overheads have classified
arnongvarious Production and Service Departments
apportiontnent of overheads among betweenproduction and service departments the costs ef sersi•e departments charged to such
(i) Allocation and help them in this process. For
products "hile service departtnents departtnents"hieh hase beenbenefitted tlk'ir ser, ices Anyone or more of the t'elk'"ing
P10ductionDepartmentsnmanufacture
production departments while
example. in a textile industrythe prn and clothes departtnents are "tethods be adopted tOr this purpose :
of a boiler houseand repailS service departntents.'[his is known as primary distribution of factory Service or use method. Under this methodoverheadsare over •sari•us production
overheads. deBtrtntentson the basis of services actually rendered.This criterion us the greatest applicabiltt_xin
(ii) Apponionmentof Service Departments' os.•rheads atnong Production Departments. is whetv overheads costs can be easily and directly traced to departments ing the benefits. c g ,
knownas secondarydistribution of factory overheads and also tv-apportionment of factory overheads. of services utilised each department can tx kept maintarning
The stages are explained below : in caseof a machine shop. a
(i) Allocationof ou•rltcads.Thereatv•certain overheadswhich can be directly estitnatedfor properjob cards. But this basis cannot be used in all cases. in case •f tendered the
diflércnt deparuncnts.These expenses are wages paid to indirect workers, contribution to provident purchaseotÄiceit will be itnpossibleto trace the actualtime taken each memFet of the purchase
tunas or any social securityscheme. depreciation. normal idle titne wages etc. Such expenses shallbe department for execution ot• each Older.
directlychargedto the departinents,for SSI)ichthese have been incurred. This is called "allocationof (h) Potential hcn€fits. Under this method department overheads to production
overheads." departmentson the basis of potential rather than actual pendet•d. This method is particularly
(ii) Apportiontnent of overheads. Certain expenses such as General Manager's salary. rentof usetill the service department costs are lar•gelyfixed and seni•es have taking into
the etc.are incurred tor the titctoryas a and. theretotx•.these will have to be apportioned eonsidetation the potential tequirements ofthe satious departments. For example. a company pros ide
overall the deparunents—bothProduction as well as Service. for its own buses tOr ttanspofling xsotkers to and.ti•o.'t the The size ot- the fleet of buses
 of of Of
•be of
The
ofcloth
between quliry
Of (O z
theireffcie•y. laid
This method is
su•vey apportionmera of for differentservice For azmple the works
wtrn it is diffcult to selecta suizble for
different production
be apportioæd to
for service of cost Ecotnting departmentmay departmentetc-
ach
the of numberof workersemployedin can be taken as reasoæble basis for
followi%
On the hsis of the above metho&. prduction departments.
of overheads of services departments over different
Basis of Apportionment
Service Depart—eatCosts
(if re z
%Üked exh
Direct bours-Mehine•hours, —cd Light
Pay rou turnover.
of Nurnber
of
Store-keqing Numberof requisitions,Quantity or Value of —sez
value Of
Value of asez
dep.-t%'t Numberof purchæ orders, Value Of
Numberof employes-
rd Rates Sq. ft- Imo
No- of employee
Intcmal *Dice. Weightor valueof the productsor weights 3.000
00
of service Direct 23,000
Illustration 5.1. Followingfigureshave been extractedfrom the accounts of a
concem for the monthof December,2016 : costsof
Service Numberof
04t- Q requisitions
Indirect Materials : Total Overheads
Production Deptt. x 950 Illustration 5 In a light
Production Deptt.
1,200
Production Deptt- z 200
period
Maintenance Deptt.
Stores Deptt. 1,500 assuming
overheads are
Indirect Wages : a of Greet
Production Deptt. x
Production Deptt. Production
Production Deptt. 1,100 Service
Maintenance Deptt. 300 DirectWages
1,ooo 2,000 D
Stores Deptt. DirectMaterials 3.000 4.000
Power and Light 650 1.000 2,000 Imo
6,000 100
Rent and Rates Electricity KWh. ISO
Insurance on assets 2,800 LightPoints
4,000 3,000 so so
Nos. 2,000
Meal Charges 1,000 10 1.000 1,000
AssetValue 4
Depreciation @ 6% p.a. on capital value of assets. .3;0QQ 60.000 40.000 6 4
,AGaOccupied. sq:-VdC- 3mooo
so
tomo
so so
 INTER-DEPARTMENTAL
SERVICE
5,
freetie pnod Illustrations I and 5.2, the cost of a service department has been apportioned over production
only, without apportioning it to other service departments. However, in some cases it is
to charge service departments' costs to each other on reciprocal twis. Therefore,
a
J,soo also called reciprocal costs, This is true in those cases where service departmentrender
J 5,000 other For example, Power-house afa factory gives power to the Repairs Departrnent md
3,000
pan of the costs of the repairs departmentand the repairs departmentmust bear a
275 pan of the costs of the power-house.There are three methods availab le for dealing with
E to wages"and inter-service distribution
:
1 simultaneous equation method, 2. Repeated distributionmethod 3. Trial and error method.
simultaneous equation method. According to this method the amount of overhead of each
department is obtained by solving simultaneousequations. The following Illustration has
Service Deptls. given explain this method.
to
D E Illustration 5.3. From the following informationwork out production hour rate of recovery of
Departments A, B, and C.
overheadsin
Total Production Deptt. Service Dept%.
1,500

IS 100
25
20
100 75 75 Electricity
Fig Insurance
450 Depreciation
150
3,000 1,000 Iranspofl

EstimatedWorking Hours
3," Expenses of the Service departments D and E are apportioned as under :

2,000 j ,000 6,000

25 25
6,010 32,825
OVERHEADS DISTRIBUTIONSUMMARY
2,373 Production Deptts. Service Deptts.

Item of Expenses
100
Rent
= cz-J5% 20
— Electricity
3 Fire Insurance
Plant Depreciation 1so
5. Transpon
6,000 1,380 2.190 I ,290 630 510
6000 1,380 1290 630 510
6. Service Department D 149 —747* 75
(apportioned) 224
6,000 2,489 1,439 -117 585
7. Service DepartmzntE
apportioned

8. Egirneed •wo&.ing
hours
9. Overbeads rare; per hoar
The D zd
cost
Lă D = Totalexpenses
cf
Let E Total of Service z
We get :

630
-.ID-E = 510
On multipłying equatioc iiîj 1
50-E =
-.ID-E = 510
On Oding fiii' ' ivi S.22;ą
4.90 = 3660
On substitutingthevzJ= cf iz
-759E = 510
E = 510—
Illustration 5-4. The —ad ci indirș:t
from t}'.ezcccunts cf a cn 3 1st 2012 :
1s-uo
Service
Item
25,000 1' ooo
Indirect Maeriîl
Indirect Lasour 2SJTJ 60,030 35,000
Superintendenťs Sa—
CĘit21 CÎ
Fuel Heat
Power
Rent & Isosn
Insurance
Mea Cheges Rŕătribatioa of Ovŕrhăds of Service Departmŕ•t A Ed B
2,705" Service Dŕpartmer,s may Se sing
Lă of Dep•tt-A = 2 —d thetotal cverhŕ=s B=
The folio•wirg d:zz :
ServiceDepztm=s 15,72.500

b= 90,250
Area t Sq-
CapitalVaľ* cf 1,200 equzions(i) (in
Kilowat Hours 102- = 15,72500
Radiar: Seaicre; 90,250
30
No. of Emp40•žee:
20
9îa=
1,69668
Paing the value cf a in equation (ii), we get

124,184
 [ION
227
O vr H
HEADG.t)lSTn10utjm

226 or OVERHEADS Department L apportioned to

DISTRIBUTION
SECONDARY Production Departments of service573) 113
(b)
l) (20'%,
Deptt. D apportioned to
Ill costs of Service 12
Items apportioned ( 10% OCR 113)
50,900 50,900 630 already
distribution
Total Overheadas per primary .69,668) 31 ,0/16 49,674 33,934 Distribution
costs of Service Deptt. E apportioned 573
oc
Servic€ Department A (80% 31.046 Additional 20% oft 12) 2
of 1.24, 18/1) apportioned
Service Department B (90% already 747 385
I ,380 2, 190 ,290
Total service department costs are overheads of Deptt. D charged to Deptts. A.
method. According to this method of total 10% has already been charged to
according to agreed percentage. The remaining
2. Repeated distribution production as well as service, 13,C, (the
is included in 585) in the given ratio
apportioned over other departments are exhausted or the figures L'and
until the total costs of the service : 40 : 20. 224 299 149
process is repeated illustration explains this
method. .30
overheads of Deptt. E charged to Deptts. A,
too small to matter, Following of Illustration 5.3, apportion the costs of service departments 80%of total retnaining 20% has already been charged
figures
Illustration 5.5. Taking the 13and C (the
292
method. in the given ratio i.e., 10 : 20 : 50 59 117
according to repeated distribution toDeptt.D)
Total Overheads I .663 2,606 1,731
Solution: SUMMARY
OVERHEADS DISTRIBUTION
be taken for
Production Deptts. Service Deptts. 4. step-down allocation method. According to this method the following steps are to
13 D E overheadsdistribution : the largest number of
(a) The overheads of the support department which renders services to
Ite
1,380 2, 190 I ,290 630 510
Total Departmental Expenses are first apportioned.
otherdepartments next largest number
/ Distribution
(t 630) 189 252 126 -630 63 (b) The budgeted costs of the support department that renders services to the
Overheads of Service Dgptt. D apportioned to this support department
Il Distribution: ofdepartmentsare then apportioned. Obviously, any apportioned cost added
The support department whose costs
fromthe other support department as per step (a) are included.
510 + 63) 57 115 286 115 -573
Overheads of Service Deptt. E apportioned (C department.
receive any share from the second support
Ill Distribution: 46 wereapportioned as per step (a) will not
35 23 -115 departments are apportioned.
Overheads of Service Deptt. D apportioned (t 115) (c) This sequence is continued till all costs of all the support
IV Distribution :
Overheads of Service Deptt. E apportioned (C I I)
2 6 2 -Il
Absorptionof factory overheads
V Distribution : overheads of a particular production
Overheads of Service Deptt. D apportioned -2 Absorption of factory overheads refers to charging of the factory
or orders executed in that department.
TotalOverheads 1,663 2,606 1,731 depaltmentto various products manufactured, or jobs completed,
two categories :
Themethodsfor absorption of these overheads may be put into
3. Trial and error method. This method can be used where two or three interlocked service cost
(i) Percentage methods.
centres are involved. In case of this method the cost of one service cost centre is apportioned to another
(ii) Hourly rate methods.
service cost centre. The cost of another service centre plus the share received from the first cost centre is case. As such the
Choice of a particular method depends on the circumstances of each individual
again apportionedto the first cost centre. The process is repeated till the amount to be apportioned cvo•nn.ny also. As far
becomes negligible. methodof absorption may differ from industry to industry, and from company to
much
Illustration 5.6. Taking the figures of Illustration 5.3., apportion the costs of service departments as possible,the method applied should be equitable so that the absorbed overheads are not in
under or over-absorption, simply
according to trial and error method. differencewith the actual overheads. Otherwise it will lead to excessive
Solution : becauseof the adoption of a particular method.
OVERHEADS DISTRIBUTION SUMMARY
Percentagemethods
Service Deptts. in the manufacture
Production Deptts.
( l) Direct material cost method. In this method the cost ofdirect materials used
Items Ofa productis used as the basis for allocation of factory overheads. The overhead rate is, therefore,
calculatedon the basis of the following formula :
Total Departinental Expenses
1,380 510
I Distribution 2,190 1,290 630 Amount of factory overheads x 100
Costs of Service Department D Factory Overhead Rate =
apportioned to Cost of direct materials used
63

573
 OVERHEADS-D s-DISTRIBUTION
OVERHEAD
circumstances :
give satisfactory results in the following to cost of materials Advantages. This method has the following advantages
This method may in relation I. Factoryoverheadsto a :
overheadsis insignificantdesired. and great extent depend
(i) Where the amountof ofallocation is ages wages. This method, therefore, gives uponthe numberof workers employed and the rate
and, therefore. a simple method produced. ofdirect satisfactory results in most cases.
output is uniform, i.e., one kind of article is 2. The method is
widely adopted on account
of its simplicity and of accuracy.
(ii) Where widely and frequently.
do not fluctuate quite 3. Direct wages normally do not fluctuatemuch.
(iiD Where the prices or materials results except in the above cases on account of the Therefore, this methodgives stable results.
followi Disadvantages. It has the following disadvantages
The method will not give satisfactory I. The method is not suitable where both skilled and unskilled
variations in the value of workers are employed. As a matter
overheadsdo not vary with material offacttheamoUnt of works overheads is less for skilled workers in comparison to the unskilled workers
(i) Except a few items. factory othersundry small stores used in manufacture naturally therefore, jobs done by the unskilled workers should be
or
Normal '*astageof materialsor coal such as work manager's salary, f
varies charged with greater amount of factory
materials used, othenvise other important items overheads, but reverse happens in case of this method.
Withthe value of the value of materials.
not vary with every change in 2. works overheads also depend upon time. The method,
rent. rates, insurance, lightingetc. do constantly fluctuating but certain factory expenses, therefore, does not give satisfactory
materials depends upon its pri& which
is as stated where the workers are remunerated on piece wage system.
are not affected in any way with a change in price of materials. 3. No distinction is made between manualwork and machine
above, are fixed and. therefore. work. The work done by machinery
therefore,give misleading results. Consider the following example involvesheavy factory overheads in the form of depreciation etc. which are not necessary where work is
ratebased on value ofmaterials may,
of cost of product A in 2016 :
The following were the constituents doneby
hand.
This method is, therefore, suitable only in cases where both labour employed and work done are
50,000
Direct Material uniform type.
20,000 da
Direct Labour 10,ooo Illustration 5.7. A company has two production departments—leather and textile and two service
Factory Rent & Rates
3,000 departments—stores and personnel. Overheads of these four departments as per primary distribution
Factory Manager's Salary
Other Factory Expenses
2,000 summaryand direct material cost and direct labour cost are as follows
5,000
C)Flce Overheads Particulars Leather Textile Stores Personnel
90,000

The factory overhead rate based on materials comes to : Overheadsas per primary distribution summary 4,00.000 139,000
15,000 Directmaterial cost 30,000
50,000
x 100= 30% Direct labour cost 7.00.ooo 1.40,ooo 60,000

Supposein 2016 the value of materialsused is doubled on account of doubling of the price level. Overheads of stores are shared by leather, textile and personneldepartments in the ratio of 5 : 4 : I
If the factoryoverheads are charged @ 30% on materials, it will result in excessive over-absorption of andthat of iersonnel department are shared by leather,textile and stores departments in the ratio of
works overheads, because most of the factory overheads are fixed.
This methodwill result in greater recovery of factory overheads from those cost units which During the month, leather department produced 500 bags and 1,000 shoes and textile department
use superiorquality of materials in comparison to those which use materials of inferior quality. This produced2,000 trousers and 5,000 shirts. Overheads of leather department are absorbed on the basis of
seems very illogical becauseactually reverse should have been the case. percentageof direct labour cost and that of textile department are absorbed on the basis of percentage of
(iil) This methoddoes not make any distinction between jobs done by skilled and unskilled workers, directmaterial cost. Direct costs of four products are as follows :
becauseworks overheadsdo not only depend upon materials but also on the type of workers employed. 500 1,000 2,000 5,000
Similarly it does not distinguish between manual and machine work. shoes trovsers shirts
(iv) The method also ignores the time factor while most fixed factory overheads vary with
time. A Direct labour cost (O
job which has taken six months to complete should be charged twice the amount of works
overheads in Directmaterial cost (O
comparison to a job which has taken only three months to complete.
(2) Direct labour cost method. The cost of direct labour incurred in the manufactureof the You are required to prepare :
productis usedas a base for allocation of factory overheads in this method. The formula (i) Secondary distribution summary and computationof absorption rates.
for calculating
the factoryoverheadrate based on labour can bf put as follows : (ii) Cost sheet showing total works cost and per unit works cost of bags and shoes.
(iii) Cost sheet showing total works cost and per unit works cost of trousers and shirts.
Amountof factory overheads [B.Com. (Hons.) Delhi, 2013]
Factory Overhead Rate = x 100
Cost of direct labour

I. The time taken in setting ajob on the machine is termedas "setting

up time" while time taken to removeajob
from the machine is termed as "setting off time".
 Ov
EIÄHEADS-DISTRI

Summary
Secondary Distribution Overhead Rate a.
Amount of facto
Solution: (i) (Repeated Distribution Method) overheadq
Prime cost
Textile Stores (R)
Leather(t) Personnel has the advantage of simplicity
and is applied because it consider' both materials and
Particulars rise to overhead expenses.
which give Ilowever, it suffers from the same drawbacks from which
cm erheads as per primary 1.75,500 methods suffer and, therefore, is rarely
distributionsummary 1.60.ooo firsttwo used.
10490,000 tnethod can give satistklctory results where
Stores (5 : 4: I) 59,667 29,833 a standard article is produced. requiring a constant
Personnel(3 : • • l)
89,500
11,933 of materials and number of hours engaged upon its manufacture.
14,917
Stores(5 : 4: l) 994 497 2,983
Personnel(3 : 2: t) 250 197 (-)497 Hourly rate methods
Stores(S : 4: I) 22 ( ) Machine hour rate method. The machinehour
28 so rate methodof allocation of factory overheads
Personnel(3 : 2 : l) isusedin those cases where the processes of manufacture are carried out by machines and there is very
Total littleOfpractically no manual labour. It is determined by dividing the overhead cost to be apportioned or
by the number of machine hours expended or to be expended. The
Computation of Absorption Rates : formula for calculating the
may be put as follows
For Leather Department : overheadrate
4.81,687 Amount of factory overheads
100 = 96.34% Overhead Rate
I. As a percentage of Direct Labour Machinehours
For Textile Department The Chartered Institute of Management Accountants (CIMA). England defines a machine hour
5.41,313 rateas"an actual or predetermined rate of cost apportionment or overhead absorption, which is calculated
x 100= 108.26%
2. As a percentageof DirectMaterials bydividing the cost of apportioned or absorbed by the number of hours tor which a machine or machines
expected to be operated."
(ii) Cost Sheet of Leather Departtnent areoperated or
(Bags and Shoes)
BASIS POR APPORTIONMENTOF DIFFERENTEXPENSES
Bags Shoes
Expenses Basis
500 Bags (k) Per bag (R) I ,OOOShoes (R) Per shoe
Particulars (R)
StandingCharges
200
Direct Materials 200 I. Rent and Rates I . According to the floor area occupied by cach machine including
400 the surrounding space.
Direct Labour 300
2, llt•atingand
Lighting 2. 'the numberof' points used plus cost of special lighting or
Prime Cost 600 heating tor any individual machine. alternatively according to
soo
Factory Overheads 1,92.675 385 289
floorarca occupiedby each machine.
(96.34% of direct labour) 3, Supervision 3. Estimatedtime devoted by the supervisory staff to cach
machine.
Factory Cost 985 789 4. LubricatingOil and Consumable Stores 4. Capital values.machinehours. or past ex-pcrtcnce.
5. Insurance 5. Insured value of each machine,
(iii) Cost Sheet of Textile Department 6. Miscellaneousexpenses 6. Equitable bcsis depending upon facts,
(Trousers and Shirts) MachineRunning Expenses
I. Depreciation' l. Machinehours or capita)values of the machinesor both.
Trousers Shirts Depreciation for each machine can bc calculated separately if
2,000 Per 5,000 details regarding cost. scrap value and working life have been
Particulars Per
given. In such a case the amount of depreciation per hour will
Trousers (Z) trouser Shirts(0 shirt (t) be cost minusresidual value divided by ettectivc working life
Direct Materials 150 40 (in hours).
Direct Labour IOO 2, power 2. Ilorse powerof machines,or machinehours or both. In case
100
separate meters have been installed for each machine, actual
Prime Cost 250 140 meter reading.
Factory Overheads 162 2, 16,520 43 3. Repairs 3. Machine hours or capital values.
( 108.26% of direct material)
Factory Cost 412
The method thus estimates the cost of running a machine for one hour and a job is debited with an
9, 16,520 183
anujuntof overheads equal to the number of hours for which the machine was used on that job multiplied
(3) Prime cost method. The method considers both direct materials and direct labour for allocation bythe hourly rate. The steps for computing the machine hour rate may be put as follows
of overheads. The formula for calculating the factory overhead rate, therefore, can be put as follows:
 DISTRIBUTION
OVERHEADS-DISTRI
Charges :
discussed before. The overheads of the service Hourly Day
232 Eight
are departmentalisedas Departments. power 24
overheads (l ) Lubricating oil
l. All factory apportioned among all Production suitable cost centres comprising groups
20
(2) Consumablestores
Departmentsare also Department is divided into among the different cost centres suitablyIt (3) 28
2. Each Production overheads are apportioned 80
factory (4) Wages
machines.and the total [BCom (Hons.). Delhi 20121
machine separately and, therefore, overheads
discussed before. calculated for each COMPUTATION OF MACHINE
HOUR RATE
3. Machinehour
rate is to be the different machines to find out the amount solution :
will be apportionedamong Particulars
centre Per Hour
one machinecost : (i) Fixed or standing charges,
Of Per Day
overheadsper machine.thus calculatedwill be divided between constant (0
irrespective ofthe use Oil
4. The overheads are those which remain StandingCharges 20
expenses. Fixed charges as power, depreciation etc Of
Variableor Machine insurance charges etc. Variable expenses such Consumable Stores 28
rent.
the machine, c.g, Wages 80
with the use of machine. calculated by totalling them and dividing by the number charges for 8 hrs.
rate offixed charges will be total working hours the TotalStanding 128 16
5. An hourly is to be noted that from the
workedby the machine. It (unless taken as productive
hours
MachineExpenses
of normalhours maintenance or for "setting up or setting off 'l time)
whichare requiredfor Separate hourly rate for each of the
machine expenses will be calculated Depreciation + 10,000 20
for this purpose. rate will give the Machine
must be deducted
charges rate and the machine expenses 5 2,000 hrs.
6. The totalof the fixed Hour 40% of Depreciation
Repairs& Maintenance 8
Rate. per hour 3
power
factory machine room, compute machine hoursper
Illustration 5.8. From the following data of a CompositeMachine Hour Rate
room will work at 90% capacity throughout the year and that a break.
annumassumingthat the machine
reasonable. There are seven holidays excluding Saturdays and
down of 10%of total working hours is =
Power Charges for 8 Hrs 24
on Satudays. Number of machines (each ofsame powerExpenses Per Hr.
Sundays.The factory works 8 hours a day and 4 hours 8 Hrs. 8
[B. Com. (Hons.), Delhi
type) is 40. 2007
Solution: Annual Power Expenses 6,000
(a) No.of//ours per annum MachineHours = Power Expenses per hour = 2,000 Hrs.
Total Number of Days 365
Less Saturdays 52 MachineHours = 2,000 Hrs.
Sundays 52 Illustration 5.10. From the following informationcomputeMachine Hour Rate in respect of a
Holidays 7 Ill installed in the department :
machine
254 Cost of the machine 40.000
Life of the machine 10 years
254 8 + 52 x 4 = 2,032+ 208= 2,240 Workinghours per year 2,200 hours
No. of MachineHours (Including setting up time of 200 hours)
90 90 Powerconsumption 10 units per hour@ I p.u.
2,240 40 x — x — = 72,576 Annual rent of the deptt. e 20.000
100 100
Illustration 5.9. Work out the Machine Hour Rate for the following machine whose Annualinsurance and other expenses of the machine 1,000
scrap value is Salary of the supervisor 5.000 per month
Nil :
Details The machine requires a chemical solution which is replaced every month at a cost oft 200. The
Cost of Machine Amount (O machine occupies 1/4 of the total area of the department. The supervisor devotes 1/6 of his time on the
Freight and Installation Charges machine.The setting up time is unproductive but power is consumed during that time.
Working life 10,000
[B.Co,m (Hons.), Delhi 20161
Repairs and Maintenance Five years
40% of Depreciation Solution:
Annual Power Expenses @ 25 paise per unit
6,000 Particulars Per annum ( Per hour (O
Someaccountantstake depreciationas a Standing Charges :
standing charge. As a matter of fact
expense.Strictlyspeakingit should be depreciation is a semi-variable 20,000
segregated between 'Fixed' and
absenceofsuchsegregation,a student 'Variable' elements. However, in the Rent
4 5,000
maygive an appropriatenote for
' VariableMachine Running'cost. taking 'depreciation' as a 'Fixed' ora
Supervisor salary (C 5,000 x 12 x 1/6) 10,000
 OVERHEADS-DISTRIBUTION
234 235
1,000
Insurance etc. 2,400 solution :
COMPUTATION OF
Chemical (200 x 12 months) 18,400 MACHINE HOUR RATES
Basis of
Total Items Total Machine Machine Machine
Apportionment
18.400 No. 1 No. 2 No. 3
Stores Allocation
Standing Charges per hour 2,000 hrs.' consumableMaintenance 1,400 300
9.20 and Allocation 500 600
Repairs Effective H.P.
1,800 400 800
Variable Charges : power 720
Rates Area 120 240 360
40,000 gent and Light Area 2,400 240 1,200
Depreciation 10 years x 2,000 hrs. Heat and 400 40
Buildings Area 200 160
2.00
Insuranceof 200 20 100 80
Power of Machines
Insurance
Book Value
480
11.00' of Machines Machine Hrs. 120 200 160
Depreciation 7,200 1,309 3,273 2,618
Machine Hour Rate supervision
Area
4,400 440
22.20
Charges Area 2,200 1,760
WorkingNotes : General 1,100 110 550
200 = 2,000 hrs.
Working hoursper annumare 2,200 less Total 20,100 3,0999,063 7,938
Power 10 I 10
MachineHours 55,000 25,000
10,000 20,000
10 Rate
Power per hour = 2,200 x 2,000 MachineHour .3099 36252 .3969
Depreciation of Machine may also be apportionedon the basis of
bookvalue of machines. In such
company has three
Illustration 5.11. A productiondepartmentof a manufacturing different a casea machine
hour rate will be :
for each of which it is desired to establishedmachinehour rates. Total
machines, MachineNo. I Machine No. 2 Machine No. 3
ending 31st December, 2016 are .
The overhead expenses for this Department for the year 7,200 2,400
Depreciation 1,800 3,000
Consumable Stores : be 20,100
300 Totalshall, then 3,590 8,790 7,720
MachineNo. I
500 MachineHour Rate .359 .3516 .386
MachineNo. 2
MachineNo. 3 600 Note. In case the Horse Power of Machines and Machine Hours vary considerablyfor different machines, it will
1,400
beappropriateto charge cost of power to different machines on the basisofa Weighted Ratio "Horse Power Machine
Repairs and Maintenance :
MachineNo.I 400 Hours".Similarly,if the values of Plant and Machineryand MachineHoursvaryconsiderablyfor different Machines,
MachineNo. 2 600 itwillbe appropriate to charge cost of depreciation over different machines on the basis of" Value x Machine Hours".
MachineNo. 3 800 Illustration 5.12. A manufacturing company uses two identical large and four identical small
1,800
machines.Each large machine occupies one quarter of the workshop and fully employed three workers;
Power 720 eachsmall machine occupies half the space of a large machine and fully employs two workers. The
Heat and Light
workersare paid by piece work.
400
Rent and Rates 2,400 Each of the six machines is estimated to work 1,440 hours per yeyr, while the effective working
Insurance of Buildings each small
Insurance of Machines
200
life is taken as 12,000 working hours for each large machine and 9,000 working hours for
machine.Large machines cost 20,000 each, and small machines 4,000 each. Scrap values are 4,000
480
Depreciationof Machines 7,200
Supervision and 100 respectively. small
Repairs, maintenance and oil are estimated to cost for each large machine 4,000 and each
4,400
General Charges 1,100
machine 1,200, during its effective life.
20 units per hour, and
Power consumption costs 5 P. per unit, and amounts for a large machine to
20,100

Additional operating information is available as follows : fora small machine to 2 units per hour.
occupies halfhis time which is
Effective H.P. Area Occupied Book Value Working The manager is paid 4,800 a year, and the workshop supervision
dividedequally among the six machines. Details of other expense are
(Sq. ft) of Machines Hours
Machine No. I 5 IOO 12,000
Rent and rates of the workshop : 6,400 a year.
10,000 employed) 1,820 a year.
Machine NO.2 Lighting (to be apportioned in the ratio of workers
500 20,000 25,000
Taking a period of three months as a basis, calculate the machine hour rate for a large machine and
Machine No. 3 15 400 16,000 20,000
a small machine respectively.
You are required to calculate a Machine Hour Rate for each of the three machines. Show clearly
the basis of apportionment that you use.
 230
'jbvee
Solution

for
Standing :
to employed)
I,igjinng occupied) j 00
ond
Supervi%ion(equally per

(being divided by
Hourly rate of Standing
Machine : Large
Small total
Depreciation
4,000
20.000
cost 000 100 "J/je following refer to of
Scrap Value 3900 incorporated in of
000
3,900 original Of machine in "Z,f//j;
12,000 9,000 lif'eis If) I
Hourly Rate
' working time per year weeks Of44 of ma.tøeoatu,•,
Repairs, Maintcnancc and Oil etc, is to take up hours,
4.000 divided by 12,000
tirnc estimated at I(if) hour", time, (
1.200dividedby 9,000
Power Consumption I .00 (b) Electricity utcd by machineduring at of 9,
20 units at 5 p. per unit unit, NO current i' taken during maintenance up
2 units at S p. per unit 4.32 (c)
"jhe machine requires a chemical winch is at at
Machine I lour Rate of? '2,0cach time,
are incurred in retspcctof a machine %hop The e%timatedcoit of maintenance per year it
Illustration 5.13. The following annual chargc%
by meant' oc five machinc% exactly Of'%ijnilar
manual labour is almost nil and where work (Ione (e) 'l'wo attendant%control the operation of machine Eden"'.al rnuh.rn,
and specification : "fljcir combincd weekly wages, in.urance and employer's pay
amount to ? 120,
for the Shop
Rent and PatC%(proportional to the floor space occupied) (f) Department and general work. allocated to mach" for 'jcat
2, Dcprcciationon cach machinc amount to ? 2,000,
Repairs and maintenance for the five machines
4, Power consumed (as per meter) @ p. per unit for (he "hop
You arc required to calculate the machine-hour ratc neccuar•j to provide fid recouprnent of 'tie
of operating thc machine, (I} Com 4, 2009 adopted/
S. Electric charges Torlight in the shop
6. Attendants : Solution COMP' /IA'[IOA
nere are two attendants IliCfive machines and they are each paid (J) pcr month,
7. Supervision :
For the five machines in the Shop thcre one %upcrvisorwhose emolument", arc 230 p,m, StandingCharges per annum
8. Sundry suppliessuch as Lubricants.Jutc and Cotton Wa%teetc, for the Shop Overheads
9. Hire Purchase Inttalment%payable for 'he machine (including 300 a%interc%t)
Machineuses JOuniti of powerper hour.Calculate the machine hour rate f'or thc machine Wages of attendant',
ror the year. //3,Com, //ons, Delhi, 2014/
Solution : COMPUTATION
or MACI RATE THE YEAR Total Standing Chargcz
Hourly of Standing
(a) Standing Cliarges :
MachineExpensesper hour
Pcm and Rates per machine
Lightning in Shop per machine
Attendant's Salary per machine C)epreciation
10
 S'

OVERHEADS-DISTRI DISTR'BIJTION
238

1.200
COMPUTATION OF
MACHINE HOC*
Repairs Maintenance 2,000 RATE
3,000
20 x 50 Standing Charges 900
Chemicals
2,000
.50 Machine Expenses :
Depreciation
l.qoox16x9 Repairs
Power Chemicals
2,000x 100 107 .63
Power
Machine hour Rate -53
4.42
Machine hour rate
orking Note :
Efléctive Machine Hours : Illustration 5.16. Calculate Mahcine
Hour Rate from the following particulars
Annual Working Hours Hrs. :
Lcss required for maintenance Salvage Value 25,00.ooo
200 Estimatedlife of the machine
2,000 Working Hours (per annum) 25,000 Hours
Illustration 5.15. Continuingthe informationgiven in the Illustration 5.14, compute the machine Hours required for maintenance 3,000 Hours
hour rate in each of the following cases
• Setting-up time required 400 Hours
8% of actual working hours
(a) If setting up time is taken as productive time and the current is taken during setting up. AdditionalInformation :
(h) If setting up time is taken as unproductive time but current is taken during setting up. (i) Power 25 units @ 5 per unit per hour.
(c) If setting up time is taken as unproductive time and no current is taken during setting up. (ii) Cost of repairs and maintenance 26,000
per annum.
Solution: (iii) Chemicals required for operating the
machine 2,600 per month.
COMPUTATION
OF MACHINEHOUR RATE (iv) Overheads chargeable to the machine
18,000 per month.
(v) Insurance Premium (per annum) 2% of
thecost of machine.
(vi) No. of operators —02(looking after three
Standing Charges other machines also)
(vii) Salary per operator per month 18,500.
Machine Expenses : 1.50
Solution : [cupc 20131
Depreciation
Repairs and Maintenance COMPUTATION OF MACHINE
HOUR RATE
Chemicals .60 Particulars
(Assuming Setting-up (Assuming Setting-up
Power 16 9 p. .50
1.44 time as 'Unproductive': time as •Productive' :
Machine hour rate Machine Hours :
4.49 MachineHours: 2.600)
(h) COMPUTATION OF MACHINE HOUR RATE
StandingCharges :
3,000 Overhead
Chargeable* 18,000 x 12 -— 2, 16,000 89.74
Standing Charges S3.os
1.900
1.58 2, 16,000
Machine Expenses :
2,407hours 2,600 hours
9.000
Depreciation Operator'sSalary :
.47
18,500 x 12 x 2 Operators
1.200
Repairs 4 machines
1.900
.63
20x 50
Chemicals 2,407 hours • 2,600 hours 46.12 42.69
1.900 .53
2.000 16x 9 Insurance
: 2%oft = 50,000 20.77 19.23
1.900x 100
I .52
156.63 145.00
Machinehour rate
4.73
 •t

240 OVERHEADS-DISTRIBUTION
241
Machine Expenses per hour
solution: (a) COMPUTATION OF MACHINE
HOUR RATE
25.00,ooo-? 1025.000
Depreciation : 95.00
StandingCharges
95.00
25,000 hours
Power : (25 units S) 125.00 supervisor's salary
125.00 800
Repairs and Maintenance : 10.80 10.00 Otherfixed charges 3,000
Total Standing Charges
26,000 26,000 3,800
2,407 hours • 2,600 hours Machine hour rate Of Standing Charges 3,800
650 5.85
2,600/ 12 2.6008 12 MachineExpenses
Chemical : 12.96 12.00 Depreciation :
2,407hours 2,600 hours
Costof the machine
77,000
Machine Hour Rate 400.39 387.00
Less : Scrap value
5,000
Working Notes : 72,000
72,000
I. (Hours) Hourlyrate of depreciation
Working Hours 650XlOx12 .92
Less : Maintenance
hours 3,000
400 2,400
Printing ink
650 3.69
2,600
Lets : Setting-uphours 720
193 Electricitycharges
2,600 hours 650 1.11
Actual working hours 3,300
108 2,407 Cost of maintenance
2. It i' assumed that no power is consumed bythe machine during introductive hours i.e., during 650 5.08
maintenanceand
unproductive setting-up hours. Machine hour rate
16.65
Illustration 5.17. (a) Fromthe followingdata for the month of March 2016, compute Operating Machine hours have been calculated as follows :
the machine
hour rate to be charged in respectof jobs carried out during the inonth on a printing Normal working hours
machine in a job 600
printing press : Less for normal repairs
(i) Cost of the Printing machine
so
77,000 550
(ii) Estimated life of the machine Add Overtime hours
I O years 100
(iii) Anticipated scrap value at the end of 10 years
(iv) Normal working hours per month 5,000 650
Machine hour rate during power failure . 16.65+u = 20.65
(v) Hours run on trial runs and job setting 600 CompositeMachinehour rate
(vi) Hours lost due to repairs (normal) 20 Total wages :
(vii) Hours lost due to power failure so for normal time
(abnormal) 520 x 4.160
(viii) Cost Of maintenance 80 for overtime
3,300
100x 12=e 1.200
Supervisor's Salary
(x) Cost of printing ink etc. 800 5,360
(xi) Electricitycharges 2,400 5,360
Hourly rate of wages = — = 9.40
(xii) Other fixed charges 720 570 hrs.•
(xiii) Overtime hours worked 3,000 *650 hrs. —80 hrs. = 570 hrs.
to complete jobs in time
(xiv) Rate of wages per hour IOO
Compositemachine hour rate = 16.65•+ 9.40 = 26.05
(normal) Cost of Abnormal Idle Time = 80 hrs. x 20.65 = t 1,652
Rate of wages per hour 8
(overtime) The abnormal idle time loss will be charged to costing profit and loss account.
(;vi) Rate of wages per 12
hour (during power (b) Since there are equal number of days in March and July, the machine
(h) Ifyou were to quote failure) hour rate of March can be
forajob to be executed usedfor quoting the price of a job in the month of July 2016. However, adjustments
extent if my, would in July 2016, requiring
you be guided by the 300 machine hours, to what madeif there is any change in the variable costs such as ink, may have to be
machine hour rate of electricity charge etc.
March 2016. Give reasons for your
Illustration 5.18. A machine costs 90,000 and is deemed to have a scrap
Ofits effective life ( 19 years). Ordinarily the machine is value of 5% at the end
expected to run for 2,400 hours per annum but
it is estimated that 150 hours will be lost for
normal repairs and maintenance and further 750
be lost due to staggering. The other details hours will
in respect of the machine shop are :

9,

4:34 "

.1
 wages. bonus and provident contributionofeaeh operators (each
operator is
Rent and rates of the shop 6,000
(c) General Lighting or the shop 3.000
Insurance premium for the machine (i) Life octhe
2SO 10
(e) Cost Of repairs and maintenance per machine
200
Shop supervisor's salary 250 Repairs
(g) Power consumption Of the machine per hour 20 units. (iii) power is consumed
SOO
rate of power per 100 units 10. Per is to be borne by the
month
(h) Other factory overheads attributable to the shop The supervisor time
There are four identical machines in the shop. The Supervisor is ex supervising not
pected to devote4,000 work on
time for supervising the machine. Compute a comprehensive machine one-fifth The cotnpany hires out
hour rate from excess capacity including one
the othis fixed variable in the machine
Solution : plus for job4. Assuming
be by
STATEMENT SHOWING COMPUTATION OF MACHINE Solidi011:
HOUR RATE [tcvv,l June.
Fixed Expenses (per annum) COMPUTATION
MACHINE
Rent and Rates RATE,
General Lighting per
750 per t 0/01
Insurance 750 VariableCosts
Supervisor's salary 800 Repairsand Maintenance
Allocatedoverheads I ,200 Consutnable Stores 24.000 6.000
Wages of the operator Depreciation x 1/10) 30.000 7.300
1,000
Power 20,000 3.000
3,000
Fixed expenses per hour (7,500/1,500) 15Units @ 3 for 600 hours (for a quarter)
7,500
Fixed Costs 27.000 43.300
(See Note)
Rent,Rates and Taxes 8,000 per quarter)
Machine Expenses (per hour) 5.00
Operator'sWages (@ 3,000 p.m.) 8.000
Power Supervisor'sSalary ( 1/5 of R 5,000 p.m. or 1.000 9.000
Repairsand Maintenance p.m.) ) .000
2.00 20.000
Depreciation TotalCost
2.00 61.300
Machine Hour Rate 3.00 TotalMachine Hours for a Quarter
7.00
600
Machine Hour Rate
Note. It is presumed that 750 hours are lost due 63.300/600
to normal staggering. Hence, the
1,500 ie, 2,400 - ( 150 + 750). normal working hours
- 100.16
Illustration 5.19. Calculate the machine hour rate Working Notes :
of a machine with information
given below: l. Total Effective Machine I-Irs.in a quarter—13x 48 •0 624
Total number of weeks per quarter = 13 Less : Maintenance Stoppage Hrs. 24
Total number of hours per week — 48 600
Stoppage due to maintenance — 8 hrs. p.m. 2. Power is being consumed during set-up time also. Hence. power has been assu„vcd'or 600 hours.
Time taken for set-up = 2 hrs./week 3. Set up time has been taken as productivetime.
Cost details :
(b) Computation of Rate to be quoted
Cost of machine Variable Cost per hour - 45,500/600 - R 75.83
Repair and maintenance 24,000 p.a. Add : 20% Margin
Consumable stores - OO,OOOp.a. t 91.00
Rent, rates and taxes — 8,000 per quarter
(2) Labour hour rate method. Under this method, overheads are charged to production on the
Operator's wages = O,ooo p.m. calculated by dividing
basis of number of labour hours of work put on every job. The overhead rate is
Supervisor's sa!ary - e 5,000 p.m. department for a given period by the total estimated direct
the total works overheads for the shop or
Cost of power = 15 units per hour at t 3 per unit labour hours for the same period. The formula for calculating the overhead rate may be put as follows :
Amount of overheads
Overhead Rate = Total Number of direct labour hours
 244 OVERHEADS-DI$NI -DISTRIBUTION
OVERHEADS
for those departments where hand
This method of allocating overheadsis adopted (3) Dual hour rate method.
results because incidence of mostlabo
Where in a
satisfactory shop both manual
dominating factor in production. It gives very over labour and machrnesplay an equally
to the time factor. ITT,po
is proportional to time and this methodgives due consideration (i) those which relate to manual
work, such as
lates to the activities of a production employee's insurance premium etc.; proportionatecharge for
Illustration 5.20. The following information re depanm those which relate to machine
lighting and forernan's
for a certain period in a factory : ent as depreciation,
power,
The former (i.e. i.) when divided by repairs, operator's wage etc.
the number of
hourrate,and the latter (i. e. ii) on being divided by direct labour hours
Materialsused the number ofmachine will give the direct labour
Direct vs-ages 72,000 hourrate.A job will be debited with the amount of hours will give the machine-
overheadscalculated
Hours of Machine operation 20,000 60,000 Forexample. if the direct labour-hour rate is Re. 1 on the basis of these two rates.
and
Labour hours worked 24,000 directlabour hours and 15 machine hours should be machine-hourrate is SO paise, ajob requiring 10
debitedwith 17.50 (i.e. 10 x I +
Overheads chargeable to the department overheads. 15 .50) as
On one order carried out in the departmentdu: '1.2period, the relevant data were : 48,000 Illustration 5.21. Ganges Printing Company
has three operating departments
Binding: No. 2 Lithographing and No. 3 Engraving. The : No. I Printing and
predetermined expense rate. Company has a job order cost system using
Material used single The management has been made
1,650 4,000 aware of the deficiencies of using
Labour Hours sucha rate and is now interested in departmentalising factory overhead.
Direct wages A study reveals that Department No. I has 8 similar
Machine Hours 1,200 3,300 machines representing a large investment and
of cost of this order by using the following three callingfor high repairs and depreciation charges. In Department No. 2 all
Prepare a comparative statement methodsOf therefore, paid the same hourly
the workers perform similar
tasksand are, wage. Department No. 3, however, has several classes of
recoveryof overheads:
(i) Direct Labour Hour RateMethod; workerseach group being paid a different rate per hour.
The estimated factory overhead and production data costs are as follows :
(ii) Direct Labour Cost Rate Method; Printing & Binding
[B.Com. (Hons.), Delhi, Lithographing Engraving
(iii) Machine Hour Rate Method. 2003]
Solution : Factoryoverhead 40,000 68,750
(i) Direct Labour Hour Rate Method: Directlabour hours 10,000 20,000 40.000
Overheadschargeable to the department
Direct Labour Hour Rate Labour hours worked Directlabour cost 25,000 55,000 80,000
Machinehours 20,000 Nil Nil
48.000 Required : (l) An analysis to advise management regarding the types of rates to be used in these
24,000 departments.
(ii) Direct Labour Cost Method. (2) A computation of the rates recommended.
Overheadsfor the department
Percentageof Direct Labour Cost = x 100 Solution :
Direct wages
(i) Department I
48,000
100 = 80% This department has 8 similar machines representing large investment and the operation is mainly
60.000 used for recovery of overheads in
done through machines. The machine hour rate should, therefore, be
(iii) Machine Hour Rate Method • this department.
Overheads for the department
Total Factory Overheads
Machine Hour Rate Hours of machine operation Machine Hour Rate= Machine Hours
48,000 40,000
2.4 = 2 perhour
20,000 20,000
COMPARATIVE STATEMENT OF COST .......ORDER machines hours" have been considered. These
While calculating machine hour rate only "effective machine.
DirectLabour for normal maintenance, repairs etc, of the
Particulars DirectLabour Machine are hours left after providing for hours required
Hour Rate Cost Rate Hour Rate (ii) Department Il hourly rate.
perform similar tasks and are paid the same
In case of this department all the workers may be applied.
of absorption of overhead
Materialused 4,000 4,000 4,000 Hence, the percentage on direct wages method
Direct wages 3,300 3,300 3,300 The rate is computed as follows :
Prime Cost 7,300 7,300 7,300 Total Factory Overheads
Factory Overheads : Factory Overhead Rate = Total Direct Labour Cost
At 2 per hr. fur 1,650 labour hrs. 3,300
68,750
At 80% of < 3,300 (direct labour cost) 2,640
55,000
x 100= 125%
At 2.4 per hr. for 1,200machinehours 2,880

Works Cost 10,600 9,940 10,180

overhead percentage should
be absorbed be applied to Direct
b
In epartment
labour hour depanment workers of
rate method is different
Theoverhead best method applied
rate is computed as follows
Overhead Rate Total FactoryOverheads
Total Direct Labour I louts
1.20.ooo
per bout ,
Illustration 5.22. production been
A factory of
and Budgeted
department among the five Oelhi. 20101
is pending
and the following details are given to you . level
Overheadapportioned/allocatüd
3.000
48.000 12.000
1.12.OOO 6.000 lobouc
32.000 Apportionnwnt

16.000
OVV.uHV,ÄO
department
Calculate the overhead rate of each production Itcvvøt,
service department costs.
of st. we
y,
(a) Let x, be total overheadcosts
y,
x - 16,000+0.1 Rote
Y2- 24,000+0.24we get x, 18.775 Cost
equations
Solving these 27,755 would be
production
among SUMMARY
The distribution of overheads
OVERHEADS
DISTRIBUTION i.ss-
S.OOO 2.00 -
particulars
48.000 1,12.ooo
(40%) 7,s10
(20%) 3.755 (20%)
Direct allocation Cost of S, (10%) 2.776 (60%) 16,633
A pportionment of Overhead Cost OfS,
comments.
be comouve five
Apportionment of Overhead . Hence,
separately.
Total Cost machine hrs. eac\Aof
labour hrs. ovevhead rates a
Budgeted Capacity 10.91 on sate.
of
Overhead Cost per hour Company makes several product lines Engineering •a
Mccrut Manufacturing
Illustration 5.23. departments - X, Yand
Z. operations.
production
proccswd through three
 10 OF PR
Stetheds
80 Cost FOR
AS
Jon
Rate
•t
60 flout Rate 80hm
Material Cost
SO
ef LabourCost 200
2.soo PrimeCost •soo
the 1.soo 600%
hours ped•d *00 2u.)O
'SOO
Nos the 12.mo
the pt.duetion
a customerand department has Hour Rate and
An has the job : Machine Hout
Rate
estimate of the cost required
MaterialCost based
2.soo time does not vary
Ntat•etial 2.000 Cost Perventage is suitableooty
4,soo \CthOd may
used if the
Percentageof PrimeCost is
simplebut
hoots - so •enta.geof Oit«t Labour Cost. the
hoers requited - so RateMethodis verysimple
is appropriatefor and
ifallthejobs
absorption rates töt absorption Recommendation to the
(a) Caleulate methods, six overhead Company. It Willbe
•teach.
and commenton the suitabitny
cost of the order based
on each Of the above
Calculate the production company, (Inter).
Give your recommendationto the
DISTRIBUTION OF OFFICE
Solution Ltd. AND ADMINISTRATIONOVERHEADS'
Atlas Engineering procedure for distribution of
ABSORPTION RATES FOR ABSORPTION OF administrationoverheads
COMPUTATION OF OVERHEAD tst•ry overheads. is moreor '—sthe same in
PRODICUONOVERHEADS collection and classification. All
of
items of administration
Formula suitable cost account numbers (as explained overheadsare collectedand grouped
St. of Absorption Absorpti
on before)This facilitates
identificationof costof
Rate item.
Os•rheads 30.00.OOO Departmentalisation. After collection
and
are allocated and'or apportioneddirectly classification,the omce and
ImbourHrs 1,200 and'or indirectly,as the casemay be, to
Direct Labour Hour Rate departments/ administrationCost
30.00.ooo Thesecostcentresmaybe generalofftce.
Overheads department. department, law department.
—e 2,000 accountsdepartmentetc. The overheadscapableof
MachineHrs ISOO hrs. identified with specific department are directlycharged to them.
2. MachineHour Rate The rest of the overheadsare
ioned over various departments on an appropriatebasis similarto that for factoryoverheads.
Overheads 30.00.ooo
300% (iii) Absorption. Oftiee os•rheads Ofeach department shall be charged to differentprod1Rtion
Percent• of DirectMaterialCost &.partmentson a suitable basis. For example overheadsof personneldepartmentcan be absorbedon
30.00,ooo of number of employees serving in each department.
ProductionOs•rheads - 600% Since administration overheads constitutea minorportionof the totalcost. it willnot be advisable
Pet•entase of Direct Wages Cost Direct to a complicated method for their absorption, as above. A blanket overheadrate: may
•
30.0000 the entire factory. The rate may be calculatedaccordingto any of the followingmethods
200% term overheads"has usedthro•out inplee the term
PrimeCost t. For and administrationoverheads."
Percentage of Prime Cost "otÄiee regarding
pt.ducti•n Ox.•theads
30.00.ooo Blanket overhead rate means a single overheadrate for the entirefactory
withoutgoinginto
tmooo
N. of Jobs 300 expensesincurred in each department.
6. Rate