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Overhead absorption

QUESTIONS-ANSWERS
Methods Of Overhead Absorption

Hourly Rates

POHEs for the period


Machine Hour OHAR= No.Of Machine Hours
Rate

Most Popular Method

Can be fixed for a Machine or Group Of Machines


Computing Machine Hour Rate

Machine Running Expenses Standing Expenses


Or Or
Variable Expenses Fixed Expenses

Cost Of
Cost of Rent & Rates
Lighting &
Power Heating
Steam Supervision
Oil Insurance
Repairs Cotton Waste
Maintenance Indirect Labour
Depreciation Consumable Stores
Lubricants
Methods Of Overhead Absorption

Common Costs to be apportioned

Both Fixed/variable costs be divided by Machine Hrs


Hourly Rates
Machine Hr represents Cost of Operating Machine
for One Hour
Machine Hour
Rate Time spent on cleaning, warming may be excluded
from Machine hours

Time spent on Normal Setting Up may be included

Cost of reserve machine ( Motor ) may be considered


Methods Of Overhead Absorption

Common Costs to be apportioned

Hourly Rates
Uniform Period
Machine Hour Basis For Apportionment
Rate
Variable Cost Calculation

Depreciation

Maintenance
 1.   Calculate the machine hour rate from the following data:

Cost of machine Rs 19,200


Scrap value Rs 1,200
Repairs and maintenance per month Rs 150
Standing charges per month Rs 50
Effective working life 10,000 hours
Running time per month 200 hours
Power used 5 units at 18 paise per unit per hour.
1. Computation of Machine Hour Rate

Particulars Per Hour (Rs)

50
Standing charges -------- 0.25
200
Variable charges :
19,200 - 1,200 1.80
Depreciation ---------------------
10,000
150
Repairs and maintenance -------
200 0.75

Power : 5 units per hour @ 18 paise 0.90

Machine Hour Rate 3.70


 
2)     From the following particulars, calculate the machine
hour rate for machine X:

Cost of the machine Rs 42,000


Estimate scrap value 2,000
Estimated working life: 1O years of 2000 hours per year
Running rime for a four week period: 150 hours
Estimated repairs for life Rs 10,000
Standing charges allocated to this machine per week Rs 300
Power consumed per hour: 5 units @ 10 paise per unit
2. Computation of Machine Hour Rate

Particulars Per Hour


(Rs.)

300 x 4
8.00
Standing charges -------------
150

Variable charges :

42,000 – 2,0000
Depreciation --------------------
10 x 2,000 2.00

10,000
Repairs --------------------
10 x 2,000 0.50

Power consumed : 5 units per hour @ 10


paise 0.50

Machine Hour Rate 11.00


 
3. Work out the machine hour rate for the following machine:
Cost of machine Rs 90,000
Freight and installation charges Rs 10,000
Working life 10 years
Working hours 2,000 per year
Repair charges 50%of depreciation
Power 10 units per hour @ 10 paise per unit
Lubricating oil @ Rs 2 per day of 8 hours
Consumable stores @ Rs 10 per day of 8 hours
Wages of operator @ Rs 4 per day
3. Computation of Machine Hour Rate
Particulars Per hour
(Rs.)
Standing charges :
Lubrication oil Rs.2 per day
Consumable stores Rs.10 per day
Wages of operator Rs. 4 per day
____________________
Total Rs.16 per day of 8 hrs.
___________________

Standing charges per hour (16 ÷ 8)


2.00
90,000 + 10,000
Depreciation -----------------------
10 x 2,000
5.00
Repairs charges : 50% of depreciation
Power : 10 units @ 10 paise per unit
2.50
1.00
Machine Hour Rate 10.50
     4. A machine costing Rs 10,000 is expected to run for 10 years at
the end of which period its scrap value is likely to be Rs 900.
Repairs, during the whole life of the machine are expected to be Rs
1,800 and the machine is expected to run 4,380 hours per year on
the average. Its electricity consumption is 15 units per hour, the
rate per unit being 5 paise. The machine occupies one fourth of the
area of the department and has two points out of a total of ten for
lighting. The foreman has to devote about one-third of his time to
the machine. The monthly rent of the department is Rs 300 and the
lighting charges amount to Rs 80 per month. The foreman is paid a
monthly salary of Rs 480. Ascertain the machine hour rate
4. Computation of Machine Hour Rate

Particulars Per annum Per hour


(Rs.) (Rs.)

Standing charges :

Rent (300 x 1 x 12)


4 900
Lighting (80 x 2 x 12) 192
10
Foreman’s salary (480 x 1 x 12) 1920
3 __________
Total Standing charges
3012
--------------
Standing charges per hour (3,012 ÷ 4,380)
0.69
Variable charges :
10,000 – 900 0.21
Depreciation -------------------
10 x 4,380

1,800
Repairs -----------------
10 x 4,380 0.04

Power : 15 units per hour @ 5 paise per unit 0.75

Machine hour rate 1.69


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

Particulars Per annum Per hour


(Rs.) (Rs.)
Standing charges :
Rent and rates for the shop 200 x 1 x 12 600
4
General Lighting 300 x 1 x 12
900
4

Insurance 960
Supervisor’s salary 600 x 1 x 12 1,440
5
_________
Total Standing charges 3,900
--------------
1.95
Standing charges per hour (3,900 ÷ 2,000)

Variable charges :
1,00,000 + 10,000 – 5,000 3.50
Depreciation --------------------------------
15 x 2,000

1,000 0.50
Repairs and maintenance ----------
2,000
2.00
Power consumption : 10 units per hour @ Rs.20 per 100 units

Machine Hour 7.95


Rate
6. Calculate the machine hour rate from the following particulars:
Rs
Cost of the machine 95,000
Installation charges 10,000
Estimated value of scrap at the end of the life (10 years) 5,000
Estimated working hours per annum 2,200 Hrs.
Rent and Rates for the shop per month 250
Supervisor's salary per month 700
General lighting for the shop per month 300
Rate of power per 100 units 50

Power consumption 10 units per hour. The machine occupies 1/4th of the
total area of the shop. The supervisor is spending 1/5th of his time for
this particular machine.
6. Computation of Machine Hour Rate
Particulars Per Per Hour
annum (Rs.)
(Rs.)
Standing charges

Rent 250 x 12 x 1
4
750

Supervisor’s Salary 700 x 12 x 1


5
1,680

General lighting 300 x 12 x 1


4 900
Total standing charges ---------
3,300
Standing charges per hour (3,330 ÷ 2,200) --------- 1.51
Variable charges :

Depreciation 1,00,000 + 10,000 – 5,000 4.77


10 x 2,200

Power : 10 x 50 5.00
100

Machine Hour 11.28


Rate
7.       A machine costs Rs 90,000 and deemed to have a scrap value of 5% of
purchase price at the end of its life of 19 years. The machine works for 1,500
hours per annum. The other details of the machine are:
Rs
a) Wages of operator (the operator is in-charge
of two machines) 6,000 per year
• Rent and rates of the shop (shop houses 4 machines 3,000 per year
• Lighting of the shop 250 per month
•    Insurance on the machine 200 per quarter
•    Cost of repairs and maintenance 250 per month
•     Shop supervisor's salary 500 per month
•    Power consumption of machine: 20 units per hour at
the rate of Rs 10 per 100 units
h) Factory overhead for the shop Rs 4,000 per year
Compute the machine hour rate.
7. Computation of Machine Hour Rate
Particulars Per annum Per Hour
(Rs.) (Rs.)
Standing charges
Rent and Rates ( 3000 ÷ 4 ) 750
Wages of operator ( Rs. 6,000 ÷ 2) 3,000
Lighting ( 250 x 12 ) 750
4
Insurance : ( 200 x 12 ) 200
3 x 4
Supervisor’s salary : ( Rs. 6,000 ÷ 4 ) 1,500
Factory overhead : (Rs. 4,000 ÷ 4 ) 1,000
Total Standing charges -----------
7,200
-----------
Standing charges per hour (7,200 ÷ 1,500 ) 4.80
Variable charges
90,000 - 4,500 3.00
Depreciation --------------------------
19 x 1,500

Repairs & maintenance Rs.250 x 12 2.00


1,500

Power consumption : 20 x 10 2.00


100

Machine Hour Rate 11.80


8.    Calculate the machine hour rate for the month of January to cover the
overhead expenses, given below, relating to a machine.
Rs
1.     Rent of the Department 780 p.a.
(1/5th area is occupied by the machine)
2.     Lighting (out of 12 points, 2 are for this machine) 288 p.a.
3.     Insurance 36 p.a.
4.     Cotton, wastes etc. 60 p.a.
5.     Foreman's salary (1/4th for the machine) 6,000 p.a.
6.     Cost of machine 9,200
7.     Scrap 200

It is assumed that machine will work for 1,800 hours p.a. and that will incur Rs
1,125 for repairs and maintenance for life. It is further assumed that 5 units of
power would be used per hour available at 6 paise per unit, and that the life of
machine will be of 10 years.

 
8. Computation of Machine Hour Rate

Per Per Hour


Particulars annum (Rs.)
(Rs)
Standing charges :
Rent ( 780 x 1/5) 156.00
Lighting ( 288 x 2/12) 48.00
Foreman’s salary (6,000 x ¼) 1,500.00
Insurance 36.00
Cotton waste etc. 60.00
------------
Total standing charges 1,800.00

Standing charges per hour (1,800 ÷ 1,800 ) 1.00


Variable charges :
90,000 - 200 0.50
Depreciation ----------------------
10 x 1,900

Repairs ( 1,125 ÷ 1,800 x 10 ) 0.06

Power 5 units @ 6 paise per unit 0.30


Machine Hour Rate 1.86
 
9. The following information is given:
1. The original cost. of the machine used (purchased in June 1998) was Rs
10,000. Its estimated life is 10 years, the estimated scrap value at the end of its
life is Rs 1,000 and the estimated working time per year (50 weeks of 44 hours)
is 2,200 hours of which machine maintenance, etc. is estimated to take up 200
hours.
2. Setting up time of 100 hours is estimated
3. Electricity used by the machine during production is 16 units per hour at a cost
of 20 paise per unit. No current is taken during maintenance or setting up.
4. The machine requires a chemical solution which is replaced at the end of each
week at a cost of Rs 20 each time.
5.   The estimated cost of maintenance per year is Rs 1,200
6.  Two attendants control the operation of the machine together with five other
identical machines. Their combined weekly wages, insurance, and the employer's
contributions to holidays pay amount to Rs 120.
7. Departmental and general works overheads allocated to this machine for the
year 1998 amount to Rs 2,000.

Calculate machine hour rate when


(a) Setting up time is unproductive
(b) Setting up-time is productive
9.    Computation of Machine Hour
a)  When setting up time is unproductive
         Effective working hours are computed as shown below :
                  Annual working hours (50 x 44)         2200 hrs
          Less  -   Maintenance time                            200 hrs
                            ---------------
                                                                               2000 hrs
         Less   -  set up time                                         100 hrs.
                       ---------------
                      Effective working hours                  1900 hrs
                                                                            --------------- 
9.a Computation of Machine Hour
Particulars Per Hour
(Rs.)
Standing charges
120 x 50 0.53
(a) Wages of attendants ----------------------
6 x 1,900

(f) Departmental and general works overheads (2,000 ÷ 1.05


1,900)
---------
Standing charges per hour Total 1.58
--------
Variable charges
10,000 - 1,000 0.47
(l) Depreciation -----------------------
10 x 1,900

20 x 50
(b) Chemical Solution ---------------- 0.53
1,900

(s) Electricity ( 16 x 20 paise) 3.20


(t) Maintenance ( 1,200 + 1,900) 0.63

Machine Hour Rate 6.41


9. (b) When setting up time is productive
       Annual working hours                                             2,200
      Less : Maintenance time                                               200
                          ---------------------
     Effective working hours                                             2,000
                                                                                     --------------------
9.b Computation of Machine Hour Rate
Particulars Per Hour
(Rs.)
Standing charges :
120 x 50
(c) Wages of attendants ------------------- 1,000.00
6 0.50

(f) Departmental and general work overheads 2,000.00 1.00


-----------
Standing charges per hour 3000 divided by 2000 1.50

Variable charges :
10,000 – 1,000
(l) Depreciation ----------------------- 0.45
10 x 2,000

20 x 50
(p) Chemical Solution -------------- 0.50
2,000

1,900 x 16 x 0.20
(t) Electricity -------------------------- 3.04
2,000

(d) Maintenance (1,200 ÷ 2,000)


0.60

Machine Hour Rate 6.09


10. The following particulars relate to a new machine

Rs.
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
Foreman’s salary 30,000 per annum
Insurance premium for the machine 3,000 per annum
Estimated repairs for the machine 5,000 per annum
Consumable Stores 4,000 per annum

Power consumed 2 units per hour at Rs.50 per 100 units. The
estimated life of the machine is 10 years and scrap value at the end
of 10th year is Rs.1,00,000. The machine is expected to run 20,000
hours in its lifetime. The machine occupies 25% of total area. The
foreman devotes 1/6th of his time for the machine. Calculate
machine hour rate for the machine.
10. Calculation of Machine Hour Rate
Particulars Per annum Per Hour
(Rs.) (Rs.)

Standing Charges

3,750 x 4 3,750
Rent -----------------
4
1,000 x 12 3,000
Lighting ---------------------
4
30,000
Foreman’s Salary ------------- 5,000
6
Insurance 3,000
Stores
4,000
--------
Total Standing Charges 18,750
--------
Standing charges per hour (18,000 ÷ 2,000) 9.375

Variable charges :
4,00,000 + 1,00,000 - 1,00,000
Depreciation -------------------------------------------- 20.000
10 x 2,000
5,000
Repairs ---------- 2.500
2,000
2 x 50 1.000
Power ------------------------
100
Machine Hour 32.875
Rate
11. From the following particulars, compute Machine Hour Rate :

Rs.
Cost of Machine 1,14,800
Installation charges 5,400
Anticipated life of machine 10 years
Residual value at the end of 10 years 5,000
Rent and rates per annum 12,000
Insurance of the machine p.a. 3,000
Repairs and maintenance p.a. 8,640
Consumable stores p.a. 1,200
Total production services p.a. 1,080

Power cost is 5 units per working hour @ 40 paise per unit


Setting up time
(non-productive) 400 hrs. p.a.
There are 300 working days of eight hours in a year.
 
11. Computation of Machine Hour Rate

Particulars Per annum Per Hour


(Rs.) (Rs.)
Standing charges

Rent and Rates 12,000


Insurance 3,000
Consumable Stores 1,200
Production Services 1,080
--------------
Total standing charges 17,280
-------------
Standing charges per hour (1`7,280 ÷ 2,000) 8.64

Variable charges :
1,14,800 + 5,400 - 5,000 11,520
Depreciation -----------------------------------
10
4,800
Power ( 300 x 8 x 5 x 0.40)
8,640
Repairs and maintenance

Total 24,960 12,48

Machine Hour Rate 21.12


12. From the following information, compute machine hour rate

Cost of the machine Rs. 3,00,000


Expenses on installation and freight charges Rs. 25,000
Estimated scrap value at the end Rs. 25,000
Insurance premium Rs. 480 p.a.
Standing charges allocated to the machine Rs. 480 p.m.
Effective working life of the machine 24,000 hours
Hours worked during the month 240 hours
Repairs during the effective life of the machine Rs. 24,000

Power consumed by the machine is 20 units per hour at a cost of 25 paise per
unit. Additional charges at 5 paise per unit are payable on the total units
consumed if the same exceeds the basic consumption of 2000 units per
month.
12. Computation of Machine Hour Rate
Per Per
Particulars annum hour
(Rs.) (Rs.)
Standing charges

Standing charges 480 x12 5760


Insurance 480

Total standing charges


6260 2.17
Standing charges per hour (6260 ÷ 2880)

Variable charges : 12.50


3,00000 + 25,000 - 25,000
Depreciation ------------------------------------
2,4000 hours
1.00
Repairs ( 24,000 ÷ 24.000 )
6.00
Power ( 0.30 x 20 )
Machine Hour Rate 21.67
13. Compute machine hour rate from the following data :

Cost of the machine Rs. 1,44,000


Installation charges Rs. 6,000
Estimated scrap value at the end Rs. 6,000
Effective working life of the machine 12,000 hours
Estimated repairs over the effective
working life of the machine Rs. 12,000
Standing charges allocated to the machine
per year Rs. 5,760
Power bill per year Rs. 7,200

Power consumed by the machine is 20 units per hour at a cost of 25 paise


per unit.
13. Computation of Machine Hour Rate
No. of  machine hours : 1440*

Particulars Per annum Per Hour (Rs.)


(Rs.)
Standing charges
(ii) Standing charges allocated to the machine 5,760
------------
Total standing charges 5,760
-----------
Standing charges per hour 4.00

Variable charges
1,44,000 + 6,000 - 6,000
• Depreciation ----------------------------------- 12.00
12,000
12,000
(xiii) Repairs ----------- 1.00
12,000

(iii) Power (20 units x 25 P) 5.00

Machine Hour Rate 22.00

Computation of Machine Hours :
•Power bill per year = Rs.7,200    Power bill per hour = 20 units x 25 p. = Rs.5
Therefore No.of machine hours per annum = 7,200/5 = 1,440 hours

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