Cost and Management Accounting {CAF 3}

FACTorY oVerheADs
CONCEPT BUILDING QUESTIONS
CBQ#1A
Ahsan Enterprises (AE) produces three products Alpha, Beta and Gamma. The cost accountant
has reviewed the records and gathered the following information:
The costs incurred during the latest period were as follows:
ALPHA BETA GAMMA TOTAL
Direct material 600,000 450,000 190,000 1240,000
Direct labour 840,000 630,000 210,000 1,680,000
PRIME COST 1440,000 1080,000 400,000 2920,000

Indirect wages – machine maintenance 600,000

– stores 150,000
– quality control 168,000
– cleaning and related
services 300,000
Fuel and power 800,000
Depreciation on plant and machinery 360,000
Depreciation on Building 300,000
Insurance on plant and machinery 240,000
Insurance on building 60,000
Stores, spares and supplies consumed 372,000
Rent, rates and taxes 250,000
TOTAL INDIRECT COSTS 3600,000
TOTAL FACTORY COSTS ? ? ? 6,520,000

Other information:
ALPhA BeTA GAmmA ToTAL
Production (Units) 25,000 15,000 10,000 50,000
Machine Hours 50,000 60,000 90,000 200,000
Labour Hours 30,000 40,000 30,000 100,000
REQUIRED:
Calculate Total Cost for each product.

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CBQ#1B
The Tristate Company has been in business for only a short period to time. During the past month, the
firm had the following indirect costs, as shown by its books and records:
Indirect material used in plant 3,000
Indirect plant labor 4,000
Supervisor’s salary, s plant 3,000
Labor Fringe cost, plant 2,800
Depreciation of plant 1,000
Depreciation of factory machinery 2,000
Property tax on plant 300
Power and light for plant. 500
Insurance on plant 200
Miscellaneous factory overhead 1,200
18,000
The company has not set up a predetermined rate for applying factory overhead. It intends to wait until
the end of each month to charge actual overhead incurred during the month to jobs worked on during
that month on the basis of DIRECT LABOUR HOURS worked. During the past month, the company
worked on three orders. Costs and other pertinent data in connection with these orders are:

JOB#301 JOB#302 JOB#303

Material Costs $6,000 $8,000 $5,500
Direct Labour Cost $17,000 $22,000 $10,500
Direct Labour Hours 3,400 4,500 2,100
Rate of Gross Profit 25% 15% 20%
Mark Up Mark Up Margin
Required: Calculate the cost of each job and billed price.

CBQ#1C
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 2023 were as follows:
Rs.
Inspection Department 1305,000
Packing Department 1540,500
Operational Expenses of Machine #1 9210,000
Operational Expenses of Machine #2 4068,750
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

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.

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CBQ#2A
Budgeted Factory Overheads {December 2022} Rs. 8000,000
Budgeted Output 50,000 units
FOH Rate / O.A.R per unit

Actual data for the year ended December 31 st 2023:

CUSTOMERS: Ordered Delivered UNITS Workings APPLIED

Mr. A Jan/5/2023 Mar/16/2023 11,000
Mr. B Mar/8/2023 Apr/5/2023 7,000
Mr. C Apr/3/2023 May/11/2023 6,000
Mr. A May/7/2023 Jul/22/2023 9,000
Mr. D Jul/25/2023 Sep/26/2023 13,000
Mr. B Sep/21/2023 Oct/15/2023 5,000
Mr. E Oct/28/2023 Dec/19/2023 4,000
55,000

Case ‘I’ Case ‘II’

Actual Factory Overheads {December 2023} Rs. 9200,000 Rs. 8200,000

Over /Under Applied?

CBQ#2B
DEPARTMENTS
A B C D
Factory Overhead Rate Rs.20 Rs.15 Rs.30 Rs.12
Per Per Per Per
machine hour labour hour Unit machine hour
Actual Machine Hours 50,000 25,000 15,000 30,000
Actual Direct Labour Hours 20,000 40,000 15,200 12,000
Actual Production (Units) 30,000 25,000 22,000 20,000
Actual Factory Overheads 920,000 625,000 700,000 330,000
FOH Applied
FOH Over/Under Applied

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CBQ#2C
Hi-way Engineering Limited uses budgeted overhead rate for applying overhead to
production orders on a direct labour cost basis for department A and on a machine hour
basis in department B. The company made the following forecasts for August 2006:
Dept A Dept B
Budgeted factory overhead (Rs.) 216,000 225,000
Budgeted direct labour cost (Rs.) 192,000 52,500
Budgeted machine hours 500 10,000
During the month, 50 units were produced in Job no. CNG-011. The job cost sheet for
the month depicts the following information:
Dept A Dept B
Material issued (Rs.) 1,500 2,250
Direct labour cost (Rs.) 1,800 1,250
Machine hours 60 150

Actual data for the month were as follows:

Dept A Dept B
Factory overhead (Rs.) 240,000 207,000
Direct labour cost (Rs.) 222,000 50,000
Machine hours 400 9,000
Required:
(a) Compute predetermined overhead rates for each department. (02)
(b) Work out the total costs and unit cost of Job no. CNG-011. (04)
(c) Compute the over / under applied overhead for each department. (02)

CBQ#3A
The following data relate to a manufacturing department for a period:
BUDGETED ACTUAL
{December 2022} {December 2023}
Direct Material Cost Rs.500,000 Rs.750,000
Direct Labour Cost Rs.500,000 Rs.552,500
Production Overhead Rs.750,000 Rs.960,000
Direct Labour Hours 100,000 130,000
Machine Hours 25,000 30,000
Sales Revenue Rs.3600,000
Operating Expenses Rs.750,000
Required:
a. Calculate Factory Overhead Rate based on Machine hours.
b. Prepare Income Statement for the year ended December 31st 2023
assuming the company uses machine hours for OAR.
{Solve the same question on the basis of labour hours}

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CBQ#3B
Sales Revenue 9000,000 Work-in-Process Opening 600,000
Direct Material Costs 2500,000 Work-in-Process Ending 500,000
Direct Labour Costs 2000,000 Finished Goods Opening 750,000
Operating Expenses 700,000 Finished Goods Ending 900,000
Actual Factory Overheads 2200,000 Income Tax Rate 40% of PBT
Actual Production (Units) 100,000
REUIRED:
Actual Machine Hours 120,000
Prepare INCOME STATEMENT assuming
Actual Direct Labour Hours 80,000
Factory Overhead Rate Rs.30 per direct
labour hour.

CBQ#4A ICAP Module ‘D’Spring 2013

Neutron Limited (NL) is engaged in the business of manufacture and supply of plastic toys.
The company uses 5 identical injection moulding machines in its machining department
which were acquired at a cost of Rs. 1,000,000. These machines have a useful life of 10
years and are manned by three dedicated operators. Following information has been
extracted from NL’s records for a period of six months:
Normal time available per month per operator 220 hours
Absenteeism without pay per month per operator 20 hours
Leave with pay per month per operator 25 hours
Average idle time per month per operator 15 hours
Average labour rate per hour per operator Rs. 35
Average estimated rate of production bonus 15% of labour cost
Fuel and power Rs. 118,000
Indirect labour Rs. 115,000
Lighting and electricity Rs. 95,000
Other expenses related to the department are as follows:
Repair and maintenance per annum 6% of machine cost
Insurance Rs. 140,000 per annum
Sundry expenses Rs. 131,800 per annum
Allocated administrative overheads Rs. 120,000 per annum
Required:
Calculate a machine hour rate (inclusive of operators’ wages) for the machining department. (10)

CBQ#4B ICAP Module ‘D’ Autumn 2022

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) 7,500
Machine maintenance hours (150 hours per machine) 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.

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 Cost and Management Accounting {CAF 3}
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 labour 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.

TrY YoUrseLF
TYS#1 ICAP C.A.F ‘03’ Autumn 2022
Pluto Limited (PL) manufactures a single product ZAA and operates at a normal capacity of
45,000 machine hours per annum which is 90% of its full capacity. PL uses absorption costing method
to manage its costs. Following information has been extracted from PL’s prior year’s records:
Actual production 44,000 units
Under absorbed overheads Rs. 420,000
Fixed overhead absorption rate Rs. 200 per machine hour
PL has a policy of revising its fixed overhead absorption rate for each year on the basis of
prior year’s actual fixed overheads. During the current year, following events took place:
(i) There was an unexpected increase in demand of ZAA due to which PL utilized
its excess production capacity to manufacture maximum units of ZAA. Further,
factory workers were paid overtime of Rs. 1.2 million for additional hours
worked during the year.
(ii) The government announced an increase in taxes on electricity which increased
PL’s cost by Rs. 300,000.
(iii) Due to a mechanical fault there was a machine breakdown which had to be
repaired at a cost of Rs. 3 million. PL received insurance claim of Rs. 2.8 million
against the machine breakdown.

Required:
(a) For each of the above events, briefly explain whether they would independently result
in over/under absorbed overheads. (03)
(b) Compute the budgeted and actual fixed overheads of prior year and current year.
Assume that there was no other increase/decrease in fixed overheads other than those
mentioned above. (07)
Solution:
Required (a):
(i) Utilization of excess production capacity will lead to an increase in number of machine
hours. Since overheads are applied on the basis of machine hours, this will lead to
OVER-ABSORPTION of factory overheads.
(i) Overtime paid to factory workers will have no effect because it is a variable direct cost
and NOT A PART OF FIXED FACTORY OVERHEADS.

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(ii) Increase in taxes will lead to an increase in actual electricity cost which will lead to
UNDER-ABSORBED overheads.
(iii) The repair cost was unforeseen, therefore it could not be included in the budgeted
repair cost. This lead to UNDER-ABSORBED overheads.
(iii) Insurance claim received will have a reverse impact of the increase in repair cost due to
machine breakdown. Therefore, this will lead to OVER-ABSORBED overheads only to
the extent of the amount received which is Rs.2.8 million.
Budgeted Factory Overheads (45,000 *200) 9,000,000
Applied Overheads 8,800,000
Add: Under Absorbed Overheads 420,000
ACTUAL OVERHEADS –Prior Year 9,220,000
Budgeted Overheads 9,220,000
Increase in Electricity Costs 300,000
Repair Cost 3,000,000
Insurance Claim (2,800,000)
Overtime {Part of Variable Overheads} --
Actual Overheads 9,720,000
TYS#2 ICAP Module ‘D’ Spring 2011
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.
Department Material Labour Machine
Rs. in million Hours
Budgeted A 80 200,000 400,000
B 150 500,000 125,000
C 120 250,000 350,000
Actual A 80 220,000 340,000
B 150 530,000 120,000
C 120 240,000 320,000
AL produced 3.57 million units during the period . The budgeted labour rate per hour is Rs.120.
The overheads for department-A is budgeted at Rs.5.0 million, for department-B at 15%
of labour cost and for department-C at 5% of prime cost of the respective departments .
Actual overheads for department A, B and C are Rs.5.35 million, Rs.8.90 million and
Rs.7.45 million respectively.
Overheads are allocated on the following basis:
Department-A Machine hours
Department-B Labour hours
Department-C % of prime cost
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)

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TYS#3
The following data relate to a manufacturing department for a period:
BUDGETED ACTUAL
Direct material cost 500 000 750 000
Direct labour cost 500 000 552 500
Prroduction overhead 750 000 800 000
Direct labour hours 100 000 hours 130 000 hours
Job XY 54 was one of the jobs worked on during the period. Direct material costing Rs.100,000 and
direct labour Rs.25,500.
Required:
(i) Calculate the production overhead absorption rate predetermined for the period based on:
(a) Percentage of direct material cost (b) Direct Labour Hours. {150% and Rs.7.5}
(ii) Calculate the production overhead cost to be charged to Job XY 54 based on the rates calculated
in answer to (i) above. {Rs.150,000 and Rs.31,875 }
(iii) Compute FOH over/under-applied for the department. {O=325,000 and O=175,000}

TYS#4 ICAP Module ‘D, Spring 2008

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, for the year 2008 have been estimated as under:
(i) Electricity used by the machine during the production will be 10 units per hour
@ Rs. 8.50 per unit.
(ii) Cost of maintenance will be Rs. 25,000 per month.
(iii) The machine requires replacement of a part at the end of every month which will
cost Rs. 10,000 on each replacement.
(iv) A machine operator will be employed at Rs. 9,000 per month.
(v) 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 (08)

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 Cost and Management Accounting {CAF 3}
Solution: #4 ICAP Module ‘D, Spring 2008
Electricity Expenses 2,400 * 10 * 8.5 204,000
Cost of maintenance 25,000 * 11 275,000
Cost of parts replaced 10,000 * 11 110,000
Salaries – operators 9,000 * 11 99,000
Other incremental overheads 5,000 * 11 55,000
Depreciation Expenses (1300,000 – 100,000) /10 * 11/12 110,000
Total Cots (for 11 months) 853,000

Revised machine hour rate:

Cost = { (12,500 – 900) * 390 } + 853,000 = 5377,000
Rate =5377,000 / 11600 + 2,400 =Rs. 384 per hour

TYS#5 ICAP Module ‘D, Spring 2006

An important feature in the installation of any accounting or costing system is the proper
classification of accounts. The Bottlers Limited, bottlers and distributors of beverages, have
recently introduced a new classification which includes the following accounts:
1. Samples S 13. Freight out S
2. Sugar M 14. Income tax A
3. Factory payroll M 15. Advertising S
4. Foreman’s salary M 16. Rent of office building A
5. Conveyance and travelling * 17. Labels S
6. Factory’s clerical salaries M 18. Depreciation on machinery M
7. Drivers’ wages * 19. Insurance *
8. Gas, oil and grease M 20. Water *
9. Depreciation of furniture & fixtures * 21. Truck tyres S
10. Salesmen’s salary and commissions S 22. Bottle breakages M
11. Light and power * 23. Telephone and communication *
12. Legal and audit fee A 24. Stationery *

Classify each account under one or more of the following headings:

• Manufacturing {M}
• Selling and Distribution {S}
• Administration {A} *All (06)

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TYS#6 ICAP Module ‘D, Spring 2005

A company manufactures and retails clothing.
You are required to group costs which are listed below and numbered 1 to 20 in the following
classification (each is intended to belong to only one classification).
 DIreCT mATerIAL 9;
 DIreCT LABoUr 16;
 DIreCT exPenses 10;
 InDIreCT ProDUCTIon oVerheAD1; 8; 18; 19
 reseArCh AnD DeVeLoPmenT CosTs 7; 20
 seLLInG AnD DIsTrIBUTIon CosTs 11; 12; 13; 17
 ADmInIsTrATIon CosTs 2; 3; 4; 6; 14; 15;
 FInAnCe CosTs 5
1. Lubricants for sewing machines
2. Floppy disks for general office computer
3. Maintenance contract for general office photocopy machine
4. Telephone rental plus metered calls
5. Interest on bank overdraft
6. Performing Right Society charge for music broadcast through the factory
7. Market research undertaken prior to a new launch
8. Wages of security guards for factory
9. Carriage on purchase of basic raw material
10. Royalty payable on production of XY
11. Road licenses for delivery vehicles
12. Parcels sent to customers
13. Cost of advertising products on television
14. Audit fee
15. Chief accountant’s salary
16. Wages of operatives in the cutting department
17. Cost of painting advertising slogans on delivery vans
18. Wages of storekeepers in a material store
19. Wages of fork lift drivers who handles raw material
20. Developing a new product in the laboratory

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