CAF-3 Cost & Management Accounting Factory Overheads

Chapter-3
Factory Overheads

When transforming Direct Material (DM) into Finished Goods, several costs are incurred in addition to
Direct Labor. These additional costs are called Factory Overheads (FOH), which include all indirect
costs incurred at the production facility that are not Direct Material or Direct Labor.

Direct Material:
The primary material that becomes part of the finished product.
Example: Fabric used to make clothing.
Direct Labor:
Labor directly involved in producing the product.
Example: Workers cutting fabric to make clothing.

Common Items of Factory Overheads

▪ Indirect Material
Materials used in the production process but not part of the final product.
Example: Needles used in sewing machines, lubricants, cleaning supplies.
▪ Indirect Labor:
Labor not directly involved in producing the product but supports the production process.
Example: Supervisors, quality assurance staff, maintenance staff, quality control workers.
▪ Fuel and Power (e.g., gas, electricity used in production)
▪ Utilities (e.g., water, heating, lighting in the factory)
▪ Repairs and Maintenance (e.g., servicing of machines and equipment)
▪ Depreciation of Factory Assets (e.g., machinery, factory building)
▪ Rent and Rates (e.g., lease costs of factory premises)
▪ Insurance for Factory Assets (e.g., insurance for building, equipment)
▪ Factory Administration Expenses (e.g., office supplies, clerical staff)
▪ Equipment Leasing Costs (e.g., rental costs for production machinery)
▪ Factory Cleaning and Waste Disposal (e.g., cleaning services, waste removal)

KEY FORMULAS
Prime Cost = Direct Material + Direct Labor
Conversion Cost = Direct Labor + Factory Overheads (FOH)

To understand how overheads are included in the cost of a product and tracked over time, it can be
broken down into two simple stages:
1. Calculations at the Start of the Period (Budgeted Data)
2. Calculations at the End of the Period (Actual Data)

1. CALCULATIONS AT THE START OF THE PERIOD

At the start of the production period, a key calculation is made to determine how overheads will be
absorbed by the products:
Overhead Absorption Rate (OAR)

It’s a predetermined rate calculated at the start of the period to allocate indirect costs (FOH) to different
products or cost objects. It’s also called the Overhead Recovery Rate.
How is OAR calculated?
The basis for calculation can vary, depending on the nature of operations or departments.
For example, OAR can be based on labor hours, machine hours, or production units.
Formula of OAR:
Total Budgeted FOH
𝐎𝐀𝐑 =
Total Budgeted Base

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Uses of OAR:
▪ Product Costing/Process Costing: Helps assign overheads to each product.
▪ Cost Accounting Records: Keeps track of indirect costs.
▪ Performance Measurement: Assesses the efficiency of operations.
▪ Standard Costing & Variance Analysis: Compares actual costs to standards.
▪ Decision Making: Provides accurate cost information for business decisions.

This rate helps ensure that overheads are fairly allocated across all products being made during the
period.

Calculation of Overhead Absorption Rate (OAR) Using Different Bases

Base Formula OAR Form

Total Budgeted FOH
𝐎𝐀𝐑 =
Direct Labor Hours Total Budgeted Base Rs. per Labor Hour

Total Budgeted FOH

𝐎𝐀𝐑 =
Machine Hours Total Budgeted Machine Hour Rs. per Machine Hour

Total Budgeted FOH

𝐎𝐀𝐑 =
Production Units Total Budgeted Production units Rs. per Unit

Total Budgeted FOH

𝐎𝐀𝐑 =
Direct Material Cost Total Budgeted Direct material cost % of Direct Material Cost

Total Budgeted FOH

𝐎𝐀𝐑 =
Direct Labor Cost Total Budgeted Direct labor cost % of Direct Labor Cost

Total Budgeted FOH

𝐎𝐀𝐑 =
Prime Cost Total Budgeted Prime Cost % of Prime Cost

Illustration-1:
A factory incurs total overhead costs of Rs.120,000. The total labor hours worked are 10,000 hours.
Calculate the overhead absorption rate using the labor hour rate.

Illustration-2:
A company incurs overhead costs of Rs.50,000, and the total machine hours are 5,000 hours. What is
the overhead absorption rate based on machine hours?

Illustration-3:
A company produces 1,500 units, and the total overheads amount to Rs.45,000.
Calculate the overhead absorption rate per unit.

Illustration-4:
Following budgeted costs relate to year 2025
“Rupees”
Direct material cost 600,000
Direct labor cost (Rs. 400 per hour) 1,000,000
Repair and maintenance 60,000
Insurance 30,000
Power 140,000
Depreciation 70,000
Indirect labor 95,000
Other FOH 25,000
Other information:
▪ Production of 1,000 units
▪ Machine hours are 3,000
Required: Calculate OAR using all bases

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CAF-3 Cost & Management Accounting Factory Overheads

COMPLICATIONS IN THE CALCULATION OF OAR

CASE-I: MULTIPLE DEPARTMENTS AND SINGLE PRODUCT

Factory operations often consist of several departments, which can be broadly classified into:
▪ Production Departments (PD)
Directly involved in the production process. Direct materials flow through these departments
until the product is finished.
Examples: Cutting department, assembly department, finishing department.
▪ Service Departments (SD)
Provide support to the production process but are not directly involved in manufacturing.
Examples: Maintenance department, stores department, canteen department.
Steps for Department-Wise OAR Calculation

Steps to Calculate Separate OAR for Each Production Department (PD)

1. Allocation of FOH to All Departments:
Allocate the total factory overheads to both production departments (PDs) and service
departments (SDs).
2. Apportionment:
▪ Primary Apportionment: Apportion all common overheads (FOH) to all PDs and SDs
using reasonable and appropriate ratios/ basis.
▪ Secondary Apportionment: Apportion the total overheads of the service departments
(SDs) to the production departments (PDs) using appropriate ratios.

3. Calculation of OAR for Each Production Department:

After the secondary apportionment, calculate the OAR for each production department based on
a relevant base (e.g., labor hours, machine hours, etc.).
Note
A department-wise OAR is usually calculated for each production department individually.
However, a blanket rate (a single factory-wide rate) can also be used for all production
departments, depending on the factory’s operations and structure.

Some famous basis normally used for apportionment:

FOH expenses 1st preference 2nd preference 3rd preference
1. BUILDING RELATED
1) Depreciation Cost of building Floor area -
2) Insurance Cost of building Floor area -
3) Rent Floor area - -
4) Cleaning expense Floor area - -
5) Cooling / heating Floor area - -
6) Lighting expense Light points Floor area -
2. PLANT AND MACHINERY RELATED
1) Depreciation Value of asset Machine Hrs. -
2) Insurance Value of asset Machine Hrs. -
3) Repair & Maintenance Maintenance Hrs. Value of asset Machine Hrs.
4) Power KWH Machine Hrs.
Horse power
3. EMPLOYEE RELATED
1) Insurance Total no. of employees Direct wages -
2) Health Total no. of employees Direct wages -
3) Canteen Total no. of employees Direct wages -
4) Supervision Total no. of employees Direct wages -
5) Leave encashment Total no. of employees Direct wages -
6) Indirect labor cost Indirect no. of employees Direct wages -
4. OTHER FOH COSTS
1) Dep. of other assets Cost of asset - -
2) Storeroom expenses No. of Mat. requisitions Direct Mat. Cost -
3) Packing cost Packing hours Direct Mat. Cost -
4) Inspection cost Inspection hours for units Inspected units -
inspected
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Illustration-5 (Primary Apportionment)

ABC Ltd has four departments in its factory namely Assembly, Finishing, Maintenance and Canteen.
The following are budgeted costs for the next period:
Description Cost
Indirect materials 20,000
Rent 15,000
Electricity 10,000
Machine depreciation 5,000
Indirect labor 16,520
Direct labor 125,000

The following information is also available:

Total Assembly Finishing Maintenance Canteen
Area (Sq. Meters) 4,000 1,000 2,000 500 500
KW Hours Consumed 10,000 2,750 4,500 1,975 775
Machine Value (Rs.) 100,000 45,000 35,000 11,000 9,000
Staff Members 62 20 30 10 2
Direct Labor Hours 6,975 3,175 3,800 - -
Indirect Materials 20,000 7,000 8,000 3,000 2,000
Indirect Labor 16,520 1,600 2,220 11,200 1,500
Required:
Using an appropriate basis, apportion joint costs and calculate total overheads for each department.

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CAF-3 Cost & Management Accounting Factory Overheads

SCENARIOS IN SECONDARY/ REAPPORTIONMENT

For reapportionment, a company may come across any of the following scenarios:

SCENARIO-I
Service Departments provide support to Production Departments Only
(Re-apportionment –Direct allocation method)
In this Scenario, Service Departments (SDs) provide support exclusively to Production Departments
(PDs) and do not support each other. The total Factory Overheads (FOH) incurred by each SD is
allocated to all PDs based on a relevant apportionment basis.

Illustration-6 (Re-apportionment –Direct allocation method)

A manufacturing company has two production departments, Department 1 and Department 2.
It also has two service departments, Quality control and the Repairs department.
Allocated overhead costs and apportioned general overhead costs for each cost Centre are as follows:
Rupees
Department A 100,000
Department B 200,000
Quality Control 150,000
Repairs 220,000
The repairs department does not work for quality control: 75% of its time is spent on repair work for
Department 1 and 25% of its time is spent on repair work for Department 2.
The quality control department does not work for repairs: 40% of its time is spent on Department 1 and
60% of its time is spent on Department 2.

Illustration-7 (Re-apportionment –Direct allocation method)

A manufacturing company has three production departments, Department 1, Department 2 &
Department 3. It also has two Service Departments.
Allocated overhead costs and apportioned general overhead costs for each cost Centre are as follows:
Rupees
Department 1 100,000
Department 2 200,000
Department 3 180,000
Service Department 1 60,000
Service Department 2 90,000
The service departments’ costs are apportioned as follows:
Department 1 Department 2 Department 3
Service Department 1 40% 50% 10%
Service Department 2 60% 40% --

Illustration-8 (Re-apportionment –Direct allocation method)

Badtameez Limited (BL) has two production departments, PD-A and PD-B, and three service
Departments SD-1, SD-2 and SD-3. Total budgeted departmental overheads after primary distribution
(i.e., before distribution of service departments costs are as follows:
PD-A PD-B SD-1 SD-2 SD-3
FOH expenses (Rupees) 800,000 900,000 200,000 300,000 400,000
Budgeted direct labour hours 10,000 15,000

SDs provide support as follows:

SD-1 30% 70% - - -
SD-2 80% 20% - - -
SD-3 55% 45% - - -
Required:
Calculate overhead absorption rate for each production department.

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CAF-3 Cost & Management Accounting Factory Overheads

SCENARIO-II
Service Departments provide One-Way Support to Service Department
(Re-apportionment – Step down method)
In this Scenario, Service Departments (SDs) not only provide support to Production Departments (PDs)
but also to other SDs.
First apportionment is done separately for each SD, and the total Factory Overheads (FOH) incurred by
each SD is allocated to both PDs and other SDs based on a relevant apportionment basis.
The process starts with the SD that supports the maximum number of other SDs.

Illustration-9 (Re-apportionment – Step down method)

A manufacturing company has two production departments, Department 1 and Department 2. It also
has two service departments, the factory canteen and the repairs department.
Allocated overhead costs and apportioned general overhead costs for each cost Centre are as follows:
Rupees
Department A 100,000
Department B 200,000
Quality Control 150,000
Repairs 220,000
The repairs department does no work for the canteen: 75% of its time is spent on repair work for
Department 1 and
25% of its time is spent on repair work for Department 2.
There are 10 employees in Department 1, 20 employees in Department 2 and 20 employees in the
repairs department.
Canteen costs are to be apportioned based on the number of employees in each department.

Illustration-10 (Re-apportionment – Step down method)

A manufacturing company has three production departments, Department 1, Department 2 &
Department 3. It also has two Service Departments.
Allocated overhead costs and apportioned general overhead costs for each cost Centre are as follows:
Rupees
Department 1 100,000
Department 2 200,000
Department 3 180,000
Service Department 1 60,000
Service Department 2 90,000
The service departments’ costs are apportioned as follows:
Department 1 Department 2 Department 3 SD 1 SD 2
Service Department 1 40% 50% 10% -- --
Service Department 2 30% 50% -- 20% --

Illustration-11 (Re-apportionment – Step down method)

Badtameez Limited (BL) has two production departments, PD-A and PD-B, and three service
Departments SD-1, SD-2 and SD-3. Total budgeted departmental overheads after primary distribution
(i.e., before distribution of service departments costs are as follows:
PD-A PD-B SD-1 SD-2 SD-3
FOH expenses (Rupees) 800,000 900,000 200,000 300,000 400,000
Budgeted direct labour hours 10,000 15,000
SDs provide support as follows:
SD-1 30% 70% - - -
SD-2 50% 20% 15% - 15%
SD-3 45% 45% 10% - -

Required:
Calculate overhead absorption rate for each production department.

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CAF-3 Cost & Management Accounting Factory Overheads

SCENARIO-III
Service Departments provide Two-Way Support to Service Department
In this scenario, Service Departments (SDs) provide support to each other as well as to Production
Departments (PDs). Because the support is mutual, the apportionment process is more complex. There
are two methods commonly used to allocate the Factory Overheads (FOH) in this case:
1. Repeated Distribution Method: This method involves repeatedly distributing the costs among
the SDs and PDs until the allocations stabilize.
2. Simultaneous Equation Method: This method uses a set of equations to calculate the cost
distribution among the SDs and PDs at the same time.

Illustration-12 (Re-apportionment –Repeated Distribution & Simultaneously Methods)

A manufacturing company has three production departments, Department 1, Department 2 &
Department 3. It also has two Service Departments.
Allocated overhead costs and apportioned general overhead costs for each cost Centre are as follows:
Rupees
Department 1 200,000
Department 2 150,000
Department 3 180,000
Service Department 1 90,000
Service Department 2 50,000

Budgeted direct labor hours

Production Department 1 5,000
Production Department 2 10,000
Production Department 3 4,000

The service departments’ costs are apportioned as follows:

Department 1 Department 2 Department 3 SD 1 SD 2
Service Department 1 30% 30% 30% -- 10%
Service Department 2 40% 20% 20% 20% --

Required:
Calculate OAR for each PD using;
a) Repeated distribution method
b) Simultaneous equations method

Illustration-13 (Re-apportionment –Repeated Distribution & Simultaneously Methods)

A manufacturing company has three production departments, Assembling & Finishing. It also has two
Service Departments, Repairs and quality control.
Allocated overhead costs and apportioned general overhead costs for each cost Centre are as follows:
Rupees
Assembling 25,000
Finishing 20,000
Repairs 7,000
Quality Control 8,000

The service departments’ costs are apportioned as follows:

Assembling Finishing Repairs Quality Control
Repairs 60% 10% -- 30%
Quality Control 30% 50% 20% --
Budgeted Direct Labor hours 10,000 12,000 14,000

Required:
Calculate OAR for each PD using;
a) Repeated distribution method
b) Simultaneous equations method

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CAF-3 Cost & Management Accounting Factory Overheads

Illustration-14 (Re-apportionment –Repeated Distribution & Simultaneously Methods)

A manufacturing company has three production departments, Department 1, Department 2 &
Department 3. It also has two Service Departments, Canteen & Quality Control
Allocated overhead costs and apportioned general overhead costs for each cost Centre are as follows:
Rupees
Department 1 600,000
Department 2 350,000
Department 3 480,000
Canteen 90,000
Quality Control 150,000

The service departments’ costs are apportioned as follows:

PD-1 PD-2 PD-3 Canteen Quality Control
Canteen 30% 30% 20% -- 20%
Quality Control 40% 30% 20% 10% --
Budgeted Direct Labor hours 10,000 12,000 14,000

Required:
Calculate OAR for each PD using;
a) Repeated distribution method
b) Simultaneous equations method

CASE-II: SINGLE DEPARTMENT AND MULTIPLE PRODUCTS

In this Case, Overhead Absorption Rate (OAR) per unit is crucial for allocating factory overheads
(FOHs) to products. Management can choose between two approaches to determine the OAR per unit
for each product:

Approach-1: Calculate “OAR per unit” for each product after allocating all FOHs among
products on a reasonable basis:
In this approach, all factory overheads are first allocated or apportioned to the individual products on a
reasonable basis, such as labor hours, machine hours, or material cost.
After allocating the total FOHs to each product, the OAR per unit is calculated by dividing the total
FOH allocated to a particular product by the total number of units of that product produced.
Formula:
Total FOH allocated to the product
OAR per unit =
Number of units produced of that product

Approach-2: Calculate “OAR per unit” on each product using a single OAR determined for
another base
In this method, instead of determining a separate OAR for each product, management calculates a
single, uniform OAR using a different base (e.g., labor hours, machine hours, or direct costs).
This OAR is then applied uniformly to all products, based on the units or some other base related to the
production process.
Formula:
Total FOH allocated to the product
OAR per unit =
Total base (e. g. , machine hours, labor hours)
Once the OAR is calculated, it can be applied to all products using the chosen base (e.g., applying OAR
per machine hour or per labor hour to each product).

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CAF-3 Cost & Management Accounting Factory Overheads

ICAP PAST PAPERS

Question-1 [Noble Industries] {Spring 2024 _ Q-2}

Noble Industries Limited has two production departments and two service departments.
Information regarding its factory overheads for the latest quarter and related details are as follows:
Production Department Service Department
Total
A B X Y
Direct factory overheads Rs. in ‘000’ 105,000 85,000 30,000 20,000 240,000
Machine hours 1890 1710 - - 3600
Floor area Square yards 1200 1050 250 150 2650
Basis of allocation – Department X 50% 40% - 10% 100%
Basis of allocation – Department Y 45% 40% 15% - 100%

In addition to direct overheads, there were common overheads of production and service departments,
which amounted to Rs. 53 million.
Required:
Compute the factory overhead rate for the production departments based on machine hours using the
repeated distribution method. (07)

Question-2 [Faisal Enterprises Limited] {Spring 2023 _ Q-9}

Faisal Enterprises Limited (FEL) produces three products A, B and C. Each product is produced in a
separate department. There are two service departments i.e. Repair & Maintenance (R&M) and Stores.
Following data is available for the month of February 2023:
Service
Production Departments
Departments
Total
A B C R&M Stores
-------------------- Rs. in '000 --------------------
Indirect material cost 180 240 120 930 30 1,500
Indirect labor cost 160 210 150 60 20 600
Fuel and electricity 1,520
Air-conditioning and lighting 150
Depreciation & insurance – Machines 665
Depreciation & insurance – Building 50
Other insurance 270

Other information:
Raw material cost (Rs. in ‘000) 60,000 45,000 30,000 - - 135,000
Labor hours (no. of hours) 2,000 3,000 4,000 - - 9,000
Machine hours (no. of hours) 5,000 6,000 8,000 - - 19,000
Area (in square meters) 200 300 400 60 40 1,000

% of apportionment of service department’s cost:

▪ R&M 25% 30% 35% - 10%
▪ Stores 30% 25% 25% 20% -
Equivalent units in process – opening 2,000 2,000 2,500 - -
Equivalent units in process – closing 1,500 3,000 2,000 - -
Units transferred to finished goods 5,500 5,000 4,500 - -

Additional information:
(i) Raw material and labor are consumed evenly during the production process.
(ii) Direct labor is paid @ Rs. 300 per hour.
(iii) FEL uses simultaneous equation method for apportioning service departments’ cost to
production departments.
Required:
Allocate the factory overheads to the departments, clearly displaying the basis of allocation, and
determine the cost of production of each unit. (16)

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CAF-3 Cost & Management Accounting Factory Overheads

Question-3 [Venus Limited] {Autumn 2022 _ Q-4}

(a) List any two examples of bases for absorption of factory overheads. Also, briefly discuss how a
base should be selected. (02)
(b) Venus Limited (VL) is a manufacturer of consumer goods. Below are the details related to
overheads of its production department for the year:
Total machine hours available (2500 hours per machine) Rs. 7,500
Machine maintenance hours (150 hours per machine) Rs. 450
Departmental overhead absorption rate per productive machine hour Rs. 850
The management of VL has decided to replace one of its existing machines having zero
book value with a new machine which will cost Rs. 1,200,000 and has a useful life of
10 years. The machine will be available for use from the beginning of next year and is
expected to run for 2,500 hours during the next year including:
i) 80 hours for setting up the machine; and
ii) 110 hours for machine maintenance.
The estimated overheads for the year related to the new machine are given below:
Electricity consumption per hour Rs. 180
Annual maintenance cost Rs. 200,000
Indirect labor cost Rs. 50,000
It has also been decided that from the beginning of next year, one of the managers from
another department will be moved to the production department for monitoring the line
efficiency. The manager’s salary is Rs. 30,000 per month.
Required:
Compute the revised overhead absorption rate for the production department for the next year. (06)

Question-4 [California Limited] {Spring 2022 _ Q-5}

California Limited (CL) runs a factory which has two production departments AB and AC, and two
service departments SA and SB. CL allocates the costof service departments using simultaneous equation
method. A summary of budgeted overheads for the year ending 31 December 2022 is as follows:
Rs. In ‘000’
Factory rent 2,500
Fuel cost 1,800
Depreciation 2,000
Electricity and other utilities 1,100
Other related information is given below:
Production Department Service Department
Total
AB AC SA SB
Machine hours 22,000 12,000 - - 34,000
Labor hours 8,000 10,000 - - 18,000
Floor area (square feet) 6,000 4,500 900 600 12,000
SA - % of services 40% 40% - 20%
SB - % of services 45% 40% 15% -
Basis of overhead absorption Machine hours Labor hours
The per hour fuel consumption of machines in department AC is 50% more than that of machines
in department AB.
Required:
Compute the departmental overhead absorption rate. (08)

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CAF-3 Cost & Management Accounting Factory Overheads

Question-5 [Bright Limited] {Spring 2021 _ Q-5}

Bright Limited (BL) is engaged in the manufacturing of two products, Shine and Glow. Both these
products are processed through two production departments, A and B, while department X and Y provide
services to both the production departments. Below is a summary of the indirect costs incurred by BL for
manufacture of 100,000 units of Shine and 60,000 units of Glow during the year ended 31 December
2020:
Rs. in ‘000’
Salaries and wages 115,000
Depreciation of machinery 80,000
Building insurance 25,000
Electricity 60,000
Total 280,000
Other information related to the four departments is given below:
Dep. A Dep. B Dep. X Dep. Y Total
Cost of machinery (000) 250,000 150,000 400,000
Floor Area (square feet) 15,000 6,000 6,000 3,000 30,000
No. of employees 150 50 25 25 250

Services provided by
− Department X 80% 20%
− Department Y 75% 15% 10%
The overhead absorption rates used by BL for allocation to Shine and Glow are Rs. 1,800 and Rs. 1,700
per unit respectively. Any under/over absorbed overheads are adjusted to cost of sales.
Required:
a) Compute product-wise actual overheads for Shine and Glow. (08)
b) Compute the product-wise under/over absorbed production overheads. (02)

Question-6 [Opal Industries Limited] {Autumn 2017 _ Q-3}

Opal Industries Limited (OIL) produces various products which pass through Processing and Finishing
departments. Logistics and Maintenance departments provide necessary support for the production.
Following information is available from OILs records for the month of June 2017:

Overhead costs Direct labor hours

Departments *Budgeted Actual Budgeted Actual
------ Rupees ------ ----- Hours -----
Processing 560,000 536,000 14,000 14,350
Finishing 320,000 258,000 10,000 9,800
Logistics - 56,700 - -
Maintenance - 45,000 - -
*Including apportionment of overhead costs of support departments

Costs of support departments are apportioned as under:

Processing Finishing Logistics Maintenance
Logistics 50% 40% - 10%
Maintenance 35% 45% 20% -

Required:
a) Allocate actual overheads costs of support departments to production departments using repeated
distribution method. (05)
b) Compute under/over applied overheads for the month of June 2017. (03)

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CAF-3 Cost & Management Accounting Factory Overheads

Question-7 [Omega Industries Limited] {Spring 2016 _ Q-5}

Omega Industries Limited (OIL) produces two products Alpha and Beta. These products are
processed through Fabrication and Finishing departments. Quality control and Logistics departments
provide all the necessary support for the production. OIL allocates production overheads to Alpha and
Beta at a pre- determined rate of Rs. 1,300 and Rs. 500 per unit respectively. Any under/over absorbed
overheads are adjusted to cost of sales. Following actual data has been extracted from the cost records
of OIL for the month of December 2015:
Fabrication Finishing Quality Control Logistics Total
Indirect labor (Rs. in '000) 1,500 1,200 500 400 3,600
Factory rent (Rs. in '000) 2,000
Power (Rs. in '000) 1,200
Depreciation of plant (Rs.in'000’) 9,000

Other information:
Cost of plant (Rs. in '000) 32,000 20,000 2,000 6,000 60,000
Floor area (Square feet) 10,000 5,000 3,000 2,000 20,000
Power (KWH) 50,000 40,000 4,000 6,000 1,00,000
Hours worked for Alpha 70% 60% - - -
Hours worked for Beta 30% 40%
Services provided by:
– Quality control 40% 60% 100%
– Logistics 60% 35% 5% 100%
8,000 units of Alpha and 10,000 units of Beta were produced during the month of December 2015.
Required:
a) Compute product wise actual overheads for Alpha and Beta. (06)
b) Prepare journal entries to record:
(i) Applied production overheads; and (03)
(ii) Under/over absorbed production overheads (03)

Question-8 [Salman Limited] { Autumn 2014 _ Q-7(b)}

Salman Limited (SL) has two production departments, PD-A and PD-B, and two service departments, SD-1 and
SD-2. A summary of budgeted costs for the year ending June 2015 is as follows
PD-A PD-B SD-1 SD- 2 Total
------------------------ Rs. in ‘000------------------------
Direct labour 5,400 3,648 - - 9,048
Direct material 13,500 9,120 - - 22,620
Indirect labour 1,900 600 50 20 2,570
Indirect materials 900 1,100 150 55 2,205
Factory rent - - - - 1,340
Power cost - - - - 1,515
Depreciation - - - - 3,500

PD-A PD-B SD-1 SD-2

Production (units) 2,250 800 - -
Direct labour hours (per unit) 20 38 - -
Machine hours 19,250 12,250 2,800 700
Kilowatt hours (000) 800 600 50 150
Floor area (square feet) 5,000 4,000 500 500
Basis of overhead application Machine Hour Direct Labor Hour

SL allocates the costs of service departments applying repeated distribution method. Details of services
provided by SD-1 and SD-2 to the other departments are as follows:
Service Departments PD-A PD-B SD-1 SD-2
SD-1 30% 65% -- 5%
SD-2 55% 35% 10% --
Required:
Compute the departmental overhead absorption rate. (10)
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CAF-3 Cost & Management Accounting Factory Overheads

Question-9 [Alpha Limited] {Spring 2014 _ Q-2}

Alpha Limited is preparing its departmental budgets and product cost estimates for the next year. The
costs and related data for the year ending 31 December 2014 have been estimated as follows:
Machining Assembling Finishing Maintenance Total
Cost -------Rs. in “000” --------
Direct Wages (Rs.) 274 1465 328 - 748
Indirect Wages (Rs.) 46 27 36 137 246
Direct Material 365 46 18 - 429
Indirect Material 68 18 36 91 213
Power 465
Light & Heat 46
Depreciation 108
Rent & Rates 114
Warehousing Cost 98

Other data:
Direct Labor Hour 12,000 8,000 16,000 6,000 42,000
Machine Hour 40,000 2,000 3,000 - 45,000
No. of Employees 6 4 8 3 21
Floor Area 1,000 400 300 300 2,000
Net Book Value of Assets (Rs.000) 20,000 8,000 3,000 4,000 35,000

80% of the maintenance department’s time is used in the maintenance of machines whereas the
remaining time is consumed in cleaning and maintenance of factory buildings.
Required:
Calculate appropriate overhead absorption rates for the machining, assembly and finishing
departments. (12)

Question-10 [Zaiqa Limited] {Autumn 2013 _ Q-7}

Zaiqa Limited (ZL) is engaged in the business of manufacturing fruit jam. It has three productions and
two Service Departments. Following information is available from ZL’s records for the month of
August 2013
Rupees
Rent and rates 85,000
Indirect wages of production departments 60,000
General lighting 75,000
Power 150,000
Depreciation machinery 50,000

Following further information relating to the departments is also available:

Production departments Service departments
Selection Jam making Bottling Storage Distribution
Direct wages (Rs.) 60,000 80,000 32,000 --- ---
Indirect wages (Rs.) ? ? ? 8,000 20,000
Power consumed (Kwh) 1,000 6,000 2,000 1,000 -
Floor area (Sq. ft) 1,500 2,000 1,250 1,000 500
Light points (No.) 10 20 15 5 10
Production Labour hours 1,533 3,577 1,815 - -
Labour hours per bottle 0.10 0.25 0.15 - -
Cost of machinery (Rs.) 600,000 1,200,000 900,000 300,000 -

After production, the jam bottles are finally packed in a carton consisting of 12 bottles. The service
departments’ costs are apportioned as follows:
Production Departments Service Departments
Selection Jam making Bottling Storage Distribution
Storage 10% 30% 40% -- 20%
Distribution 20% 50% 30% -- --

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CAF-3 Cost & Management Accounting Factory Overheads

Raw and packing material costs of Rs. 36 and labour cost of Rs. 25 is incurred on each bottle.
Required:
Calculate the cost of each carton of jam bottles. (16)

Question-11 [Stem Limited] {Autumn 2012 _ Q-3(a)}

Stem Limited (SL) is engaged in the manufacture and sale of two products Patel and Leaf.
Following information is available from SLs records for the year ended 30 June 2012:

Patel Leaf
Direct material 250 kg @ Rs. 80 per kg 125 kg @ Rs. 128 per kg
Direct labour @ Rs. 25 per hour 720 hours 960 hours
Sales Rs. 65,000 Rs. 80,000
Profit margin 25% on cost 30% on sales price
Factory overheads are allocated to the products as a percentage of direct labour whereas administrative
overheads are allocated as a percentage of direct material cost.
Required:
Compute the amount of factory and administrative overheads using simultaneous equations. (10)

Question-12 [Nitrate Limited] {Spring 2012 _ Q-2}

Nitrate Limited (NL), producing industrial chemicals, has three production and two service
departments. The annual overheads are as follows:
Production Departments Service Departments
A B C X Y
56,000 50,000 38,000 16,500 10,600

The service departments’ costs are apportioned as follows:

Production Departments Service Departments
A B C X Y
Service department X 20% 40% 30% --- 10%
Service department Y 40% 20% 20% 20% ---
Required:
Apportion costs of service departments using simultaneous equation method. (10)

Question-12 [Sparrow (Pvt) Limited] {Autumn 2011 _ Q-1}

Sparrow (Pvt) Limited (SPL) is engaged in the manufacture of two products A and B. These
products are manufactured on two machines M1 and M2 and are passed through two service
departments, Inspection and Packing, before being delivered to the warehouse for final distribution.
SPL’s overhead expenses for the month of August 2011 were as follows:
Rupees
Electricity 2,238,000
Rent 1,492,000
Operational expenses of machine M1 5,500,000
Operational expenses of machine M2 3,200,000

Following information relates to production of the two products during the month:
A B
Units produced 5,600 7,500
Labour time per unit – Inspection department 15 minutes 12 minutes
Labour time per unit – Packing department 12 minutes 10 minutes

The area occupied by the two machines M1 and M2 and the two service departments is as follows:
Square feet
Machine M1 5,500
Machine M2 4,800
Inspection department 12,000
Packing department 15,000
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CAF-3 Cost & Management Accounting Factory Overheads

Machine M1 has produced 50% units of product A and 65% units of product B whereas machine M2
has produced 50% units of product A and 35% units of product B.
Required:
Allocate overhead expenses to both the products A and B. (18)

Question-12 [Amber Limited] { Spring 2011 _ Q-2}

Amber Limited (AL) manufactures a single product. Following information pertaining to the year 2010
has been extracted from the records of the company’s three production departments.

Material Labor Machine

Department
Rs. in million Hours
A 80 200,000 400,000
Budgeted B 150 500,000 125,000
C 120 250,000 350,000
A 80 220,000 340,000
Actual B 150 530,000 120,000
C 120 240,000 320,000

AL produced 3.57 million units during the period. The budgeted labor rate per hour is Rs. 120. The
overheads for department-A is budgeted at Rs. 5.0 million, for department-B at 15% of labor cost and
for department-C at 5% of prime cost of the respective departments. Overheads are allocated on the
following basis:
Department-A Machine Hour
Department-B Labor Hour
Department-C % of Prime Cost

Actual overheads for department A, B and C are Rs. 5.35 million, Rs. 8.90 million and Rs. 7.45 million
respectively. There was no beginning or ending inventory in any of the production departments.
Required:
a) Budgeted overhead application rate for each department. (05)
b) The total and departmental actual cost for each unit of product. (08)
c) The over or under applied overhead for each department. (03)

Question-13 [RT Limited] Amended { Spring 2009 _ Q-2}

Following information has been extracted from the records of RT Limited for August 2009;

Departments
Production Service
P-1 P-2 P-3 S-1 S-2
Budgeted machine hours 60,000 100,000 120,000
Actual machine hours 60,500 110,000 100,000
Budgeted labor hours 50,000 200,000 75,000
Actual labor hours 55,000 190,000 75,000
Budgeted material cost (Rs. ‘000) 50,000 40,000 3,000
Actual material cost (Rs. ‘000) 50,000 42,000 3,200
Budgeted overheads (Rs. ‘000) 1,200 2,000 2,250 600 700
Actual overheads (Rs. ‘000) 1,250 2,000 1,800 500 750
Services provided by S-1 20% 30% 40% - 10%
Services provided by S-2 30% 40% 20% 10% -
Basis of overhead application Machine hours Labor hours Material cost

Required:
a) Allocate the actual costs of service departments using repeated distribution method.
b) Compute department wise over / under applied (absorbed) overheads. (12)

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Question-14 [Zia Textile Mills] {Spring 2018 _ Q-2(b)}

On December 1, 2007 Zia Textile Mills Limited purchased a new cutting machine for Rs. 1,300,000 to
augment the capacity of five existing machines in the Cutting Department. The new machine has an
estimated life of 10 years after which its scrap value is estimated at Rs. 100,000. It is the policy of the
company to charge depreciation on straight line basis.
The new machine will be available to Cutting Department with effect from February 1, 2008.
It is budgeted that the machine will work for 2,600 hours in 2008. The budgeted hours include:
▪ 80 hours for setting up the machine; and
▪ 120 hours for maintenance.
The related expenses of new machine, for the year 2008 have been estimated as under:
a) Electricity used by the machine during the production will be 10 units per hour @ Rs. 8.50
per unit.
b) Cost of maintenance will be Rs. 25,000 per month.
c) The machine requires replacement of a part at the end of every month which will cost
Rs. 10,000 on each replacement.
d) A machine operator will be employed at Rs. 9,000 per month.
e) It is estimated that on installation of the machine, other departmental overheads will increase
by Rs. 5,000 per month.
Cutting Department uses a single rate for the recovery of running costs of the machines. It has been
budgeted that other five machines will work for 12,500 hours during the year 2008, including 900
hours for maintenance.
Presently, the Cutting Department is charging Rs. 390 per productive hour for recovery of running cost
of the existing machines.
Required:
Compute the revised machine hour rate which the Cutting Department should use during the year 2008
after purchase of new machine. (08)

Question-15 [ABYZ] {Spring 2004_Q-8}

From the following information, allocate overheads of service departments to individual producing
departments by adopting Algebraic method:
Departmental overheads before Service Provided
Departments
distribution of service Departments Dept. Y Dept. Z
Production Dept. – A 60,000 40% 20%
Production Dept. –B 80,000 40% 50%
Service Dept. – Y 3630 -- 30%
Service Dept. – Z 2,000 20% --

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