COST ACCOUNTING AND COST

CONTROL

LABOUR COST CONTROL

Meaning of Labour Cost -
Labour cost, representing the human contribution to production is an important cost factor which require
constant control, measurement and analysis.

Human effort used for conversion of materials into finished product or doing various jobs in the business are
known as labour. Labour is the most perishable commodities and as such should be effectively utilised
immediately. Therefore, efficient and effective utilisation of labour is an important need of the modern
business. Payment made towards the labour is called labour cost. Labour cost is the significant element of
the total cost of production.

The cost which is incurred toward the labour is known as the labour cost. Labour is one of the most important
factor of production and so the labour cost forms key constituent for any product or service. Thus, labour
cost is basically the money spent on manpower for those who are engaged in the production process.

Before an entrepreneur indulges in industrial activities, he has to ascertain the labour cost to know the
viability of the project, as the success and failure of the project depends on it. It gives an insight on the total
labour cost and helps to identify the extent to which further labour welfare expenses can be carried out.

Importance of Labour Cost Control -

Following are the importance of labour cost control.
1. Labour cost control puts proper time keeping of labour.
2. Significance is placed on the requirement of the right labour for the cost reduction.
3. Skilled labour always observes so it should be used properly.
4. Labour cost influences the cost per unit of the product to a large extent.
5. As labour i.e. human is one of the, factor of production, it signifies contribution of the human in the
production.
6. Due to the different laws available for the protection of the labour it is a committed cost.
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TIME KEEPING
Meaning of Time Keeping -
When the arrivals as well as the departure time of the labour is recorded, it is known as time keeping. Where
there are large numbers of employees in an organisation, separate personnel in the name of "time keeper"
is appointed who heads the time keeping department. The purpose of this department is to provide timely
information to the payroll department, which was assist the latter in computation of the wage payments.

Benefits / Objectives of Time Keeping -

Time keeping has the following advantages or benefits :
1) It helps in assessing and controlling the overtime and ensure that the production is done within the
budgeted time.
2) Payroll is smoothly managed with the help of proper time keeping.
3) Top level management is timely and effectively reported.
4) It helps workers to be disciplined and keeps them motivated at the same time.
5) It assists in exercising control over the labour cost.
6) Awareness of the goals it created and at the same time priority of the goals is set.

Purpose of Time Keeping -

Time Keeping has the following purposes :
1) It helps in maintaining the rules and discipline and avoid extra payments to employees.
2) It provides overhead rates on the basis of labour hours.
3) It differentiates between the normal time and the overtime and thus the same is separately allocable.
4) Statutory requirements are duly complied with.
5) Where the labour is paid on time rate basis it provides with the actual time.
6) It is helpful in calculation of Bonus, Gratuity, Pension Payment etc.

Different Methods of Time Keeping -

Attendance of workers is usually recorded by the following methods :

A) Manual Method -
1. Disc or Token Method -
As the chances of manipulation are extremely high, reasonable care should be taken in exercising this
system. Thus, it is suitable only in case of small organisations where the numbers of employees are less. A

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Unique Identification number is allocated to each worker and the same is put on tokens or on discs, which
are hung on the factory gate. Each worker arriving removes the same from the display and it is put in a
separate box kept there for such purpose only. After the reporting time is over the box is switched with
another box in which the latecomers put their tokens along with details of the extent they are late. Further,
the attendance is recorded on the basis of these records.

2. Attendance Register Method/Muster Roll -

Under this method, register is kept at the factory gate and the workers coming in and going out of the factory
mark their attendance in this register. This is an old and a traditional method of recording the attendance.
This marking may be done by the employee himself or any person deputed by the organisation. Afterwards
from the attendance register, entries are posted to the individual accounts.

B) Mechanical Methods -
Since the manual methods were facing a lot of defects, mechanical method were adopted for the purpose
of time keeping and the attendance is recorded by a time clock.

1. Time Recording Clock Method -

These clock card were then kept in a rack which was available at the factory gate. A clock card bearing and
identification number was allotted to every worker. On arrival, a worker was supposed to punch his card
with his arrival time and again kept in the rack. Upon the departure the process was simply reserved and he
attendance was taken into account.

2. Dial Recorders and Key Recorders -

There also exist dial recorders and key recorders apart from the above clock recorders and they are as follows
a) Key Recorders -
A number of keys are present and every key is imprinted with the number appearing on the ticket of the
worker. When the key is put in the hole and is rotated automatically, the time and the ticket number gets
recorded on the paper which is placed inside the recorder.
b) Dial Recorders -
Under these mechanical method, several holes are present across a dial. Each hole represent a number
which corresponds to the ticket number of workers. When the workers presses the dial arm into a hole, time
get recorded at romantically on the piece of paper which is placed inside the recorder in front of the ticket
number of the workers.

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TIME BOOKING
Meaning of Time Booking -
Under this system, time that is spent by a worker in a day of various alternate jobs is calculated. For marking
the start time and the end time attributable to a particular job, job cards, piecework tickets or time tickets
are used.
It is a system by which time spent by a worker on various jobs, order or contract is calculated.

Benefits / Objectives of Time Booking -

Time booking has the following objectives :
1. Wage and the bonus payment can also be easily computable.
2. Labour cost incurred on different products, job, contracts can also be calculated.
3. Labour performances can be evaluated by comparing the budgeted with the actual.
4. Labour hour spent and idle labour hour can be determined.
5. Overhead rates and absorption of overheads can easily be ascertained under the labour and machine hour
method.

Different Methods of Time Booking -

Following are the methods of time booking :

1) Weekly Time Sheets -

Better supervision can we exercised but manipulations are possible as the sheet is to be submitted at the
end of the week. Sometimes be timings are entered collectively for a week, which are based upon the
memory of the worker and may also be incorrect. Apart from this, worker may alter his timings for hide idle
time and claim higher wages. They are just like daily time sheets. Instead of recording the details on day-to-
day basis, the details are entered on the completion of the week. As 7 sheets are replaced by a single sheet
this method is rather more economical.

2) Daily Time Sheets -

Complete details of the worker i.e. his name, code number, start time of the job, end time of the job, nature
of the job are recorded in this sheet. This helps in checking that no false particulars are filled in the sheet.
Where the size of the firm is small, all the workers are provided with a daily time sheet which carries the
particulars of each job on day-to-day basis. The time spent on each job is calculated on day to day basis and
the same is recorded on these sheets.

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3) Labor Cost Card -
Instead of giving one card to each employee, only one card is passed on to all employee and time taken on
the job is recorded by each employee. This card shows the aggregate labor cost of the job or the product.
This card is meant for a job, which involves several operations or stages of completion

4) Time and Job Card -

This card is a combined record, which shows both, the attendance time as well as the time taken for
completion of the job. Therefore there is no need to keep separate record of both, time taken and
attendance time.

5) Job Cards -
The shop supervisor issued one card to every worker. When a worker begins a work, time is recorded using
a recording clock and the same card is purchased again on the termination of the job. Where the work is
lengthy and in between certain breaks are required than also the same is punched on and off for the timings.
When the job finally terminates, the card is returned to the supervisor and a new card for the fresh job is
issued in the same manner.

The purpose of job card is closely monitor the time spent on each job by the workers. Some of its main
objective are as follows :
i) To facilitate time booking with respect to the job done.
ii) To authorize the worker to carry out the job as per the directions.

Types of Job Card -

There are four types of job cards. They are as follows :
1. Job Card for Each Job -
Where the number of jobs to be completed is high and each job goes through different workers who
complete the job a separate card is issued for each specific job. By adopting this system, total labour cost
can be easily computed.

2. Combined Time and Job Card -

As the name suggest this gives the combine information regarding the attendance time as well as the time
allocated to each job including the idle time on weekly basis. It contain both the data, i.e. attendance time
and job time are marked on a single sheet, thereby reducing the paper work.

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Afterwards, attendance time is reconciled with the job time and the idle time ascertained can be dealt
accordingly.

3. Job Card for Each Worker -

Under this, at the beginning of the day or week, each worker if handed over his respective card in which his
start time and end time for a job are recorded. This card is kept with the department and is self-explanatory
about the job, which the worker has attended.

4. Piece Work Cards -

A piece work card or a group piece card is allocated to each worker or to a group of workers, depending
upon the system of wage payment is use. There is a particular card for particular job or one card for two
jobs, one card may serve the purpose of recording the work done on several jobs, the number of pieces
against each job and the time spent on them is recorded.
The workers are paid on piece rate basis and not on the time basis and the number of pieces produced for
the jobs done are calculated accordingly.

Difference between Time Keeping & Time Booking -

Time Keeping Time Booking

When a worker enter and leaves the factory his It records the time when the job was started and
attendance is marked. finished by the worker.
A separate time keeper is appointed. Job cards are marked by the workers only and there
after verified by the foreman.
Mainly used for calculating wages and overtime Mainly used for calculating direct labour cost on a
payment. job.
It calculates both time booked as well as time lost. Idle time or the lost time is not calculated.

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 OVERHEADS
Meaning and definition:

Overheads is the aggregate of indirect material cost, indirect labour cost, and indirect expenses which cannot
be conveniently identified with and directly allocated to a particular cost centre or cost object in an
economically feasible way. It is also known as indirect cost or burden or on cost.

It may be recalled that the total cost is broadly divided into direct cost and indirect cost. the total of all direct
costs i.e. direct materials, direct wages and direct expenses, is termed as prime cost whereas the total of all
indirect costs i.e. indirect material, indirect wages, indirect expenses is known as ‘overhead’.

Overheads = indirect material + indirect wages + indirect expenses

Definition:

1) CIMA, London
“Overheads is an aggregate of indirect material, indirect wages and indirect expenses.”
2) Harper
“overheads are those costs which do not result from the existence of individual cost units.”

3) W.w. Bigg
“All indirect costs are termed as overheads”.

Features of overheads

1) Overhead are indirect costs

2) They are common costs.
3) Overheads comprise of both cash expenses (i.e. rent , taxes, insurance etc.) and non-cash expenses
(I.e. depreciation)
4) Overheads consist of both production and non-production expenses.
5) Overheads are both variable and fixed.
6) They include both escapable and inescapable.

All overheads are the costs, but all costs are not the overheads

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Composition of overheads:

Type of Department Indirect Indirect Labour Indirect expenses

overhead concerned materials
costs
Works Factory or works Lubricants, Salary to foreman, Coal and coke, gas and
or production or consumable stores, shop-supervisor, water, heating and
manufacturing cotton waste, oil, technical directors, lighting, motive power,
dusters, brooms, works manager, haulage, time keeping
cleaning materials, store-keeper, shop expenses etc.
industrial oil and floor inspectors etc.
grease, soaps and
detergents etc
Office Administrative or Printing and Salary to office Public relation
office or stationery etc. manager, cashier, expenses, audit fees
management or telephone operator, postage and telegrams,
establishment computer staff, accountancy charges,
accountants, branch office expenses,
administrative legal charges,
officer etc. management expenses
etc.
Selling Sales or marketing Catalogues and Salary to sales Market research
price lists, banners manager, traveling expenses
and hand bills, free salesman, sales- advertisement, bad
samples and gifts, depot manager, debts, debt collection
posters etc. marketing staff etc. charges, traveling
expenses, publicity
charges, export duty
etc.
Distribution Distribution or Secondary packing Salary to distribution Packing charges,
delivery materials etc. staff, wages of carriage on sales,
packers, and freight outward,
dispatch clerk, delivery van running

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 delivery van-drivers charges, repairs and
and conductors etc. maintenance of
delivery vans,
warehousing charge
etc.

Classification of Overheads:

Overheads
Function wise Element wise behavior wise Control wise Normality
classification classification classification classification classification
Factory Indirect materials Fixed overheads Controllable Normal overheads
Overheads Overheads
Administrative Indirect Labour Variable overheads Uncontrollable Abnormal
Overheads Overheads overheads
Selling Overheads Indirect expenses Semi-variable
overhead
Distribution
Overheads

A) Function wise overheads :

1) Factory overheads:
These are the costs associated with manufacturing activities, the sequence of which begins with the
procurement of materials and ends with primary packing of the product. Factory overheads are also
termed as production overheads, works overheads, manufacturing overheads it means indirect
expenditure incurred in connection with production operations.
e.g. indirect wages, power, consumable stores, lubricants.
2) Administrative overheads:
These are the cost of formulating the policy, directing the organization and controlling the operations of
an undertaking which is not related directly to production, selling, distribution research or development
activity. Administrative overheads are also termed as office overheads or management overheads. E.g.
legal charges, stationery, postage, office lighting .

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3) Selling overheads:
These are the cost of seeking to create and stimulate demand or of securing orders. It is the cost incurred
for transferring the ownership of goods to the buyer. These are the expenses incurred for promoting
sales and retaining customers e.g. advertising, salaries and commission of sales personnel, showroom
expenses, travelling exp., bad debts, catalogues.
4) Distribution overheads:
It comprises of al expenditure incurred from the time, product is completed in the factory until it reaches
its destination or customer. E.g. packing cost, carriage outward, delivery van costs, warehouse costs.
B) Element wise overheads:
1) Indirect Material :
In the course of manufacture of a product, indirect materials do not form part of finished product
the indirect. The indirect materials are consumable items, coolants, cotton waste.
Which are required for completion of a finished product. Indirect materials cost is the cost which
cannot be allocated but which can be apportioned to or absorbed by cost centres or cost units.

2) Indirect Labour:
Indirect wages are the actual wages and overtime wages paid for all labour (other than direct labours)
in the factory, viz. helpers in factory, foremen, supervisors, inspection staff and production manager
etc. who do not help directly in converting the raw materials in to a finished product. It also includes
salary paid to office staff, selling and distribution staff.

3) Indirect expenses:
Indirect expenses are all expenses of the factory such as rent, rates, taxes and insurance of factory,
repairs of machinery. It also include indirect expenses incurred for office and selling and distribution.

C) Behavior wise classification:

1) Fixed overheads:
These overheads remain unaffected or fixed in total amounts by fluctuations in volume of output.
E.g. rent and rates, managerial salaries, buildings depreciation, postage, stationery, legal expenses
etc.
Fixed overheads have the following important characteristics:
 Total fixed overheads do not vary with the change in the volume of production upto a given range.
 Fixed overheads per unit varies with change in the volume of production i.e. fixed overheads per
unit decreases as the production increases and vice-versa.
 Fixed overheads are uncontrollable in nature.

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 2) Variable overheads:
This is the cost which, in aggregate, tends to vary in indirect proportion to change in the volume of
output. Variable overheads per unit remain fixed. E.g. indirect materials, indirect labour, salesman’s
commission, power, etc.
variable overheads have the following important characteristics:
 Total variable overheads vary in direct proportion to the volume of production i.e. total variable
overheads decrease as the production decreases and vice-versa.
 Variable overheads per unit remains fixed.
 Variable overheads are controllable in nature
3) Semi-variable overheads.
These types of overheads are partly fixed and partly variable. In other words, such costs vary in part
with the volume of production and in part they are constant, wheatear be the volume of production.
E.g. electricity charges, telephone charges, delivery van exp, etc.
Semi-variable overheads have the following important characteristics:
 These overheads stand mid-way between fixed overheads and variable overheads.
 They remain fixed in total overheads a short range of variation in output.
 The per -unit semi-variable overheads decline with increase in output, and vice-versa.

Distinction between fixed overheads and variable overheads

Fixed overheads Variable overheads

1) Fixed overheads do not change with change Variable overheads vary in direct proportion with
in production or activity. change in level of activity.
2) The cost per unit decreases with increases in The cost per unit remains unaffected with increase
output and vice-versa. or decrease in volume
3) Fixed overheads are related to period hence Variable overheads are related to product hence
they are termed as capacity costs they are termed as inventoriable costs.
4) Rent, insurance , salary to office staff are Power consumption, salesman’s commission,
examples of fixed overheads indirect materials, heating and lighting are the
examples of variable overheads.
5) Fixed overheads does not vary with output. Variable overheads vary with output.
6) Fixed overheads are uncontrollable. Variable overheads are controllable.

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D) Control wise classification
1) Controllable overheads:
These are the indirect costs which may be directly controlled at a given level of management
authority. Variable overheads are generally controllable.

2) Uncontrollable overheads:
These are the indirect costs which cannot be influenced/ control by the action of a specific
member of an organization.

Allocation of overheads:
Certain items of overheads costs can be directly identified with a particular department or cost centre as
having been incurred for that cost centre. Allotment of such costs to departments or cost centres is known
as allocation. Thus, allocation may be defined as “ the allotment of whole items of cost centres or cost unit”.
In other words, allocation is charging to a cost centre those overheads that result solely from existence of
that cost centre. A point to be clearly understood is that allocation can be made only when the exact amount
of overhead incurred in a cost centre is definitely known.

In short allocation of overheads is the process of charging the full amount of an individual item of cost
directly to a cost centre for which this item of cost was incurred.

Apportionment of overheads:

Certain overhead costs cannot be directly charged by to a department or cost centre. Such costs are common
to a number of cost centres or departments and do not originate from any specific department. Distribution
of such overhead costs to various departments is known as ‘apportionment’. Thus, apportionment may be
defined as “the allotment of proportions of items of cost to cost centre or cost units”.

In other words, it is charging to a cost centre as fair share of an overhead. Where an item of overhead is
common to various cost centres, it is allotted to different cost centres, proportionately on some equitable
basis.

In short apportionment of overheads is the process of charging the proportion of common items of cost to
two or more cost centres on some equitable basis.

Where only one electric meter is installed in a factory, the common electricity charges should be a0ortioned
to all the department on the basis of number of light points or floor are occupied.

Distinction between ‘Allocation of Overhead’ And Apportionment of Overheads’:

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 Allocation of Overhead Apportion of Overhead
1) Allocation deals with whole item of Apportionment deals with proportions of items
costs. of cost.
2) In allocation, the cost is allotted In apportionment, the costs are distributed on
directly. a proportionate basis.
3) Allocation is a direct process. Apportionment is an indirect process according
to suitable basis.
4) Overheads cannot be allocated directly It is possible to charge the expenses indirectly
to the products. through apportionment and absorb the cost in
the final products.
5) Overheads should always be allocated, If overhead cannot be allocated, it is
if possible. apportioned.
6) This is known as ‘primary distribution of This is also a part of primary distribution of
overheads’. overheads costs.
 Allocation and apportionment of overheads aims at ascertaining the exact cost of cost units.

Production Department Service Department

Weaving Department Purchasing Department
Crushing Department Store Department
Mixing Department Personnel Department
Grinding Department Inspection Department
Polishing Department Canteen
Finishing Department Accounting Department

 Common bases of apportionment of overheads:

Common items of factory overheads Basis of apportionment
1  Factory rent, rates and taxes Floor are occupied
 Repairs and maintenance of factory building,
air conditioning
 Insurance of factory building
 Depreciation of factory buildings if owned
2  Repairs and maintenance of plant and  Capital cost of plant and machinery or
machinery machine hours

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  Insurance of plant and machinery  Capital cost of plant and machinery
 Depreciation of plant and machinery  Capital cost of plant and machinery
3  Insurance of stock  Insured value of stock
4  Supervision  number of workers/ direct labour hours
 Canteen, staff welfare expenses  Number of workers
 Time-keeping and personnel exp.  Number of workers
 Medical expenses  Number of workers
5  Compensation to workers  Wages
 Employers state insurance contribution  Wages
 Provident fund contribution  Wages
6  stores overhead or store keeping expenses  value of direct materials
7  Material Handling charges  Weight of direct materials
8  Lighting and heating  Number of light points or floor area occupied
r kilowatt hours
9  Power or steam consumption  Horse power of machines or machine hours
10  Fire insurance  Value of assets
12  Machine shop expenses  Machine hours or labour hours
13  General expenses  Direct wages or number or employees
14  Audit fees  Sales or total cost.

 Primary distribution of overheads /Departmentalization of overheads:

After overhead costs have been collected under various standing order numbers, the second step is to
allocate and apportion the overheads to production and service departments. This is also known as
“Departmentalization or Primary Distribution of Overhead”.

 Need for departmentalization of overheads:

1) Control of overhead costs:
Effective control of overhead costs is possible because departmentalization makes the incurrence of
costs in a department or cost centre the responsibility of someone who heads the department or the
cost centre. Thus, with the help of departmentalization, responsibility accounting can be effectively
introduced for control purposes.

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 2) Forecasting and estimating:
Because of greater accuracy in cost ascertainment and cost control, departmentalization ensures
more accurate forecasting and estimating and decision-making.

3) Ensures greater accuracy in cost ascertainment:

by proper allocation and apportionment of overheads for accurate costing of each function or
operation, overhead absorption rates should be determined separately for each cost centres. This is
possible only with the help of departmentalization.

4) Valuation of work-in-progress:
Correct cost of work-in-progress cannot be ascertained unless overheads are departmentalized.

5) Cost of service department:

Departmentalization help in ascertaining the cost of various service departments which is useful for
making estimates and submitting quotations for those items which make use of the services of
various cost centres.

 Re-Apportionment of overheads
Once the overheads have been allocated and apportioned to production and service departments and
totaled, the next step is to re-apportion the service department costs to production departments. This is
necessary because out ultimate object is to charge overheads to cost units, and no cost units pass
through service departments.

Therefore, the costs of service departments must be charged to production departments which directly
comes in contact with costs units. This is called ‘secondary distribution of overheads.’

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Basis of Re-apportionment of overheads of service department:

Service Departments Basis of Re-apportionment

Purchase Department Number of purchase order or number of
purchase requisitions or value of materials
purchased.
Stores Department Number of material requisitions or value of
materials issued.
Time-keeping Department, payroll Number of employees or total labour hours or
Department machine hours
Personnel Department, canteen , welfare, Number of employees or total wages.
medical and recreation Department
Repairs and maintenance Number of worked in each department
Power house Department Meter reading. H.P hour for powers, meter
reading or floors space for lighting, heat
consumed.
Inspection Department Inspections hours or value of items inspected
Drawing office Department Number of drawings made or man-hours
worked.
Accounts Department Direct labour hours or machine hours or wages
Tool rooms Department Direct labour hours or machine hours or wages
Factory office Department Number of employees
Boiler hours Department Percentage of steam utilized.
Internal transport Department Weight and distance.

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 ILLUSTRATION
A) PRIMARY DISTRIBUTION :
Illustration No: 1.
Bharat ltd. Baroda has three production departments X, Y and Z and two service departments, ‘A’ and ‘B’.
the following figures are extracted from the records of the company for the period ended 31-3-2023.

Rent and rates Rs 5,000 General lighting Rs. 600

Indirect wages Rs. 1,500 Power Rs. 1,500
Depreciation of machinery Rs. 10,000 Sundries Rs. 10,000
The following further details are available.

Particulars Total X Y Z A B
Floor space (sq, ft) 10,000 2,000 2,500 3,000 2,000 500
Light points (numbers) 60 10 15 20 10 5
Direct wages (Rs.) 10,000 3,000 2,000 3,000 1,500 500
H.P. of machines (H. P.) 150 60 30 50 10 -
Value of machinery (Rs.) 2,50,000 60,000 80,000 1,00,000 5,000 5,000
Apportion the costs to various departments on the most equitable basis.
Illustration :2.
Coment Ltd., Chembur, has two production departments and tow service departments and provides you
the following data for the period ended 31st March, 2023.

Particulars Production dept. Service dept.

P1 P2 S1 S2
Direct materials 40,000 30,000 20,000 10,000
Directs wages 15,000 20,000 5,000 10,000
Floor areas (sq. ft) 5,000 4,000 3,000 2,000
Value of plant and machinery 1,00,000 1,20,000 40,000 20,000
Value of stock 35,000 25,000 5,000 5,000
Number of workers 100 50 25 25
Number of light points 200 50 25 25
Horse power of machines 50 25 15 10

The indirect expenses for the period were: Rs.

Factory rent, rates, taxes and repairs 14,000
Depreciation, insurance and repairs of machinery 56,000
Insurance of stock 700
Supervision and staff welfare expenses 2,000
Stores overheads 1,000
Lighting and heating 3,000
Power 1,000
Prepare the statement showing the apportionment of overheads for the period ended 31 st March, 2023.
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Illustration :3.
The following are the figures obtained from the records of Bharat Petro Chemicals Ltd., Baramati for the
month of March, 2023.

Departments Indirect material Indirect labour

Production Department
‘A’ 7,300 4,700
‘B’ 4,850 2,650
‘C’ 2,400 3,800
Service Dept-
‘X’ 8,300 4,250
‘Y’ 4,150 2,600
Additional information : Rs.
Lighting, Heating and Power 20,000
Rent, rates , Taxes 8,000

Staff welfare charges 10,000

Depreciation on machinery 30,000

Particulars Production dept. Service dept.

‘A’ ‘B’ ‘C’ ‘X’ ‘Y’
Area Occupied (sq. ft) 3,000 2,000 1,000 1,500 500
Kilo watt-Hours (KWH) 6,000 5,000 4,500 2,500 2,000
Number of employees (No.) 80 100 60 130 30
Value of Machinery 1,00,000 50,000 78,000 62,000 10,000

You are required to apportion the costs to various departments by considering the most suitable basis.
Illustration 4.
Cadbury india Ltd., chandannagar, has two production cost centres ‘A’ and ‘B’ and tow service cost centre
‘X’ ad ‘Y’. the following is the summary of overhead costs for the month of March, 2023.
Rs.
Salary to works Manager 6,000
Light and power 36,000
Repairs to plant 10,000
Rent of factory buildings 8,000
Meals to working staff 12,000
Depreciation on machinery 25,000
Provident fund contribution 15,000

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Additional Information:

Particulars Production dept. Service dept.

‘A’ ‘B’ ‘X’ ‘Y’
Number of workers (NOS.) 12 18 3 3
Area Sq. meter (sq. mtr) 1,000 2,000 500 500
Value of plant and machinery (Rs.) 45,000 90,000 45,000 45,000
Direct wages (Rs.) 5,000 6,000 2,000 2000
Horse power (HP) 5 4 - 3
You are required to distribute the overhead costs to the production and service Dept. on the most
equitable basis.
Illustration :5.
Dabar chems, Ltd., Mumbai has four departments, three producing departments viz. I, II and III and one
service department viz. IV. The actual costs for the month of March 2023, were as follows:
Rs.

 Indirect Expenses :
Producing Departments
I 825
II 100
III 955
Service Departments
IV 620
 Additional Expenses:
Repairs 1,500
Depreciation 1,000
Rent, rates and Taxes 5,000
Lighting 500
Insurance of buildings 1,000
Supervision charges 4,000
ESIC by the employer 500
Motive power 2,000
Other information:

Particulars Production dept. Service dept.

I II III IV
Area sq.ft 100 150 90 160
Number of workers (NOS) 15 10 9 16
Direct wages (RS.) 5,000 8,000 5,000 2,000
Value of plant and machinery (Rs.) 25,000 10,000 8,000 7,000
Number of light points (NO) 10 5 6 4
Kilo-watt hours (KWH) 2,000 5,000 6,000 7,000
You are required to apportion the overhead costs to the various producing and service departments on
suitable basis.

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Illustration No.6
Escorts Machineries Pvt. Ltd, Pune, has five operating departments viz. A, B, C, D and E. the actual costs
incurred for March, 2023 were was as under:

 Indirect material and labour:

Rs.
Dept. ‘A’ 980
Dept. ‘B’ 540
Dept. ‘C’ 770
Dept. ‘D’ 730
Dept. ‘E’ 580
 The other costs were as follows:
Insurance on plant 10,500
Taxes and building and premises 12,500
Depreciation 7,000
Supervisor’s salary 28,000
Insurance of stock 6,400
Employers liability for employees insurance 3,000
Electric lighting 9,000
The following data is also available in respect of five departments.

Particulars Production dept.

‘A’ ‘B’ ‘C’ ‘D’ E
Area Sq. Ft 140 120 110 90 40
Number of workers (numbers) 25 20 10 10 5
Prime cost wages 1,00,000 80,000 50,000 50,000 20,000
Value of plant 2,00,000 1,80,000 1,60,000 1,00,000 60,000
Value of stock 1,50,000 1,00,000 50,000 20,000 -
You are required to prepare statement primary distribution of overhead costs for the month ended 31 st
March, 2023.

B. SECONDARY DISTRIBUTION
Illustration No: 7.
Ford Tools Ltd., Faizpur, has three production departments and six service department. The overhead
expenses for the departments as per primary distribution summary were as follows:

Rs
Production Dept.
 A 50,450
 B 20,800
 C 30,750
Service dept.
 Stores 5,000
 Accounts 4,000
 Power House 3,000
3,000
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  Canteen 5,000
 Time-keeping 8,000
 Tool room
Total 1,30,000
The following additional information were made available from the costing records as regards the
production departments.

Particulars Production
A B C
Number of workers (nos) 80 100 20
H.P of machines (H.P) 500 800 700
Value of stores requisitioned (Rs.) 6,000 2,000 2,000
Service rendered 25 50 25
You are required to prepare a statements showing secondary distribution of service departments costs to
production departments for the month ended 31st March, 2023.
Illustration No: 8
Kalyani Steel Ltd., Kalyan, has three production departments and four service departments. The
departmental overhead summary for the month of March, 202, disclose the following results:

Particulars Rs
Production Dept.
 cutting 7,000
 milling 8,000
 grinding 10,000
Service dept.
 Stores 3,000
 Repairs 5,000
 Time-keeping 1,000
 Staff-welfare 4,000
Additional information:

Particulars Production dept.

Cutting Milling Grinding
Employee numbers (no.) 40 70 90
Material requisition (MR) 10 16 14
Direct labour hours worked (Hrs.) 975 2,075 3,950

You are required to work out the overhead absorption rate.

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C. PRIMARY AND SECONDARY DISTRIBUTION
ILLUSTRATION: 9
In kismat industries Ltd., Islampur, there are two production dept, viz ‘A’ and ‘B’ and two service dept. Viz.
‘C’ and ‘D’. ‘C’ department provides services to ‘A’ and ‘B’ in the ratio of 2:3 whereas ‘D’ provides services
to ‘A’ and ‘B’ in the ratio of 6:1.
The other details as regards to the expenses and other charges for the period ended 31-3-2023 are as
follows:
Rent rates, and taxes 40,000
Insurance 15,000
Electricity 5,000
Motive power 20,000
Depreciation 2,00,000
Amenities to staff 13,000
Additional information:

Particulars Production dept.

‘A’ ‘B’ ‘C’ ‘D’
Assets value 10,00,000 5,00,000 4,00,000 1,00,000
Floor area (sq, mtr) 8,000 6,000 4,000 2,000
Number of light points (Nos) 40 30 15 15
H.P. of machines (H.P) 800 500 400 300
Numbers of workers (Nos) 75 50 50 25
Direct wages 2,200 1,400 1,000 875

You are required to prepare a statement showing distribution of overhead costs and also find out the total
overhead costs each production department.
Illustration no. 10
Hinduja Techno Ltd., Himmatput, is having four departments ‘A’ , ‘B’ and ‘C’ are the production
departments and ‘D is the service departments. The actual costs for the period ended 31-3-23 are as
follows:
Indirect materials: Rs.
Production departments

 A 295
 B 535
 C 365

Service departments

 D 405
Rent 2,000
Repairs and maintenance 1,200

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 Electric lighting 200
Depreciation 900
Supervisor’s salary 3,000
Employer’s liability towards ESIC 300
Power 1,800
Insurance on stock 1,000
The following additional data are also made available in respect of four departments.

Particulars Production dept. Service dept.

A B C D
Area Sq. ft 150 110 90 50
Value of stock 15,000 9,000 6,000 -
Number of employees No. 24 16 12 8
Value of plant 24,000 18,000 12,000 6,000
Total wages 8,000 6,000 4,000 2,000
Apportion the costs to various departments on most basis. RE-apportion the overhead costs of department
‘D’ to the production department A,B and C in the ratio of 40% :40%:20 respectively.
Illustration No: 11.
The following data were obtained from J.K corporation Ltd., Jalgaon for the six months ended 31-3-2023.
Calculate department overhead rates for each of the production Dept. assuming that the overheads are
recovered as a percentage of prime cost materials.

Particulars Production dept. Service dept.

‘A’ ‘B’ ‘C’ ‘X’ ‘Y’
Direct materials 3,200 5,000 8,700 1,500 1,000
Direct wages 7,000 6,000 5,000 1,000 1,000
Employee numbers 200 150 150 50 50
Electricity K.W.H 8,000 6,000 6,000 2,000 3,000
Light point numbers 10 15 15 5 5
Capital value of assets 50,000 30,000 20,000 10,000 10,000
Area occupied sq. mtr 800 600 600 200 200
Other expenses for the period were:
Production dept: Rs.

 A 660
 B 780
 C 900

Service dept.

 X 900
 Y 860

Material handling charges 400

Motive power 1,500
Electric and lighting 200
Recreation room expenses 3,000

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 Depreciation 6,000
Repairs and maintenance 1,200

General overheads 10,000

Rent and taxes 600
Apportion the expenses of service dept. X in the ratio of 4: 3: 3 and that of service dept.
Y in the proportion to direct materials. (6:5:4)
Illustration :12
Global engineering Ltd., Gurgaon has the following the following particulars for the month ended 31-3-
23 form which you are required to calculate the departmental overhead rate for each of the production
department assuming that overheads are recovered as apercentage of direct wages.

Particulars Production dept. Service dept.

‘A’ ‘B’ ‘C’ ‘X’ ‘Y’
Direct materials Rs. 15,000 30,000 30,000 22,500 22,500
Direct wages Rs. 30,000 45,000 60,000 15,000 30,000
Staff numbers No. 1,500 2,250 2,250 750 750
Electricity assets value KWH 6,000 4,500 3,000 1,500 1,500
Assets value Rs. 60,000 40,000 30,000 10,000 10,000
Area sq. ft 1,500 2,500 500 500 500
Light points No. 10 16 4 6 4
The overheads expenses for the period were-
Power 1,100
Lighting 200
Stores overheads 800
Staff welfare 3,000
Depreciation 30,000
Repairs 6,000
General overheads12,000
Rent and taxes 550
Apportion the overhead expenses of service dept. Y on the basis of direct wages and those of service
dept X in the ratio of 10:6:4 to the production Dept.

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