Cost Accounting: Overhead Problems and Solutions

The overhead cost chapter in a business or accounting context typically deals with expenses that are incurred in the operation of a business but cannot be directly attributed to specific products or services.

1. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Module 4
Overhead Cost Control

1. The following information is supplied from the costing records of a company.

Particulars Dept A Dept B Dept C Dept D
Floor Space(Sq.feet) 150 110 90 50
No.Workers 24 16 12 8
Total direct wages (in Rs) 8,000 6,000 4,000 2,000
Cost of machinery (in Rs) 24,000 18,000 12,000 6,000
Stock of goods (in Rs) 15,000 9,000 6,000
Prepare a statement showing apportionment of cost to the various departments.
Solution:
Primary overhead distribution summary
Particulars Base Total
Production department
A(Rs) B(Rs) C(Rs) D(Rs)
Rent
Floor Area
(15:11:9:5)
2,000 750 550 450 250
Maintenance
Cost of
Machinery
(4:3:2:1)
1,200 480 360 240 120
Depreciation
Cost of
Machinery
(4:3:2:1)
900 360 270 180 90
Lighting
Floor Area
(15:11:9:5)
200 75 55 45 25
Insurance
Stock of Goods
(5:3:2)
1,000 500 300 200 -
Employers Contribution to
PF
Direct wages
(4:3:2:1)
300 120 90 60 30
Energy
Cost of
Machinery
(4:3:2:1)
1,800 720 540 360 180

Rs

Rs
Rent 2,000 Insurance on stock 1,000
Maintenance 1,200 Employers Contribution to PF 300
Depreciation 900 Energy 1,800
Lighting 200 Supervision 3,000

2. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Supervision
No. of Workers
(6:4:3)
3,000 1,200 800 600 400
Total Overheads 10,400 4,205 2,965 2,135 1,095

2. The following data is obtained from the books of a company for the half year ended 30
th

September 2020. Prepare overhead distribution summary.
Particulars
Production Dept. Service Dept.
A B C X Y
Direct Wages (in Rs) 7,000 6,000 5,000 1,000 1,000
Direct Materials 3,000 2,500 2,000 1,500 1,000
No. Employees 200 150 150 50 50
Electricity (k.wh) 8,000 6,000 6,000 2,000 3,000
No. of light points 10 15 15 5 5
Asset value (in Rs) 50,000 30,000 20,000 10,000 10,000
Area occupied (square yards) 800 600 600 200 200

The Expense for the 6 months were:
Stores overhead Rs.400
Motive power Rs.1,500
Electric lighting 200
Labour welfare 3,000
Depreciation 6,000
Repairs and Maintenance 1,200
General overheads 10,000
Rent and Taxes 600
Apportion the expenses of Dept X in the ration 4:3:3 and dept Y in the Proportion of direct
wages to the depts. A, B and C, respectively.
Solution
Primary overheads distribution summary
Particulars Basic Total
Production Dept Service Dept
A B C X Y
Direct materials Actuals 2,500 - - - 1,500 1,000
Direct Wages Actuals 2,000 - - - 1,000 1,000
Stores Overheads
Direct materials
(6:5:4:3:2) 400 120 100 80 60 40
Motive power
Electricity(KWH)
(8:6:6:2:3) 1,500 480 360 360 120 180

3. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Electricity
lighting
No. of light
points
(2:3:3:1:1) 200 40 60 60 20 20
Labour Welfare
No. employees
(4:3:3:1:1) 3,000 1,000 750 750 250 250
Depreciation
Value of Assets
(5:3:2:1:1) 6,000 2,500 1,500 1,000 500 500
Repair &
Maintenance
Value of Assets
(5:3:2:1:1) 1,200 500 300 200 100 100
Genaral
overheads
Direct wages
(7:6:5:1:1) 10,000 3,500 3,000 2,500 500 500
Rent & taxes
Area (Sq.yards)
(4:3:3:1:1) 600 200 150 150 50 50
Total overheads 27,400 8,340 6,220 5,100 4,100 3,640

Secondary overhead distribution summary
Particulars Basis Total
Production Dept
A B C
As per primary distribution
summery Actuals 19,660 8,340 6,220 5,100
Service depts X (4:3:3) 4,100 1,640 1,230 1,230
Y
Direct wages
(7:6:5) 3,640 1,416 1,213 1,011
Total overheads 27,400 11,396 8,663 7,341


3. Sneha company is having 4 departments A,B and C are production department and D is a
service department. The actual cost for a period is as follows:-
Rent Rs.20,000
Repairs Rs.12,000
Depreciation Rs.9,000
Lighting Rs.2,000
Supervision Rs.30,000
Insurance on materials Rs.10,000
Employees insurance Rs.3,000
Power Rs.18,000
The following data is available in respect of 4 departments:
Particulars A B C D
Area in Sq. feet 150 110 90 50

4. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


No. of Workers 24 16 12 8
Total wages (in Rs) 8,000 6,000 4,000 2,000
Value of stock (in Rs) 15,000 9,000 6,000 -
Value of plant 24,000 18,000 12,000 6,000

Apportion of cost to the various department on most equitable basis and service department to
the production department in the ratio 4:4:2.

Solution:
Primary Distribution Summary

Particulars Base Total Production department
Service
department
A(Rs) B(Rs) C(Rs) D(Rs)
Rent
Floor area is
sq.feet
(15:11:9:5) 20,000 7,500 5,500 4,500 2,500
Repairs
Value of plant
(4:3:2:1) 12,000 4,800 3,600 2,400 1,200
Depreciation
Value of plant
(4:3:2:1) 9,000 3,600 2,700 1,800 900
Lighting
Area in sq.feet
(15:11:9:5) 2,000 750 550 450 250
Supervision
No. of workers
(6:4:3:2) 30,000 12,000 8,000 6,000 4,000
Insurance on
materials
value of stock
(5:3:2) 10,000 5,000 3,000 4,000 -
Employees
Insurance
Total wages
(4:3:2:1) 3,000 1,200 900 600 300
Power
Value of plant
(4:3:2:1) 18,000 7,200 5,400 3,600 1,800
Total Overheads

1,04,000 42,050 29,650 21,350 10,950

5. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Secondary Distribution Summary

Particulars Base Total
Production department
A(Rs) B(Rs) C(Rs)
As per primary
distribution summary 93,050 42,050 29,650 21,350
Service department D (4:4:2) 10,950 4,380 4,380 2,190
Total overheads 1,04,000 46,430 34,030 23,540


4. Lakshmi Ltd. has 3 production department and two service departments. From the
following figures, prepare the overhead distribution summary using simultaneous
equation method and repeated distribution method and also calculate overhead rate per
labour hour.

Particulars
Production Dept. Service Dept.
A B C X Y
Direct Materials 45,000 30,000 15,000 12,000 9,000
Direct wages 30,000 22,500 15,000 6,000 4,500
value of machine 60,000 45,000 30,000 - -
Floor area (Sq.feet) 30,000 20,000 15,000 10,000 5,000
HP rate of machine 240 200 160 - -
No. of light points 120 90 60 30 20
No. of labour hrs 8,000 6,000 4,000 - -
Other details:
Indirect materials Rs.22,200
Indirect wages Rs.15,600
Depreciation on Machinery Rs.27,000
Depreciation on building Rs.12,000
Rent Rate & Taxes Rs.9,000
Electric power Rs.33,750
Lighting Rs.2,400
General expenses Rs.7,500
The Service rendered by each department to other department are as follows.
A B C X Y
X 30% 40% 20% - 10%
Y 10% 20% 50% 20% -

6. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Solution:
Primary Overhead Distribution Summary

Particulars Basis Total
Production Dept. Service Dept.
A B C X Y
Direct materials Actuals 21,000 - - - 12,000 9,000
Direct Wages Actuals 10,500 - - - 6,000 4,500
Indirect Materials
Direct
materials
(15:10:5:4:3) 22,200 9,000 6,000 3,000 2,400 1,800
Indirect Wages
Direct wages
(20:15:10:4:3) 15,600 6,000 4,500 3,000 1,200 900
Depreciation on
machinery
value of
machine
(4:3:2) 27,000 12,000 9,000 6,000 - -
Depreciation on
building
Floor area
(6:4:3:2:1) 12,000 4,500 3,000 2,250 1,500 750
Rent, rates and taxes
Floor area
(6:4:3:2:1) 9,000 3,375 2,250 1,688 1,125 562
Electric power
HP rate of
machine
(6:5:4) 33,750 13,500 11,250 9,000 - -
Lighting
No. of light
points
(12:9:6:3:2) 2,400 900 675 450 225 150
General expenses
Direct wages
(20:15:10:4:3) 7,800 3,000 2,250 1,500 600 450
Total overhead 1,61,250 52,275 38,925 26,888 25,050 18,112


(1) Simultaneous equation method

X=25,050+
20
100
Y

Y=18,112 +
10
100
X

7. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


X=25,050 + 0.2Y
Y=18,112+0.1X
X-0.2Y=25,050 x (0.1)
-0.1X + Y = 18,112 x (1)

0.1X – 0.02Y = 2,505
-0.1X + Y = 18,112
0.98Y= 20,617

Y =
20,617
0.98

Y = Rs 21,038
X – 0.2(21,038) = 25,050
X – 4208 = 25,050
X = 25,050 + 4,208
X = Rs. 29,258
Therefore, Service department X = Rs. 29,258
Y = Rs. 21,038

Secondary distribution summary
Particulars Total
Production Dept.
A B C
As per primary distribution summary 1,18,088 52,275 38,925 26,888
Service department
X(29,258) in (30%,40%,20%) 26,332 8,777 11,703 5,852
Y(21,038) in (10%,20%,50%) 16,830 2,104 4,207 10,519
Total Overheads 1,61,250 63,156 54,835 43,259

8. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


(2) Repeated distribution method: (Secondary distribution summary)
Particulars
Production Dept. Service Dept.
A B C X Y
As per primary distribution summary 52,275 38,925 26,888 25,050 18,112
Service departments
X(30%, 40%,20% & 10%) 7,515 10,020 5,010 -25,050 2,505
20,617
Y (10%,20%,50% & 20%) 2,062 41,234 10,309 4,123 -20,617
X 1,237 1,649 825 -4,123 412
Y 41 82 206 83 -412
X 25 33 17 -83 8
Y 1 2 5 -8
Total overhead 63,156 54,835 43,259 -
No. of labour hours 8,000 6,000 4,000
Labour hour rate 7.89 9.14 10.81

Note: Slight Changes in answer due to decimal point is acceptable.
5. An Engineering company has 3 production department and 2 service departments. The
overhead analysis of the various departments are as follows –
Production department – A – Rs 10,250, B - Rs 12,260, C – Rs 6,840
Service departments – X – Rs 5,523 y – Rs 3,327
The service department overheads are apportioned to the production department are as follows –


Apportion the service department expenses to the production department under:
1. Simulation Equation method.
2. Repeated distribution method.
Solution:
X = 5,523 +
10
100
�
Particulars A B C X Y
X 25% 30% 25% - 20%
Y
40% 20% 30% 10% -

9. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Y = 3,327 +
20
100
�
X = 5,523 + 0.1Y
Y = 3,327 + 0.2X

( X – 0.1Y = 5,523) x0.2
(-0.2X + Y = 3,327 ) x1
0.2X – 0.02Y = 1,105
-0.2X + Y = 3,327
0.98Y = 4,432

Y =
4,432
0.987

Y = 4,522
X – 0.1Y = 5,523
X – 0.1(4522) = 5,523
X – 456 = 5,523
X = 5,523 + 452
X = 5,975
Secondary Distribution Summary


Repeated distribution method
Particulars
Production Department
Service
Department
A B C X Y
As per Primary Distribution summary 10,250 12,260 6,840 5,523 3,327
Service department
X (25%, 30%, 25% &20%)
1,381 1,657 1,381 -5,523 +1,105
4,432
Y (40%,20%,30% & 10%) 1,773 886 1,330 443 -4,432
Particulars Total
Production Department
A B C
As per Primary Distribution summary
Service department 29,350 10,250 12,260 6,840
X (5,975) 4,781 1,494 1,793 1,494
Y (4,522) 4,069 1,809 904 1,356
Total Overheads 38,200 13,553 14,957 9,690

10. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


X 111 133 111 -443 89
Y 36 18 27 8 -89
X 2 4 2 -8 -
Total OH 13,553 14,958 9,691 - -

Decimal points could cause some changes in answer which is acceptable.

6. A factory has 3 production departments and 2 service departments. The following figures
are extracted from the books of accounts –

Overheads
Production Department Service Departments
A B C X Y
15,620 25,086 9,094 8,000 2,500


Particulars Production Department Service Departments
A B C X Y
X 30% 40% 10% ----- 20%
Y 20% 20% 50% 10% -----

Estimated working hours of production departments are – A – 500 hrs, B – 1,250 hrs and C –
700 hrs.
Prepare a statement shoeing the distribution of two service departments by using simultaneous
equation method and repeated distribution method and also calculate hourly rate for each
department.

Solution:
Simultaneous equation method
I Step: X = 8,000 + 10Y / 100
Y = 5,200 + 20X / 100
II Step: X = 8,000 + 0.1 Y
Y = 5,200 + 0.2 X

III Step: X – 0.1Y = 8,000 (multiply with 0.2)
-0.2X + Y = 5,200 (multiply with 1)

IV Step: 0.2X – 0.02Y = 1,600
-0.2X + Y = 5,200

11. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


V Step: 0.98Y = 6,800
Y = 6,800/0.98 = 6,939.

VI Step: X = 8,000 + 0.1 Y
X = 8,000 + (0.1 * 6,939)
X = 8,000 + 694 = 8,694
Therefore, Service department X = Rs 8,694 & Service department Y = RS 6,939

Secondary Distribution Summary (Simultaneous equation method)
Particulars
Total Production Department
A B C
As per Primary Distribution summary 49,800 15,620 25,086 9,094
Summary


Service department:
X (30%, 40%, 10%) 6,955 2,608 3,478 869
Y (20%, 20%, 50%) 6,246 1,388 1,388 3,470
Total Overheads 63,000 19,616 29,952 13,432
Estimated Working hours 500 1,250 700
Rate per hour 39.23 23.96 19.19


Note: Apportionment of service department X:
A = 8,694 * 30/100 = 2,608, B = 8,694 *40/100 = 3,478, C = 8,694 * 10/100 = 869
Apportionment of Service department Y:
A = 6,939 *20/100 = 1,388, B = 6,939 * 20/100 = 1,388, C = 6,939 *50/100 = 3,469

Secondary distribution summary (Repeated distribution summary)
Particulars
Production Department
Service
Department
A B C X Y
As per Primary Distribution summary 15,620 25,086 9,094 8,000 5,200
-8,000 +1,600
Service department
X in (30%,40%10% & 20%) 2,400 3,200 800 6,800
-6,800
Y in (20%,20%,50% &10%) 1,360 1,360 3,400 680
X 204 272 68 -680 136
-136
Y 27 27 68 14
X 4 6 1 -14 3

12. Cost Accounting
III sem BBA

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Assistant Professor


Y 1 1 1 -3
Total Overhead 19,616 29,952 13,432 ----- -----
Estimated Working hours 500 1,250 700
Rate per hour 39.23 23.96 19.19
While apportioning X dept expenses its divided to all dept excluding Y and viceversa.

7. Practice Question
The following particulars relate to a manufacturing company which has 3 production
departments A, B & C and two departments X & Y.
Total department overhead as per primary distribution ---
Production departments – A: Rs 6,300, B: Rs 7,400 & C: Rs 2,800
Service departments - X: Rs 4,500, Y: Rs 2,000
The company decided to change the service department cost on the basis of the following
percentages:
Particulars A B C X Y
X 40% 30% 20% ---- 10%
Y 30% 30% 20% 20% ----

Find out the total overhead of production departments, charging service department cost to the
production department by simultaneous Equation method.
Solution
After solving under Simultaneous Equation method , X value = 5,000 and Y value = 2500
Total Overhead Charges under both the method = A = 9,050
B = 9,650 and C = 4,300

13. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Machine Hour Rate :

1. Compute Machine hour rate
Cost of Machine Rs 11,000
Scrap value Rs 680
Repairs for the effective working life Rs 1,500. Standing charges for 4 weekly period Rs
1,600.Effective working life 10,000 hrs. Power used 6 units per hr at 0.05 paisa per unit
.Hours worked in 4 weekly period 120hrs.
Solution
Computation of Machine Hr rate

Weekly Working hrs = 120hrs
Particulars Amt Rate /hr
Standing Charges 1600
Total Standing charges per hour. 13.3333
Variable charges or Running charges
Depreciation 1.032

Repairs
1500/10,000 0.15

Power used
6*0.05 0.3

Total Running Charges per hour

1.482
Total Machine Hr rate 14.815


Working Note:
Standing charges refers to those expenses that remains fixed
Running Charges refers to those expenses that fluctuates with the changing production.

1.Standing charges per hour = Total standing charges
Total hrs worked in week
= 1,600/120 = Rs 13.333/ hr
2) Calculation of Depreciation
Depreciation = Cost of Machine +Installation charges-Scrap
Estimated life of Machine in hours
Dep= 11,000+0-680 = Rs 1.032/ hr
10,000

14. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


2. The details given below relate to 3 machines in a workshop. Determine the machine hour
rate of these machines.
Particulars Machine I Machine II Machine III
Value of the Machine 50,000 1,50,000 75,000
Floor Area (Sq Mtrs) 50 100 50
Wages of Operators 2,000 3000 1,500
Oil Waste etc 500 700 600
No of light points 5 10 5
Sundry Expenses 300 350 250
Hp of Machine 12 25 13
Machine hrs 1,200 2,500 1,300

The other particulars are as follows
Depreciation Rs 27,500
Rent Rs 4,500
Lighting Rs 400
Power Rs 5,000
Supervisory Expenses Rs 3,000 (the supervisor devotes equal time on all the machine)
A job requires materials of Rs 3,000, Labour Cost Rs 500 and it utilizes the services of machines
as follows.
Machine 1 10hrs, Machine II 12 hrs and Machine III 5 hrs .
Also estimate factory cost of the job.
Solution
Calculation of Machine Hr rate
Particulars Base Total Machine I Machine II
Machine
III
Depreciation
Cost of Machine
2:6:3 27,500 5000 15,000 7500
Rent
Floor area
1:2:1 4,500 1125 2250 1125
Lighting
No of Light
points
1:2:1 400 100 200 100
Power
HP of Machines
12:25:13 5000 1200 2500 1300
Supervisory Expenses
Equal Time
1:1:1 3,000 1000 1000 1000
Sundry Expenses Actual 900 300 350 250
Wages of Operators Actual 6,500 2000 3000 1500

15. Cost Accounting
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Oil waste Actual 1,800 500 700 600
Total Machine Expenses 11225 25000 13375
No of Machine Hrs 1200 2500 1300
Machine hr rate 9.35 10.00 10.29

Machine hr rate = Total Machine Expenses /No of Machine hrs.

Calculation of Factory Cost of the job
Particulars Amount
Materials 3000
Labour Wages 500
Prime Cost 3,500
(+) Works Overhead
Machine I (10*9.35) 93.5
Machine II (12*10) 120
Machine III (5*10.29) 51.45 264.95
Factory or Works Cost 3764.95

3. From the following relating to the machine, Calculate Machine hr rate :
Purchase price of the machine with the scrap value zero Rs 90,000
Installation and Incidental charges incurred on the machine Rs 10,000
Life of the machine 10 yrs
Working hrs per annum 2,000
Repair Charges :50% of depreciation
Machine consumes 10 units of electric power per hour at Rs 40 paisa per unit.
Oil expenses at Rs 8 per day of 8 hrs
Consumable Stores at Rs 16 per day of 8 hrs
Wages of 2 machine operators at Rs 32 per day of 8 hrs.

Solution
Calculation of Machine hr rate
Working hrs 2,000pa
Particulars Amount Rate / hr
Standing Charges
Oil Expenses 8
Consumables Stores 16
Total Standing charges (A) 24 3
Running charges

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Depreciation 5
Repairs Charged (50% of depreciation) 2.5
Power (10units*0.40 paise/unit ) 4
Wages of operators (32/8) 4
Total Running Charges (B) 15.5
Machine Hr rate (A+B) 18.5


Working Notes:
1. Standing charges per hour = Total standing charges
Total hrs worked in day
= 24 /8 = Rs 3/ hr
2) Calculation of Depreciation
Depreciation = Cost of Machine +Installation charges-Scrap
Estimated life of Machine in hours

Dep= 90,000+10,000-0 = Rs 5
10*2,000

4. Practice Question
Compute Machine hr rate, From the following information
Particulars Amount
Depreciation of Machinery 24,000
Depreciation of Building 4,000
Repais to Machinery 8,000
Insurance on Machinery 1,600
Indirect Wages 12,000
Power 12,000
Lighting 1,600
Employee State Insurance 8,400

17. Cost Accounting
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Particulars Machine I Machine II Machine III
Direct Wages 2,400 4,800 4,800
Power (Units) 60,000 20,000 40,000
No of Workers 8 16 16
Light Points 16 48 96
Space Occupied (Sq Mtrs) 800 1,600 1,600
Cost of Machine 60,000 2,40,000 3,00,000
Hours Worked 500 600 800

Solution :
Depreciation on Building is calculated on space occupied.
Total Machine I Machine II Machine III
71,600 14,400 25,680 31,520
Machine Hr rate 28.8 42.8 39.4

5. A Machine Costing Rs 10,000 is expected to run for 10 years. At the end of it’s life the
scrap value is expected at Rs 900.repairs during the whole life of machine was Rs
10,000.The machine is expected to run 3,600 hrs per year on an average. The electricity
consumption is 20units per hour at 5 paisa per unit. The machine occupies ¼ of the area
of the department and has two light points out of 10 light points for lighting. The foreman
has to devote 1/6 of his time towards this machine. The monthly rent of the department is
Rs 600 and lighting charges amount to Rs 240 per month. The foreman is paid a monthly
salary of Rs 1,800.
Find out the machine hour rate, assuming insurance is @ 1%p.a and the expenses oil and
other consumable stores amounts Rs 20 per month.
Solution

Calculation of Machine hr rate
Working hrs 3600 hrs p.a
Particulars Amount Rate / hr
Standing Charges
Rent (600*1/4) 150
Lighting (240*2/10) 48
Sundry expenses & other consumables 20

Insurance (10,000*1 * 1
100 12 8.33
Foreman salary (1,800*1/6) 300

18. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor




Working Notes:
1. Standing charges per hour = Total standing charges
Total hrs worked in month
= 526.33 /300= Rs 1.75/ hr
Hours worked in a month = Hrs worked in year /12 months
= 3600/12 = 300 hrs
2) Calculation of Depreciation
Depreciation = Cost of Machine +Installation charges-Scrap
Estimated life of Machine in hours

Dep= 10,000+0-900 = Rs 0.25
10*3600


6. Practice Question
Compute Machine hr rate
Particulars Rate / hr
Electric Power 85 paisa
Steam 35 paisa
Water 25 paisa
Repairs Rs 550 P.a.
Rent Rs 3,200 P.a.
Cost of Machine Rs 15,000
Rate of depreciation 10% P.a.
Running hrs of Machine 2000 hr P.a.

Total Standing charges (A) 526.33 1.75
Running charges
Repairs 10,000
10*3600 0.28
Depreciation 0.25
Power (20*0.05) 1
Total Running Charges

1.53
Machine Hr rate (A+B)

3.28

19. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Solution: Treat Steam and Water as standing Charges
Machine Hr rate = Rs 3.97

7. Calculate Machine Hr Rate

Particulars Amount
Rent of Department (1/5 space occupied by the machine) 60,000
Lighting(2 light points is used out of 12) 36,000
Insurance Premium on the Machine 6,000
Repair and Maintainence of its entire life 18,000
Cotton waste and oil 6,000
Salary of foreman (1/4 of his time devoted towards this machinery) 32,000
Cost of Machine 1,00,000
Estimated Scrap Value of machine 10,000
Installation charges of machine 20,000

Working life of the machine is expected at 18,000 hrs
Machine Consumes 10 units of Power per hour at Rs 1.5 per unit
Working hours of machine is 2,200 hrs per annum which includes setting up time of 200 hrs
Solution
Computation of Machine hour rate
Working hrs (2,000 pa)
Particulars Amount Rate / hr
Standing Charges
Rent (60,000*1/5) 12,000
Insurance premuim 6,000
Standing Charges
Salary of Foreman (32,000*1/4) 8,000
Lighting (36,000*2/12) 6,000
Cotton waste and oil 6,000
Total standing Charges 38,000 19
Running Charges
Depreciation 6.11
Repairs (18,000/18,000) 1
Power (10*1.5) 15.00
Total Running Charges 22.11
Machine hr rate 41.11

20. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor



1.Standing charges per hour = Total standing charges
Total hrs worked in year
= 38,000 /2000 = Rs 19/ hr
2) Calculation of Depreciation
Depreciation = Cost of Machine +Installation charges-Scrap
Estimated life of Machine in hours

Dep= 1,00,000+20,000-10,000 = Rs 6.111/ hr
18,000
3) Working hrs = 2,200
(-) setting up time = 200
Effective Working hrs = 2,000
Assuming setting up time is unproductive we deduct it from working hrs, if its specified in
question that setting up time is productive then you needn’t deduct.

8. Practice Question
Compute Machine hr rate;
Particulars Amount
Cost of Machine 1,30,000
Life of Machine 10 years
Installation Charges 20,000
Residual value (Scrap) 10,000
Rent and Rates per annum 16,000
Insurance per month 500
Repairs and Maintainence per annum 9,000
Consumable Stores per annum 3,000
Total Manufacturing services 2,000
Power cost is 5 units per hour 40 paise per unit
Setting up time (Non Productive) 700 hrs
Number of Working days in a yr 300 and 9 hrs of working each day

Solution
Effective Working hrs = 300*9 = 2700 (-) setting up time (700) = 2,000 hr per year
Total standing charges = Rs 13.5
Total Running charges = Rs 13.5
Machine hr rate = Rs 27

21. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


9. Practice Question
Compute Machine hr rate
Particulars Amount
Cost of Machine 1,60,000
Installation Charges 25,000
Estimated Scrap Value after the expiry of life (15 yrs) 10,000
Rent rates for the shop per month 1,500
General Lighting for the shop for the month 1,000
Insurance premium per annum 2,200
Power Consumption- 20 units per hour 0
Rate of power per 100 units 25
Estimated working hrs per annum 2400 hrs
Setting up time 400 hrs
Machine Maintenance (Productive purpose) 5% of total working time
Shop supervisor salary per month 1,000
Repairs and Maintenance expenses per annum 2,000

Solution: Machine Hr Rate Rs 16.98

10. Following annual charges are available for machine number 101, compute machine hour
rate,

Rs
Lighting (10 light points in the department of which 4 are engaged on this machine) 55,000
Rent (1/4
th
area occupied by the machine) 66,000
Supervisor's salary (1/3 of his time devoted on this machine) 48,000
Insurance 16,000
Lubricants 4,000
Cost of machine 1,80,000
Scrap Value 20,000

Past Experience shows that:
1. The working life of machine will be 20,000 hours.
2. Estimated working hours per annum 3,000 hours which includes setting up time 10%
(unproductive) and machine maintenance 200 hours.
3. It consumes 5 units of power per hour and rate per unit of power is Rs.2.

Solution:

22. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Computation of machine hour rate
Effective working hours 2,500 p.a.
Particulars Amount in Rs Rate per hour
A. Standing Charges
Lighting (55,000 x4/10) 22,000
Rent (66,000 x 1/4 ) 16,500
Supervisor Salary (48,000 x 1/3) 16,000
Insurance 16,000
Lubricants 4,000
Total standing charges / Rate per hour 74,500 29.80
B. Running Charges:
Depreciation
1,80,000−20,000
20,000
x
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8
Power (5x2) 10
Total Running Charges per hour 18.00
Machine Hour Rate (A+B) 47.80

Working Notes
Calculation of total hours worked in a year
Yearly working time = 3,000 hrs P.a.
(-) Setting up time (unproductive 10%) = 300
(-) Machine Maintenance = 800
Effective yearly working hrs = 2,500 hrs p.a.

Standing Charges = 74,500/2,500 = 29.80


11. From the following particulars compute a Machine Hour Rate including shop expenses
Rs.
Cost of mobile crane 25,000
Estimated life of machine 10 Years
Depreciation 10% per annum on original cost
Insurance 1000 p.a.
Actual repairs and maintenance as estimated for its life 40,000
Consumable stores 1,200 p.a.

Rent for floor space allotted Rs. 1,800 per year, rates and taxes and shop expenses for 5 similar
machines Rs. 3,000 per quarter. Assume that crane will work (normal) 300 hours per month and
works only at 80% of its capacity. Cost of diesel, oil etc per hour is Rs.6.

Solution:

23. Cost Accounting
III sem BBA

Chaithra C M.com, NET
Assistant Professor


Computation of Machine Hour Rate
Effective Working Hours 2,880 Hours.
Particulars Amount in Rs Rate per hour
A. Standing Charges
Insurance 1,000
Consumable Stores 1,200
Rent 1,800
Rates, Taxes, and shop expenses(3,000x4x1/6) 2,000
Total Standing Charges / Rate per hour 6,000 2.083
B. Running Charges
Depreciation 0.868
Repairs and Maintenance (40,000/2,880 x 10) 1.389
Cost of diesel, oil etc. 6.000
Total Running Charges Per hour 8.257
Machine Hour Rate (A + B) 10.34

Note: 1. Calculation of working hours
Normal working hours per month 300
Number of working hours per annum (300 x 12) = 3,600
Working capacity : 3,600 x 80/100 = 2,880 hours per year

2. Calculation of Depreciation
Depreciation = Cost of Machine +Installation charges-Scrap
Estimated life of Machine in hours
= 25000+0+0
2880*10
= 0.868 Or
10% annum on original Cost thus, 25,000*10%= 2,500 p.a
2,500/2880= Rs 0.868

12. The following particulars relate to processing machine in a factory. Compute machine
hour rate.

Cost of Machine 20,000
Estimated life of machine 10 Years
Scrap Value 2,000
Yearly working time(50weeks of 44 hours each) 2200 hours
Setting up time is estimated at 5% of total productive time and is power
consumed at 10 paise per unit for the shop
-
Electricity consumption is 16 units per hour at 20 paise per unit