Module II

Overheads: Classification and Collection, Difference between Cost Allocation and Cost
Apportionment, (Full-fledged Problems on Primary and secondary distribution,
Simultaneous equations, Absorption of Overhead, Theory on Under and Over absorption of
Overhead). Demerits of Traditional Costing, Activity Based Costing, Cost Drivers, Cost
Analysis Under ABC (Unit level, Batch Level and Product Sustaining Activities), Benefits
and weaknesses of ABC. (Theory & Problems).

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Bases of apportionment of overhead

SL No. Overhead Costs Basis of apportionment

(i) Rent & other building expenses

(ii) Lighting & heating
1 Floor area or Volume of department
(iii) Fire precautionary services
(iv) Air conditioning
(i) Fienge benefits
(ii) Labour welfare expenses
(iii) Time-keeping
2 Number of workers / Employees
(iv) Personnel Office expenses
(v) Supervision
(vi) Canteen Expenses
(i) Compensation to workers
(ii) Holiday pay
3 (iii) ESI & PF Contribution Direct wages
(iv) Fienge benefits
(v) Indirect Wages
(i) General overhead
Direct Labour hours / Direct wages /
4 Sundry expenses/ other
(ii) machine hours
expenses
(i) Repairs of plant & machinery
5 Capital value or value of assets
(ii) Repairs of any fixed assets
 Depreciation of plant &
(iii) machinery or any other fixed
assets
(iv) Insurance on assets
(i) Power or steam consumption
6 (ii) Internal transport Technical Estimates
(iii) Managerial Salary
7 (i) Lighting Number of light points
HP hours machine / no. of machine
8 (i)
Electric power hours /volume of machine
9 (i) Material handling / direct volume of material / weight of material
material / stores overhead

STEPS IN OVERHEAD DISTRIBUTION

Step 1:- Classification & Collection of Overhead

Step 2 :- Allocation & Apportionment of O/h to production & service department

{Primary Distribution}

Step 3 :- Re-apportionment of service department cost to production department

{Secondary Distribution}

Step 4 :- Absorption of each production department on cost unit

 PRIMARY DISTRUBUTION

1. XYZ industry limited has 4 departments A, B, C are production departments & “D” is
service department. The actual expenses for the month of July are as follows.

Particulars Amount
Rent & Rates 15000
Indirect wages 1800
Depreciation of Plant & Machinery 12000
Power 2500
Lighting 800
Sundry Expenses 10000

Following are the additional information

Production Department Service Department

Particulars A B C D
Floor Space 4000 5000 6000 4000
Light Points 20 30 40 20
Direct wages 3000 2000 3000 1500
HP hours of machine 60 30 50 10
Value of machinery 60000 80000 100000 50000

Apportion expenses to 4 departments on most equitable basis.

2. The following are obtained from PQR Ltd., for half year ended on 30 th September 2019.
Prepare departmental distribution summary.

Particulars Amount
Stores Overhead 400
Power 1500
Lighting 200
Labour Welfare 3000
Depreciation on fixed assets 6000
Repairs & Maintenance 1200
General expenses 10000
Rent & taxes 600
 Following are the base of cost apportionment.

Production Department Service Department

Particulars
A B C X Y
Direct wages 7000 6000 5000 1000 1000
Direct material 3000 2500 2000 1500 1000
Number of employees 400 300 300 100 100
HP hours of machine 8000 6000 6000 2000 3000
Light Points 10 15 15 5 5
Asset Value 50000 30000 20000 10000 10000
Area Occupied 800 600 600 200 200
Machine hours 10 5 8 5 10

3. Mohan Lal Co. Ltd., has 3 production departments. P, Q & R & 2 service departments A
& B. the following figures are extracted from the records of the company

Particulars Amount
Rent & taxes 5000
Indirect wages 6000
Depreciation on Machinery 10000
Labour Welfare 2000
PF Contribution 8000
Lighting & Heating 5000
Sundries 4500
Insurance 10500
Time keeping 1500
Lighting expenses 2600
Power 12000
Material handling 6800

Following are the base of cost apportionment.

Production Department Service Department

Particulars
A B C X Y
Direct wages 8000 7000 5000 2000 1000
Direct material 3000 2500 2000 1500 1000
Number of employees 30 40 30 20 20
Horse power of machine 8000 6000 6000 2000 3000
Light Points 10 15 15 5 5
Value of machinery 5000 3000 2000 1000 1000
Floor Area 600 600 500 300 300
Apportionment of Overhead to only production department

4. XYZ electronic limited have been collected following information

Production Department Service Dept.

Particulars
A B C X Y

Direct Wages 2000 3000 4000 1000 2000

Direct Material 1000 2000 2000 1500 1500

Number of Staff 100 150 150 50 50

Electricity Kilo wats 4000 3000 2000 1000 1000

Light points 10 16 4 6 4

Asset Value 60000 40000 30000 10000 10000

Area Occupied 150 250 50 50 50

Expenses for the period as follows

Expenses Amount

Motive power 550

Lighting 100

Stores Overhead 400

Amenities to staff 1500

Depreciation 15000

Repairs & Maintenance 3000

General Overhead 6000

Rent & taxes 275

Apportion of cost of service department “Y” under the basis of direct wages & the
department “X” based on the ratio 5:3:2 for production department A, B & C.
5. In an engineering factory, the following particulars have been extracted for the year ended
31/3/2020

Production Department Service Dept.

Particulars
P Q R X Y

Direct Wages 30000 45000 60000 15000 30000

Direct Material 15000 30000 30000 22500 22500

Number of Staff 1500 2250 2250 750 750

Electricity Kilo wats 6000 4500 3000 1500 1500

Light points 10 16 4 6 4

Asset Value 60000 40000 30000 10000 10000

Area Occupied 150 250 50 50 50

Expenses for the period as follows

Expenses Amount Expenses Amount

Depreciation on
Power 1100 30000
assets
Lighting 200 Insurance on assets 6000

Stores Overhead 800 General Overhead 12000

Welfare to staff 3000 Rent & taxes 550

Apportion of cost of service department “X” under the basis of direct material & the
department “Y” based on the ratio 4:3:3 for production department P, Q & R.
 Apportionment of Overhead to production department & Service Department

I. NON-RECIPROCAL METHOD - STEP LADDER METHOD

6. Calculate the overhead applicable to production departments A & B, there are also 2
service departments X & Y. X render service worth Rs. 12000 to “Y” & balance to A &B
as 3:2. “Y” renders service to A & B as 9:1

Production Department Service Dept.

Particulars
A B X Y
Floor Space 5000 4000 1000 2000
Asset Value 1000000 500000 300000 100000
HP. Of machine 1000 500 400 100
Number of workers 100 50 50 25
Light points 50 30 20 20

Following expenses are provided for the current year.

Expenses Amount
Depreciation 190000
Insurance 15200
Rent, rate & taxes 36000
Power 20000
Canteen Expenses 10800
Electricity 4800

7. The manufacturing company has 2 production departments X & Y & 3 service

departments, time keeping, store & maintenance departments. The departmental summary
showed for the month of August -2020

Particulars Amount Amount

Production Departments
X 16000
Y 10000 26000
Service Departments
Time Keeping 4000
Store 5000
Maintenance 3000 12000
TOTAL 38000
 Other information is as follows

Production Department Service Dept.

Particulars
X Y Time Keeping Store Maintenance

Number of workers 40 30 20 16 10

Number of stores requisitions 24 20 ---- ---- 6

Machine hours 2400 600 ---- ---- ----

You are required to make departmental allocation of expenses.

8. MN manufacturing Ltd., has 3 production departments & 4 service departments. Service
department costs are distributed to production department using step ladder method of
distribution. Estimate the factory overhead cost to be incurred by each department in the
forthcoming year as follows. Data required for distribution is also shown against each
department.

Factory Area in Sq.

Department Direct labour Hours No. of employees
Overhead meter
Production:
X 193000 4000 100 3000
Y 64000 3000 125 1500
Z 83000 4000 85 1500
Service:
P 45000 1000 10 500
Q 75000 5000 50 1500
R 105000 6000 40 1000
S 30000 3000 50 1000
The Overhead costs of the 4 service departments are distributed in the same order viz., P,
Q, R & S respectively on the following basis:-

Department Basis
P No. of employees
Q Direct labour hours
R Area in Sq. meter
S Direct labour hours

You are required to prepare a schedule showing the distribution of overhead costs of the
four service departments to the 3 production departments.
 II. RECIPROCAL METHOD
(A) REPEATED DISTIBUTION METHOD/ CONTINUOES / RE-DISTRIBUTION
(B) SIMULTANEOUS EQUATION METHOD

9. The following information related to PQR. It consist of 3 production departments 2

service departments. The total department overhead as per primary distribution as on
31/3/2020 are as follows.

Department Overhead
Production:
A 6300
B 7400
C 2800
Service:
P 4500
Q 2000
The company has to charge service department cost on the basis of following percentage
using reciprocal methods.

Department A B C P Q

P 40 30 20 --- 10

Q 30 30 20 20 ----

10. Vishnu Ltd., has 3 production departments i.e P, Q & R & 2 service departments M & N.
The total primary overhead distributions for the department as on 31/12/2019 are as
follows.

Department Overhead
Production:
P 16000
Q 13000
R 14000
Service:
M 4000
N 6000
 Service department costs are charged to production departments & service departments
on the basis of following basis

Department A B C P Q

P 25 30 15 --- 30

Q 20 30 30 20 ----

You are required to re-apportion primary overhead under

(i) Repeated Distribution Method
(ii) Simultaneous Equation Method

11. A factory has of 3 production departments 2 service departments. The overhead

departmental distribution summary shows the following

Department Overhead
Production:
A 650000
B 600000
C 500000
Service:
P 120000
Q 100000
The service department expenses are allotted on a percentage basis as follows

Department A B C P Q

P 30 40 15 --- 15

Q 40 30 25 5 ----
Show how the expenses of the 2 service departments are to be charged to production
departments under Repeated Distribution Method & under Simultaneous Equation Method .
12. Onida manufacturing company has 3 production departments’ i.e P, Q & R & 2 service
departments M & N. The following is the budget for August 2020.

Production Department Service Dept.

Particulars Total
P Q R M N

Direct Material 1000 2000 4000 2000 1000

Direct Wages 5000 2000 8000 1000 2000

Factory rent 4000

Power 2500

Depreciation 1000

Other Overhead 9000

Additional information is given as under

Production Department Service Dept.

Particulars
A B C X Y

Area sq. ft. 500 250 500 250 500

Capital Value of asset (Rs. in lakhs) 20 40 20 10 10

Machine hours 1000 2000 4000 1000 1000

Horse power of machine 50 40 20 15 25

A technical assessment for apportionment of the costs of service departments is as under

Department A (%) B (%) C (%) P (%) Q (%)

P (%) 45 15 30 ---- 10

Q (%) 60 35 ---- 5 ----

You are required to distribute overheads to various departments & re-distribute

service department costs to production department under reciprocal method. Also compute
machine hour rate for production departments.
13. DK Company has 5 department X, Y, Z are production department & A,B are service
department. The actual cost for the period are as follows.

Particulars Amount Particulars Amount

Power 5000 Employee Lab insurance 7000

Supervision 10000 Depreciation on P&M 20000

Lighting 6000 Repairs of building 5000

Insurance on P &M 5000 Insurance on land & building 6000
Insurance on Stock 6000 Canteen expenses 7500

Rent 15000 Medical expenses 3000

Other overheads 9000

Following are the additional information

Production Department Service Dept.

Particulars
X Y Z A B

Area Occupied 200 300 400 500 200

No. of workers 150 75 100 25 50

Direct wages 25000 30000 40000 20000 25000

Value of P & M 30000 60000 90000 30000 -----

Value of L & B 40000 80000 100000 20000 40000

Direct material 3000 4000 2000 3000 2000

Value of stock 25000 100000 75000 50000 75000

HP hours of machine 45 55 65 35 25

Working hours 4500 3020 3150 ----- ------

 Technical assistant are suggest apportionment of service department cost to production
department under following basis:

Department X Y Z A B

M 20 30 40 ---- 10

N 40 20 30 10 ----

You are required to calculate:-

(i) Primary overhead distribution
(ii) Secondary Overhead under (a) Repeated Distribution Method & (b) Simultaneous
Equation Method.
(iii) Calculate the overhead absorption rate per hour in respect of 3 production
department
(iv) Total cost of article if raw material is Rs. 28, labour cost is Rs.35 & it passes 3
production departments X, Y & Z for 5 hour, 4 hours & 48 hours.

14. Alpha Ltd., has 3 production departments i.e P, Q & R & 2 service departments M & N.
The following are the expenses of Alpha ltd for the year ended 31/3/ 2020.

Particulars Amount Particulars Amount

Rent & Rates 10000 Medical expenses 8000

Lighting 1200 Insurance on P&M 28000

Indirect wages 3000 Employee PF 12000

Power 3000 Repairs of L & B 36000

Depreciation on P&M 20000 Supervision 10000

Sundry expenses 20000

Following are the additional information

Production Department Service Dept.

Particulars
P Q R M N

Floor Space 2000 2500 3000 2000 500

Light Points 20 30 40 20 10

Direct wages 6000 4000 6000 3000 1000

HP hours of machine 120 60 100 20 ----

Cost of P & M 24000 32000 40000 2000 2000

Direct material 18000 15000 12000 8000 6000

Value of L & B 28000 18000 32000 12000 10000

No. of workers 80 40 20 30 20

Working hours 4670 3020 3050

Expenses of service department M & N are allocated on the following basis

Department P Q R M N

M 20 30 40 ---- 10

N 40 20 30 10 ----
You are required to calculate:-
(v) Primary overhead distribution
(vi) Secondary Overhead under (a) Repeated Distribution Method & (b) Simultaneous
Equation Method.
(vii) Calculate the overhead absorption rate per hour in respect of 3 production
department
(viii) Total cost of article if raw material is Rs. 15, labour cost is Rs.30 & it passes 3
production departments X, Y & Z for 4 hour, 5 hour & 3 hour.