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Illustration 1:

A factory has 3 production departments (P1, P2, P3) and 2 service departments (S1 & S2). The following
overheads and other information are extracted from the books for the month of January 2014.
Expense Amount Expense Amount
Rent
Repair
Depreciation
lighting
6,000
3,600
2,700
600
Supervision
Fire Insurance for stock
ESI contribution
Power
9,000
3,000
900
5,400

Particulars P1 P2 P3 S1 S2
Area sp. Ft.
No. of workers
Wages
Value of plant
Stock Value
Horse power of plant
400
54
18,000
72,000
45,000
600
300
48
15,000
54,000
27,000
400
270
36
12,000
48,000
18,000
300
150
24
9,000
6,000

150
80
18
6,000


50
Allocate or apportion the overheads among the various departments on suitable basis.

Illustration 2:
The following information is supplied from the costing records of a company :
Particulars Particulars
Rent
Maintenance
Depreciation
lighting
2,000
1,200
900
200
Insurance (Stock)
Employers contribution to P.F.
Energy
Supervision
1,000
300
1,800
3,000

Particulars Departments
A B C D
Floor space (sq. mtr.)
Number of workers
Total direct wages ()
Cost of machinery ()
Stock of goods()
150 110 90 50
24 16 12 8
8,000 6,000 4,000 2,000
24,000 18,000 12,000 6,000
15,000 9,000 6,000 -
Prepare a statement showing apportionment of costs to various departments.
Illustration 3:
MM Ltd. has three production departments X, Y, Z and two service departments S and C. The following
details are extracted from the books of accounts in respect of indirect expenses incurred during April
2014 :
Particulars Amount ()
Indirect Cost :
Indirect Wages ...
Lighting
Rent And Rates
Electric Power
Depreciation
Sundry Expenses


9,000
1,200
12,000
6,000
24,000
7,800
60,000

Following further details are collected for distribution of the above costs :
Particulars Departments
X Y Z S C
Value of machinery (in 000)
Horse power of machines
Light points (Nos.)
Floor space (sq. metres)
Direct wages (in 000)
Machine hours worked
60
40
20
150
30
4,250
50
45
30
200
20
3,380
80
60
40
250
40
7,120
10
5
20
100
4

-
-
10
50
6
Prepare Primary Overheads Distribution Summary.

(1) Meaning : Machine Hour Rate (MHR) is the cost of running a machine for one hour. Under this
method machines hours are used as the basis for overhead absorption rate. The rate is calculated as
follows:

MHR=




(2) Example: Factory overheads 12,000, Machine Hours 1,000, A Job No. 101 requires 100 Machine
hours.
MHR=

= 12
OH absorbed by Job No. 101 : 100 12 = 1,200

(3) Computation : Computation of Machine Hour Rate involves the following steps-
(i) Treat each machine as a separate cost centre.
(ii) Apportion Standing (Fixed) Charges as shown below :
No. Standing Charges Basis of Apportionment
1 Rent & Rates Floor Area occupied
2 Heating & lighting No. of light points or Floor area occupied
3 Supervision Time devoted by the supervisor
4 Insurance Insured value of each machine
5 Lubrication oil & consumable stores Machine hours or past experience
6 Cleaning Materials No. of Machines or past experience
7 Miscellaneous expenses Equitable basis based on facts
Note: Standing/Fixed Charges vary with time; not with use of machine.
(iii) Calculate Machine Hours of each machine for a particular period (year, quarter, month or week) as
follows:
A. No. of working Days (365 Holidays)
B. No. of Working Hours available per day
C. Total No. of Working Hours (A B)
D. Less : Hours required for maintenance
E. Productive Machine Hours (if set up time is given / assumed to be productive)
F. Less : Unproductive Set up time (if given / assumed to be unproductive)
G. Machine Hours (E F)



(iv) Standing Charges per Machine Hour =




(v) Calculate Running charges for each machine: some charges may be apportioned as shown below :
No. Running Charges Basis of Apportionment
1 Depreciation Value / Useful life (in hours)
2 Repairs and maintenance Machine hours
3 Power Meter reading / HP / Machine hours
4 Miscellaneous expenses Equitable basis based on facts
Note : Running charges vary with use of machine; more use means more running charges.

(vi) Calculate hourly rate for Running expenses per machine as follows:

Running Charges per Machine Hour =




(vii) Calculate Machine Hour Rate as follows:
Fixed / Standing Charges per hour + Running charges per hour = Machine Hour Rate.
[Tutorial Note : The final machine hour rate is used in Absorption Costing. The distinction between
Standing (Fixed) Charges and Running (Variable) Charges is important in Marginal Costing (which you will
be studying in the next semester.]
(7) Format: The following format can be used for computing the Machine Hour Rate :
Total

Per Hour

A. Standing Charges :
(a) Rent & Rates
(b) Heating & lighting
(c) Supervision
(d) Insurance
(e) Lubricating oil & Consumable stores
(f) Sundry supplies / Cleaning materials
(g) Department & General overheads
Total Fixed/Standing Charges per hour
B. Running Charges :
(a) Depreciation
(b) Repair & Maintenance
(c) Power
(d) Machine operator
(e) Other running expenses
C. Machine Hour Rate



Q. 2:
Calculate the machine hour rate from the following details:
Bought machinery 45,000
Installation charges 5,000
Life of machine 5 years
Working hours per year 2,500
Repair charges 75% of depreciation
Electric power consumed: 10 units per hour @ 15 paise per unit
Lubricant oil 4 per day of 8 hrs
Consumable stores @ 10 per day of 8 hrs
Wages of machine operator @ 8 per day of 8 hrs



Q. 3.
The following particulars relate to a new machine :
Purchase Price 4,00,000
Installation Expenses 1,00,000
Rent per quarter 3,750
General Lighting for the total area 1,000 per month
Foremans Salary 30,000 per annum
Insurance Premium for the machine 3,000 per annum
Departmental Overheads for the machine 5,000 per annum
Consumable Stores 4,000 per annum
Power 2 units per hour at 50 paise per unit.
The estimated life of the machine is 10 years and scrap value at the end of 10
th
year is 1,00,000. The
machine is expected to run 20,000 hours in its life time. The machine occupies 25% of total area. The
foreman devotes 1/6
th
of his time for the machine.

Q.4.
From the following information, compute machine hour rate :
Cost of machine 44,000
Scrap value 4,000
Rent for the workshop 25,000 per annum
General lighting for the workshop 160 per annum
Power consumption 20 units per hour @ 20 per every 100 units
Administrative expenses allocated to the machine 4,000 per annum
Repairs and maintenance 75% of depreciation
Workshop supervisors salary 3,000 per month
Estimated working time per year 50 weeks of 40 hours each
Setting up time which is regarded as productive time 200 hours per year
Effective life of the machine 10 year
The machine occupies 1/4
th
area of the workshop. The supervisor is expected to devote 1/3
rd
of his time
;in supervising the machine.

Q.5.
Compute the machine hour rate from the following data :
Cost of machine 1,00,000
Installation charges 10,000
Estimated scrap value after the expiry of its life (15 Years) 5,000
Rent and rates for the shop per month 200
General lighting for the machine per annum 300
Insurance premium for the machine per annum 960
Repairs and maintenance expenses per annum 1,000
Power consumption 10 units per hour -
Rate of power per 100 units 20
Estimated working hours per annum 2,200 -
(This includes non-productive setting up time of 200 hrs)
Shop supervisors salary per month 600
The machine occupies 1/4
th
of the total area of the shop. The supervisor is expected to devote 1/5
th
of
his time of supervising the machine.

Q.6.
Compute a comprehensive machine hour rate for a machine in Production department A of factory
from the following details:
Machine:
Cost including installation charges 20,00,000
Estimated useful life 10 years
Estimated salvage value 10%
Working Hours :
Number of working days 300
Number of shift per day 2
Effective working hrs. per shift 7
Stoppages for repairs and maintenance 200 hrs.
Operating & Other Costs:
1. Wages of two operators (one for each shift) @ 5,000 p.m.
2. Salary of supervisor (one for each shift) @ 7,500. (Only one-fifth of the supervisors time devoted
to this
machine)
3. Electric Power : 20 units per hour, each unit costing 3.20
4. Insurance Charges : 5,000 per annum
5. Repairs and Maintenance (estimated) : 12,500 p.m.
6. Rent, rates & taxes (allocated) : 10,000 p a.
7. General lighting etc. (allocated) : 750 p.m.
8. Other factory overheads (allocated) : 1,40,000 p a.

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