CAF-03 Overheads

CHAPTER 3

OVERHEADS

Crescent College of Accountancy Page 57

CAF-03 Overheads

3.1 Manufacturing expenses are of two types:

i) Direct expenses – expenses that are fully traceable to the product, service or department that is
being costed or in other words, the expenses which can be attributable directly to specific cost object.
⯈ Examples:
• Raw Materials that are specifically used for the product in consideration. For example, milk
is raw material used in production of butter or cheese.
• Labour which is directly involved in converting the raw material. For example, labour cost in
connection with production of sugar.
• Other expenses that are specifically incurred for the product. For example, hiring cost of
machine in order to manufacture specific product.
ii) Indirect expenses (Production overheads) –are those expenses that incur in the course of making
a product, providing of service or running department but which cannot be traced directly and fully
to the product, service or department.
⯈ Examples:
• Labour not directly involved in the conversion of raw material but indirectly involved in
making of the product, such as supervisor responsible for supervising the production process.
• Tools, spares and materials that are used in the machinery or equipment used in the production.
• Factory rent if the factory premises are hired.
• Depreciation of machinery and equipment.
• Electricity and other utility expenses incurred for the production facilities.
3.2 The manufacturing expenses generally comprise:
i) Direct materials
ii) Direct labour and
iii) Production / manufacturing / factory overheads.
3.3 Cost behaviors refer to how a cost reacts to changes in the level of activity. As the activity level
rises or falls, a particular cost may rise or fall as well or it may remain constant. To help make such
distinctions, the costs are often categorized as ‘variable cost’ or ‘fixed cost’.
i) Variable costs are those that tend to change with level of activity in direct ratio with equal
proportion. The variable expenses are fixed per unit of output while they vary in total. For
example, direct material, direct labour etc.
ii) Fixed costs are those that remained constant, irrespective of the level of output. Fixed expenses
vary per unit of output while they are fixed in total. For example, monthly rent, salaries etc.
iii) There are few costs that are called Semi-variable because they carry some fixed part of cost
and some variable. For example, electricity bill comprises of fixed charges as line rent / fixed
connection charges as well as variable charges based on units of power consumed.
3.4 Production and non-production overheads
i) Overheads that incur in relation to the production processes are called production overheads
(also called manufacturing overheads / factory overheads). For example, salary of factory
supervisor, depreciation of production machine, electricity cost of factory, rent of factory
premises etc. Production overheads can be fixed or variable.
ii) Overheads that incur to support the overall objectives of the business are called non-production
overheads. For example, salaries of sales team, salaries of finance, HR and IT teams, rent of the
building occupied by finance, IT, sales and HR departments (other than production department),
Depreciation of computers being used in these departments etc. These are classified as
‘Administrative Expenses, Marketing, Selling and Distribution Expenses’ in the Statement of
Comprehensive Income.

Crescent College of Accountancy Page 58

CAF-03 Overheads

3.5 Product cost and period cost

i) If a cost is incurred to acquire or produce something that will eventually be sold, then the cost
should be recorded as an expense only when the sale takes place – that is, when the benefit
occurs. Such costs are called product costs.
ii) Period costs are all costs that are not product costs. Period costs are not included as part of the
cost of either purchased or manufactured goods instead, period costs are expensed in the period
in which they are incurred.
3.6 Factors affecting the predetermined overhead rate
In addition to the selection of bases, the following more factors are also considered:
i) Activity Level Selection:
Activity level can be described as the level at which the business performs its production
activities. For example, a company has the capacity to produce 100,000 units every month using
7,000 labour hours and 5,000 machine hours. However, in past months the company has only
produced 80,000 units due to the market demand. This shows that company’s activity level is
80% (80,000/100,000) of its maximum capacity.
If, the company expects that there is no change in the demand and therefore, the same number
of units shall be produced. This is called Normal Capacity and overhead rate should be based
on this capacity. In normal capacity, the overhead rate is calculated using average utilization of
plant and expenditures over a period long enough to level out the highs and lows that occur in
every business venture. A rate based on normal capacity should not change periodically because
of change in actual production. The rate will be changed when the prices of certain expense
items change or when fixed costs increase or decrease.
If the company expects that the demand will increase or decrease and estimates a level at 90%
or 70%, this is called Expected Actual Capacity and overhead rate should be based on this
capacity. In expected actual capacity, the overhead rate is determined using the expected cost
and production at expected actual output for the next production period. This method usually
results in different predetermined rates for each period. When the company is unable to judge
its current performance on a long range (normal capacity) then this activity level is used.
ii) Inclusion or exclusion of fixed overheads
In cost accounting there are two methods of assigning costs to the products:
a) In Absorption costing / conventional costing / full costing, both fixed and variable
manufacturing costs are included in product cost. Therefore, when predetermined overhead
rate is determined, both fixed and variable overhead costs are taken into account.
b) In Marginal costing, fixed costs are considered as period cost and are not included in cost
of product. Therefore, when a predetermined overhead rate is determined, only variable
overhead costs are taken into account.
iii) Overhead rates can be classified as:
a) Single rate system
A single overhead rate is used to describe a single overhead absorption rate that is
established for the organization as a whole.
Single rate system involves three steps:
Step 1
Predetermined FOH absorption rate is calculated at the start of period by using following
formula:
Budgeted FOH cost
FOH absorption rate = Budgeted base
Step 2
FOH cost is included in the production cost of various products or orders during the period
by using FOH Absorption rate as shown below:
FOH absorbed = FOH Absorption rate x Actual activity level performed.

Crescent College of Accountancy Page 59

CAF-03 Overheads

Step 3
FOH variance is calculated at the end of the period by comparing absorbed FOH cost with
actual FOH cost as shown below:
Under / (over) absorbed = Actual FOH cost – Absorbed FOH cost
Important points for single rate system
1) FOH absorption rate is also known as FOH applied rate, plant wide rate, blanket rate,
composite rate, FOH recovery rate, or predetermined FOH rate.
2) Budgeted FOH cost includes budgeted Fixed FOH cost and budgeted Variable FOH
cost.
3) Budgeted base can be budgeted total direct labour hours, budgeted total machine hours,
budgeted production units, budgeted direct material cost, budgeted direct labour cost,
or budgeted prime cost.
4) Actual activity level actual direct labour hours, actual machine hours, actual production
units, actual direct material cost, actual direct labour cost, or actual prime cost.
b) Departmental rate system
Single factory overheads absorption rate assumes all departments have same base but
actually in factory there are different types of production departments.
For example, labour intensive production departments (like assembly department) are
those departments where production is primarily performed through workers and in these
departments direct labour hours is considered as suitable base for factory overheads
absorption rate. And machine intensive production departments (like machining
department) are those departments where production is primarily performed through
automated machines and in these departments machine hours seems suitable base for
factory overheads absorption rate.
So, in different types of departments, using a single factory overheads absorption rate is
unrealistic and company should compute separate departmental factory overheads
absorption rates according to their respective suitable base.
Departmental rate system involves five steps:
Step 1
Department wise budgeted FOH distribution sheet is prepared at the start of period by using
budgeted data to calculate department wise budgeted FOH cost.
Step 2
Department wise FOH absorption rate is calculated at start of period using budgeted
departmental FOH cost from FOH distribution sheet prepared in step 1.
Assume we have 2 production departments, department A and department B. Also assume
that department A is labour intensive and department B is machine intensive.

Budgeted FOH cost of department A

FOH Absorption Rate (Dept. A) =
Budgeted direct labour hours of department A
Budgeted FOH cost of department B
FOH Absorption Rate (Dept. B) =
Budgeted machine hours of department B
Step 3
FOH cost is included in the production cost of various products or orders during the
period by using FOH Absorption rate as shown below:
Rs.
Department A (FOH absorption rate per hour × Actual labour hours of department A) xx
Department B (FOH absorption rate per hour × Actual machine hours of department B) xx
Total FOH cost absorbed in production cost xx

Step 4
Department wise budgeted FOH distribution sheet is prepared at the end of period by using
actual data to calculate department wise actual FOH cost.

Crescent College of Accountancy Page 60

CAF-03 Overheads
Step 5
FOH variance is calculated at the end of the period by comparing absorbed FOH cost with
actual FOH cost as shown below:
Dept. A Dept. B
Actual FOH cost from step 4 xx xx
Less: Absorbed FOH cost from step 3 (xx) (xx)
Under / (over) absorbed xx xx

Important points for departmental rate system

1) Types of departments
There are two types of departments or cost centers in a factory of manufacturing
organisation:
Production departments (production cost centers)
Production departments are all those departments which are engaged actively in
manufacturing of product. For example: Cutting, assembly, finishing, machining, or paint
department etc.
Service departments (service cost centers)
Service departments don’t actively participate in production of product. These departments
provide assistance to production departments as well as to other service departments. For
example: Canteen, Inspection and quality control, maintenance, and storage department
etc.

2) Format of FOH distribution sheet (Budgeted or Actual)

Total Production dept. Service dept.
FOH expenses Base
(Rs.) PD-A PD-B SD-1 SD-2
Indirect material cost Given √ √ √ √ √
Indirect labour cost Given √ √ √ √ √
Building related exp. Floor area √ √ √ √ √
Asset related exp. Value of asset √ √ √ √ √
Labour related exp. No. of workers √ √ √ √ √
Lighting exp. Light points √ √ √ √ √
Power expense KWH √ √ √ √ √
Total costs √ √ √ √ √
Allocation of SDs cost:
SD-1 √ √ (√)
SD-2 √ √ (√)
Total FOH cost √ √ √ - -

Crescent College of Accountancy Page 61

CAF-03 Overheads
3) Some famous basis normally used for apportionment of costs to departments
FOH expenses 1st preference 2nd pref. 3rd pref.
1. Building related
(i) Depreciation Cost of building Floor area -
(ii) Insurance Cost of building Floor area -
(iii) Rent Floor area - -
(iv) Cleaning expense Floor area - -
(v) Cooling / heating Floor area - -
(vi) Lighting expense Light points Floor area -
2. Plant and machinery
related
(i) Depreciation Value of asset Machine hrs -
(ii) Insurance Value of asset Machine hrs -
(iii) Repair & Maint. Maintenance hrs Value of asset Machine hrs
(iv) Power KWH Horse power Machine hrs
3. Employee related
(i) Insurance Total no. of employees Direct wages -
(ii) Health Total no. of employees Direct wages -
(iii) Canteen Total no. of employees Direct wages -
(iv) Supervision Total no. of employees Direct wages -
(v) Leave encashment Total no. of employees Direct wages -
(vi) Indirect labour cost Indirect no. of emplyees Direct wages -
4. Other FOH costs
(i) Dep. of other assets Cost of asset - -
(ii) Storeroom expenses No. of Mat. requisitions Direct Mat. cost -
(iii) Packing cost Packing hours Direct Mat. cost -
(iv) Inspection cost Inspection hours for Inspected units -
units inspected
4) Re allocation of cost of service departments to production departments
Service departments don’t produce any product that is why any cost charged to service
departments will be transferred to production departments for realistic departmental
FOH absorption rate.
There are three main methods for reallocation of service department’s cost to
production departments:
(i) Step down method
Step down method is used to allocate overheads cost of service departments to
production departments in specific order. The service department that does the
largest proportion of work for other service departments is closed first and so on.
This method is suitable when non-reciprocal services are provided by service
departments.
(ii) Repeated distribution method
Under repeated distribution method, the service department costs are repeatedly
allocated in the specified percentages until the figures become too small to be
significant. This method is used when reciprocal services are provided by service
departments.
(iii) Algebraic method (Simultaneous equation method)
Instead of using the repeated distribution (reciprocal) method the same allocations
can be derived using the simultaneous equation method. This method is also used
when reciprocal services are provided by service departments.

3.7 Treatment of Over or Under Applied / Absorbed Overhead:

The over or under applied overhead so calculated is treated either as:
i) Period cost – charged to cost of goods sold, or
ii) Product cost – charged to production (including closing inventory)

Crescent College of Accountancy Page 62

CAF-03 Overheads

QUESTIONS
Question-1
1 unit of a product requires 6 kgs of material and 10 hours of direct labour. Material cost is Rs. 600 per kg
and direct labour cost is Rs. 400 per hour. FOH is included in product cost at Rs. 140 per direct labour hour.
Required
Calculate product cost per unit.
Question-2
1 unit of a product requires 4 kgs of material and 3 hours of direct labour. Material cost is Rs.100 per kg
and direct labor cost is Rs 250 per hour. FOH is included in product cost at 50% of direct material cost.
Required
Calculate product cost per unit.
Question-3
Budgeted information for the year 2025 is as follows:
Production 5,000 units
Total Direct material cost Rs.125,000
Total Direct labour cost (Rs.50 per hour) Rs 500,000
Total FOH Rs.75,000
Machine hours 5 hours per unit
Required
a) Calculate overhead absorption rate (OAR) based on:
(i) Direct labour hours (ii) Machine hours (iii) Production units
(iv) Direct labour cost (v) Direct material cost (vi) Prime cost
b) For each part calculated in (a) above, calculate product cost per unit using OAR calculated in each
part. above
Question-4
Alpha Ltd. provided following data for the month of April, 2018:
Budgeted direct labour hours 25,600
Budgeted machine hours 80,000
Budgeted units of product 500,000
Rs.
Budgeted direct material cost 1 million
Budgeted direct labour cost 0.64 million
Budgeted Factory overheads cost
Fixed FOH 0.3 million
Variable FOH 0.5 million
Required
Calculate predetermined factory overheads absorption rate based on:
a) Direct labour hours d) Direct labour cost
b) Machine hours e) Direct material cost
c) Units of product f) Prime cost

Crescent College of Accountancy Page 63

CAF-03 Overheads

Question-5
Cost accounting department of Zain Ltd. made the following estimates for the coming year:
Factory overheads cost Rs. 525,000
Direct material cost Rs. 750,000
Production volume 40,000 units
Direct labour cost Rs. 300,000
Direct labour time 60,000 hours
Required
1) Calculate predetermined factory overheads absorption rate based on:
a) Direct labour hours c) Direct material cost
b) Direct labour cost
2) Calculate total production cost of job No. 924 by using each absorption ratefrom part (1), if job No.
924 requires:
• Direct material cost Rs. 20,000
• Direct labour cost (1,400 labour hours) Rs. 8,400

Question-6
Rashid Ltd. produces three products. The company has provided estimated factory overheads cost of Rs.
100,000 which is based on estimated machine hours for the next month.
Following estimated information is also provided for the next month:
Product A Product B Product C
Budgeted production units 5,000 10,000 15,000
Budgeted machine hours per unit 2 2.5 1
Actual information is as under:
Product A Product B Product C
Direct material cost per unit Rs. 10 Rs. 12 Rs. 8
Direct labour cost per unit Rs. 9 Rs. 6 Rs. 7
Actual production units and actual machine hours were same as budgeted.
Required
(i) Calculate plant wide factory overheads absorption rate based upon machine hours.
(ii) Calculate cost per unit for each product using above absorption rate.
(iii) Calculate sale price per unit if company adds markup equal to 20% of cost.

Question-7
Budgeted info for the year 2025 is as follows:
Direct material cost Rs.600,000
Direct labour cost (400 per hour) Rs.1000,000
Repair and maintenance Rs.60,000
Indirect labour Rs.140,000
Indirect material Rs.30,000
Fuel & power Rs.70,000
Depreciation Rs.95,000
Other FOH Rs.25,000
Production 1,000 units
Machine hours 3 hrs per unit
Required
Calculate OAR based on all 6 bases.

Crescent College of Accountancy Page 64

CAF-03 Overheads

Question-8
Rehman Ltd. estimates its factory’s overheads cost for the next year amounting Rs. 1.5 million. It is
estimated that 400,000 units will be produced at direct material cost of Rs.600,000 and production of these
units will require 300,000 direct labour hours at an estimated wages cost of Rs. 1,800,000. The machines
will run for about 500,000 hours.
Required
Calculate predetermined factory overheads absorption rate based on:
a) Direct labour hours d) Direct labour cost
b) Machine hours e) Direct material cost
c) Units of product f) Prime cost
Question-9
Cost accounting department of Haris Ltd. made the following estimates for the coming year:
Factory overheads cost Rs. 800,000
Direct material cost Rs. 1,200,000
Production volume 100,000 units
Direct labour cost Rs. 1,000,000
Direct labour time 80,000 hours
Machine hours 50,000 hours
Required
1) Calculate predetermined factory overheads absorption rate based on:
a) Direct labour hours b) Direct material cost
b) Direct labour cost d) Machine hours
2) Calculate total production cost of job No. 110 by using each absorption ratefrom part (1), if job No.
110 requires:
• Direct material cost Rs. 72,000
• Direct labour cost (2,500 labour hours) Rs. 64,000
• Machine hours 2,800 hours
Question-10 (Spring 2008, Q-2)
a) Explain the treatment of under-absorbed and over-absorbed factory overheads. Give three reasons for
under-absorbed / over absorbed factory overheads. (06)
b) 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.

Crescent College of Accountancy Page 65

CAF-03 Overheads

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 during the year 2008.
(08)
Question-11 (Autumn 2022, Q-4)
(a) List any two examples of bases for absorption of factory overheads. Also briefly discuss how a base
should be selected. (02)
(b) 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 (2,500 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.
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.
Required:
Compute the revised overhead absorption rate for the production department for the next year. (06)

Crescent College of Accountancy Page 66

CAF-03 Overheads

Question-12 (Autumn 2008, Q-6)

Ternary Engineering Limited produces front and rear fenders for a motorcycle manufacturer. It has three
production departments and two service departments. Overheads are allocated on the basis of direct labour
hours. The management is considering to change the basis of overhead allocation from a single overhead
absorption rate to departmental overhead rate. The estimated annual overheads for the five departments are
as under:
Production Departments Service Departments
Fabrication Phosphate Painting Inspection Maintenance
-------------------------Rs. in 000--------------------------------
Direct materials 6,750 300 750
Direct labour 1,200 385 480
Indirect material 30 75
Other variable overheads 200 70 100 30 15
Fixed overheads 480 65 115 150 210
Total departmental expenses 8,630 820 1,445 210 300

Maximum production capacity 20,000 25,000 30,000

Direct labour hours 24,000 9,600 12,000
Machine hours 9,000 1,000 1,200
Use of service departments:
Maintenance - Labour hours 630 273 147
Inspection - Inspection hours 1,000 500 1,500
Required:
(a) Compute the single overhead absorption rate for the next year. (06)
(b) Compute the departmental overhead absorption rates in accordance with the following:
• The Maintenance Department costs are allocated to the production department on the basis of
labour hours.
• The Inspection Department costs are allocated on the basis of inspection hours.
• The Fabrication Department overhead absorption rate is based on machine hours whereas the
overhead rates for Phosphate and Painting Departments is based on direct labour hours. (10)
Question-13 (Autumn 2003, Q-3)
The estimated overheads likely to be incurred relating to a cost center with two major machines installed
are as under:
Rupees
Supervision 8,000
Indirect employees, wages 10,000
Earned leave 5,000
Maintenance cost 15,000
Power 20,000
Depreciation of machine 5,000
Rent of building 2,500
65,000

Crescent College of Accountancy Page 67

CAF-03 Overheads

Details of various allocations of the cost centers are as under

Machine1 Machine2 Total
1) Machine Running hours Hours. 5,000 1,000 6,000
2) Supervision cost Rs. 4,000 4,000 8,000
3) Capital cost of machine Rs. 20,000 5000 25,000
4) Indirect employees No. 8 2 10
5) Total employees No. 20 5 25
6) Maintenance hours Hours. 600 120 720
7) Kilowatt hours Hours. 100,000 20,000 120,000
8) Floor Space Sq. ft. 5,000 5,000 10,000

Required: Calculate machine hour rate for each machine. (10)

Question-14 (Spring 2014, Q-2)

Alpha Limited is preparing its departmental budgets and product cost estimates for the next Year. The costs
and related data for the year ending 31 December 2014 have been estimated as follows:
Machining Assembly Finishing Maintenance Total
---------------------------- Rupees in ‘000 ----------------------------
Costs:
Direct wages 274 146 328 - 748
Indirect wages 46 27 36 137 246
Direct materials 365 46 18 - 429
Indirect materials 68 18 36 91 213
Power - - - - 465
Light and heat - - - - 46
Depreciation - - - - 108
Rent and rates - - - - 114
Warehousing cost - - - - 98
Other related data:
Machining Assembly Finishing Maintenance Total
Direct labor hours 12,000 8,000 16,000 6,000 42,000
Machine hours 40,000 2,000 3,000 45,000
No. of employees 6 4 8 3 21
Floor area (m2) 1000 400 300 300 2000
Net book value of fixed assets (Rs 20,000 8,000 3,000 4,000 35,000
000)
80% of the maintenance department’s time is used in the maintenance of machines whereas the remaining
time is consumed in cleaning and maintenance of factory buildings.
Required:
Calculate appropriate overhead absorption rates for the machining, assembly and finishing Departments.
(12)

Crescent College of Accountancy Page 68

CAF-03 Overheads

Question-15 (Autumn 2005, Q-4)

The factory overhead budget of a manufacturing company for the year ending June 30, 2006 is as follows:
Rupees
Indirect wages 1,627,920
Insurance – labour 114,240
Supervision 514,080
Machine maintenance wages 485,520
Supplies 257,040
Power 828,240
Tooling cost 285,600
Building insurance 14,280
Insurance of machinery 399,840
Depreciation -machinery 856,800
Rent and rates 371,280
5,754,840
At present, overheads are absorbed into the cost of the company’s products at 70% of direct wages. The
company is considering changing to a separate machine hour rate of absorption for each of its four different
machine groups.
The following are some further details of costs and machine groups:
Machine groups
A B C D Total
Tooling costs (Rs.) 115,958 88,042 55,832 25,768 285,600
Supervision (Rs.) 159,340 145,471 111,877 97,392 514,080
Supplies (Rs.) 118,634 79,089 19,772 39,545 257,040
Machine maintenance hours 3,000 2,000 4,000 1,000 10,000
Number of indirect workers 6 6 2 2 16
Total number of workers 26 34 15 10 85
Floor space (Sq.ft.) 3,000 2,400 1,600 1,000 8,000
Capital cost of machines (Rs.’000) 3,200 2,400 1,000 1,800 8,400
Horse-power hours 55,000 27,000 8,000 15,000 105,000
Machine running hours 30,000 60,000 25,000 10,000 125,000
Required:
(a) Calculate a machine hour rate for each group of machines.
(b) Calculate the overhead to be absorbed by product no. 123 involving:
Machine group Hours
A 8
B 3
C 1
D 4
(c) Calculate the overhead to be absorbed by each unit of product 123 if the labour cost is Rs.1,200 and
the present method of absorption is used. (15)

Crescent College of Accountancy Page 69

CAF-03 Overheads

Question-16 (Illustration)
Asghar Limited (AL) has two production departments, PD-A and PD-B, and three service Departments,
SD-1, SD-2 and SD-3. Total budgeted departmental overheads after primary distribution (i.e., before distribution
of service departments costs are as follows:
PD-A PD-B SD-1 SD-2 SD-3
FOH expenses (Rupees) 800,000 1,000,000 200,000 150,000 400,000
Budgeted direct labour hours 12,000 18,000 - - -
SDs provide support as follows:
SD-1 40% 60% - - -
SD-2 80% 20% - - -
SD-3 50% 50% - - -
Required: Calculate overhead absorption rate for each production department.

Question-17 (Illustration)
Assume all data is same as in question 16 above, except SDs provide support as follows:
PD-A PD-B SD-1 SD-2 SD-3
SD-1 40% 60% - - -
SD-2 50% 20% 15% - 15%
SD-3 40% 40% 20% - -
Required: Calculate overhead absorption rate for each production department.

Question-18 (Spring 09, Q-5)

The expenses of the production and service departments of a company for a year are as follows:
Expenses before distribution Service provided
Department of service department costs (%age)
Rs. ‘000’ Deptt. X Deptt. Y
Production department –A 500 50 40
–B 400 30 50

Service department –X 100 - 10

–Y 60 20 -
Required:
Allocate the service departments expenses to production departments by:
i) Repeated distribution method
ii) Simultaneous equation method (13)

Question-19 (Spring 2004, Q-8)

From the following information, allocate overheads of service departments to individual producing
departments by adopting algebraic method:
Departmental overheads before Service Provided
Departments distribution of Service Departments Dept Y Dept Z
Producing Dept – A Rs 6,000 40 % 20 %
Producing Dept – B Rs 8,000 40 % 50 %
Service – Y Rs 3,630 - 30 %
Service – Z Rs 2,000 20 % -

Total Departmental Overheads Rs 19,630 100 % 100 %

(10)

Crescent College of Accountancy Page 70

CAF-03 Overheads

Question-20 (Autumn 14, Q-7[b]

Salman Limited (SL) has two production departments, PD-A and PD-B, and two service Departments,
SD-1 and SD-2. A summary of budgeted costs for the year ending June 2015 is as follows:
PD-A PD-B SD-1 SD-2 Total
………….………….…………. Rs. in ‘000’…….………………….…
Direct labour 5,400 3,648 - - 9,048
Direct material 13,500 9,120 - - 22,620
Indirect labour 1,900 600 50 20 2,570
Indirect materials 900 1,100 150 55 2,205
Factory rent - - - - 1,340
Power cost - - - - 1,515
Depreciation - - - - 3,500
Other related data is as follows:
PD-A PD-B SD-1 SD-2
………….………….………. Rs. in ‘000’…….………………….
Production (units) 2,250 800 - -
Direct labour hours (per unit) 20 38 - -
Machine hours 19,250 12,250 2,800 700
Kilowatt hours (000) 800 600 50 150
Floor area (square feet) 5,000 4,000 500 500
Basis of overhead application Machine hours Direct labour hours - -

SL allocates the costs of service departments applying repeated distribution method.

Details of services provided by SD-1 and SD-2 to the other departments are as follows:
Service department PD-A PD-B SD-1 SD-2
SD-1 30% 65% - 5%
SD-2 55% 35% 10% -
Required:
Compute the departmental overhead absorption rate. (10)

Question- 21 (Spring 2012, Q-2)

Nitrate Ltd (NL), producing industrial chemicals, has three production and two service departments. The
annual overheads are as follows:
Rs.'000'
Production departments:
A 56,000
B 50,000
C 38,000
Service departments:
X 16,500
Y 10,600
The service departments' costs are apportioned as follows:
Production departments Service Departments
A B C X Y
Service department X 20% 40% 30% - 10%
Service department Y 40% 20% 20% 20% -
Required:
Apportion costs of service departments using simultaneous equation method and repeated distribution
method. (15)

Crescent College of Accountancy Page 71

CAF-03 Overheads

Question-22 (Autumn 2004, Q-2)

The AJFA & Co is preparing its production overhead budgets and therefore need to determine the
apportionment of these overheads to products. Cost center expenses and related information have been
budgeted as below:
Production department Service departments
Total Machine Machine
Assembly Canteen Maintenance
Shop A Shop B
Direct Wages Cost (Rs.) 518,920 128,480 99,640 290,800
Indirect Wages (Rs.) 313,820 34,344 36,760 62,696 118,600 61,420
Consumable Material (incl.
(Rs.) 67,600 25,600 34,800 4,800 2,400
Maintenance)
Rent & Rates (Rs.) 66,800
Building Insurance (Rs.) 9,600
Heat & Light (Rs.) 13,600
Power expenses (Rs.) 34,400
Depreciation of Machine (Rs.) 160,800
Area (Sq ft) 90,000 20,000 24,000 30,000 12,000 4,000
Value of Machines (Rs.) 1,608,000 760,000 716,000 88,000 12,000 32,000
Power Usage (%) 100% 54% 40% 3% 1% 2%
Direct Labour hours (hours) 72020 16020 12410 43590
Machine Usage hours (hours) 54,422 14,730 37,632 2,060
The proportion of Maintenance cost center time spent for other cost centers is:
Machine Shop A 45%
Machine Shop B 40%
Assembly 13%
Canteen 2%
Required:
Allocate the overhead expenses by using the appropriate bases of apportionment. (12)

Question-23 (Autumn 13, Q-4)

Zaiqa Limited (ZL) is engaged in the business of manufacturing fruit jam. It has three production and two
service departments. Following information is available from ZL’s records for the month of August 2013:
Rupees
Rent and rates 85,000
Indirect wages 60,000
General lighting 75,000
Power 150,000
Depreciation machinery 50,000
Following further information relating to the departments is also available:
Production departments Service departments
Selection Jam making Bottling Storage Distribution
Direct wages (Rs.) 60,000 80,000 32,000 8,000 20,000
Power consumed (KWH) 1,000 6,000 2,000 1,000 -
Floor area (Sq. ft.) 1,500 2,000 1,250 1,000 500
Light points (Nos.) 10 20 15 5 10
Production hours 1,533 3,577 1,815 - -
Labor hours per bottle 0.10 0.25 0.15 - -
Cost of machinery (Rs.) 600,000 1,200,000 900,000 300,000 -
After production, the jam bottles are finally packed in a carton consisting of 12 bottles. The services
department’s costs are apportioned as follows:

Crescent College of Accountancy Page 72

CAF-03 Overheads

Production Departments Service Departments

Selection Jam making Bottling Storage Distribution
Storage 10% 30% 40% - 20%
Distribution 20% 50% 30% - -
Raw and packing material costs of Rs. 36 and labor cost of Rs. 25 is incurred on each bottle.
Required:
Calculate the cost of each carton. (16)
Question-24 (Autumn 06, Q-1)
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:
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. (2)
b) Work out the total costs and unit cost of Job no. CNG-011. (4)
c) Compute the over / under applied overhead for each department (2)
Question-25 (Spring 11, Q-2)
Amber Ltd (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:
Material Labour Machine
Department
Rs. million Hours
A 80 200,000 400,000
Budgeted B 150 500,000 125,000
C 120 250,000 350,000
A 80 220,000 340,000
Actual 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 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. (5)
(b) The total and departmental actual cost for each unit of product. (8)
(c) The over or under applied overhead for each department. (3)

Crescent College of Accountancy Page 73

CAF-03 Overheads

Question-26 (Spring 22, Q-5)

California Limited (CL) runs a factory which has two production departments AB and AC, and two service
departments SA and SB. CL allocates the cost of service departments using simultaneous equation method.
A summary of budgeted overheads for the year ending 31 December 2022 is as follows:
Rs. in '000
Factory rent 2,500
Fuel cost 1,800
Depreciation 2,000
Electricity and other utilities 1,100
Other related information is given below:
Production department Service department
Total
AB AC SA SB
Machine hours 22,000 12,000 - - 34,000
Labour hours 8,000 10,000 - - 18,000
Floor area (square feet) 6,000 4,500 900 600 12,000
SA - % of services 40% 40% - 20%
SB - % of services 45% 40% 15% -
Machine Labour hours
Basis of overhead absorption
hours
The per hour fuel consumption of machines in department AC is 50% more than that of machines in
department AB.
Required:
Compute the departmental overhead absorption rate. (08)
Question-27 (Spring 2021, Q-5)
Bright Limited (BL) is engaged in the manufacturing of two products, Shine and Glow. Both these products
are processed through two production departments, A and B, while department X and Y provide services
to both the production departments. Below is a summary of the indirect costs incurred by BL for
manufacture of 100,000 units of Shine and 60,000 units of Glow during the year ended 31 December 2020:
Rs. in '000
Salaries and wages 115,000
Depreciation of machinery 80,000
Building insurance 25,000
Electricity 60,000
280,000
Other information related to the four departments is given below:
Department Department Department Department Total
A B X Y
Cost of machinery (Rs. in '000) 250,000 150,000 400,000
Floor Area (square feet) 15,000 6,000 6,000 3,000 30,000
No. of employees 150 50 25 25 250
Services provided by
− Department X 80% 20% - - -
− Department Y 75% 15% 10% - -
The overhead absorption rates used by BL for allocation to Shine and Glow are Rs. 1,800and Rs. 1,700 per
unit respectively. Any under/over absorbed overheads are adjusted tocost of sales.
Required:
(a) Compute product-wise actual overheads for Shine and Glow. (08)
(b) Compute the product-wise under / over absorbed production overheads. (02)

Crescent College of Accountancy Page 74

 CAF-03 Overheads

Question-28 (Spring 2016, Q-5)

Omega Industries Limited (OIL) produces two products Alpha and Beta. These products are processed
through Fabrication and Finishing departments. Quality control and Logistics departments provide all the
necessary support for the production.
OIL allocates production overheads to Alpha and Beta at a pre-determined rate of Rs. 1,300 and
Rs. 500 per unit respectively. Any under/over absorbed overheads are adjusted to cost of sales.
Following actual data has been extracted from the cost records of OIL for the month of December- 2015:
Quality
Particulars Fabrication Finishing Logistics Total
control
Indirect labour Rs. in '000 1,500 1,200 500 400 3,600
Factory rent Rs. in '000 - - - - 2,000
Power Rs. in '000 - - - - 1,200
Depreciation - Plant Rs. in '000 - - - - 9,000
Other information: - - - - -
Cost of plant Rs. in '000 32,000 20,000 2,000 6,000 60,000
Floor area Square feet 10,000 5,000 3,000 2,000 20,000
Power KWH 50,000 40,000 4,000 6,000 100,000
Hours worked for Alpha 70% 60% - - -
Hours worked for Beta 30% 40% - - -
Services provided by: - - - - -
- Quality control 40% 60% - - 100%
- Logistics 60% 35% 5% - 100%
8,000 units of Alpha and 10,000 units of Beta were produced during the month of December 2015.
Required:
(a) Compute product wise actual overheads for Alpha and Beta. (10)
(b) Prepare journal entries to record:
(i) Applied production overheads; and
(ii) Under/Over absorbed production overheads (02)

Question-29 (Autumn 2017, Q-3)

Opal Industries Limited (OIL) produces various products which pass through Processing and Finishing
departments. Logistics and Maintenance departments provide necessary support for the production.
Following information is available from OIL’s records for the month of June 2017:

(i) Departments Overhead costs Direct labour hours

*Budgeted Actual Budgeted Actual
------Rupees------ ------Hours-----
Processing 560,000 536,000 14,000 14,350
Finishing 320,000 258,000 10,000 9,800
Logistics - 56,700 - -
Maintenance - 45,000 - -
*including apportionment of overhead costs of support departments
(ii) Costs of support departments are apportioned as under:
Processing Finishing Logistics Maintenance
Logistics 50% 40% - 10%
Maintenance 35% 45% 20% -
Required:
(a) Allocate actual overhead costs of support departments to production departments using repeated
distribution method. (05)
(b) Compute under/over applied overheads for the month of June 2017. (03)

Crescent College of Accountancy Page 75

CAF-03 Overheads

Question-30 (Spring 2023, Q-9)

Faisal Enterprises Limited (FEL) produces three products A, B and C. Each product is produced in a
separate department. There are two service departments i.e. Repair & Maintenance (R&M) and Stores.
Following data is available for the month of February 2023:
Service
Production Departments
Departments Total
A B C R&M Stores
Rs. in ’000
Indirect material cost 180 240 120 930 30 1,500
Indirect labour cost 160 210 150 60 20 600
Fuel and electricity - - - - - 1,520
Air-conditioning and lighting - - - - - 150
Depreciation & insurance - Machines - - - - - 665
Depreciation & insurance - Building - - - - - 50
Other insurance - - - - - 270
Other information: - - - - -
Raw material cost (Rs. in ‘000) 60,000 45,000 30,000 - - 135,000
Labour hours (no. of hours) 2,000 3,000 4,000 - - 9,000
Machine hours (no. of hours) 5,000 6,000 8,000 - - 19,000
Area (in square meters) 200 300 400 60 40 1,000
% of apportionment of service department’s cost:
• R&M 25% 30% 35% - 10% -
• Stores 30% 25% 25% 20% - -
Equivalent units in process - opening 2,000 2,000 2,500 - - -
Equivalent units in process - closing 1,500 3,000 2,000 - - -
Units transferred to finished goods 5,500 5,000 4,500 - -
Additional information:
(i) Raw material and labour are consumed evenly during the production process.
(ii) Direct labour is paid @ Rs. 300 per hour.
(iii) FEL uses simultaneous equation method for apportioning service departments’ cost to production
departments.
Required:
Allocate the factory overheads to the departments, clearly displaying the basis of allocation, and
determine the cost of production of each unit. (16)

Question-31 (Spring 2024, Q-2)

Noble Industries Limited has two production departments and two service departments. Information
regarding its factory overheads for the latest quarter and related details are as follows:
Production Service
Departments Departments Total
A B X Y
Direct factory overheads Rs. in ‘000 105,000 85,000 30,000 20,000 240,000
Machine hours 1,890 1,710 - - 3,600
Floor area Square
yards 1,200 1,050 250 150 2,650
Basis of allocation - Department X 50% 40% - 10% 100%
Basis of allocation - Department Y 45% 40% 15% - 100%
In addition to direct overheads, there were common overheads of production and service departments,
which amounted to Rs. 53 million.
Required:
Compute the factory overhead rate for the production departments based on machine hours using the
repeated distribution method. (07)

Crescent College of Accountancy Page 76

CAF-03 Overheads

SOLUTIONS
Solution 4
Rs 800,000
(a) OAR = 25,600 hours
= Rs. 31.25 per direct labour hour
Rs 800,000
(b) OAR = 80,000 hours
= Rs. 10 per machine hour
Rs 800,000
(c) OAR = 500,000 units
= Rs. 1.6 per unit
Rs 800,000
(d) OAR = Rs 640,000
x 100 = 125% of diect labour cost
Rs 800,000
(e) OAR = Rs 1,000,000
x 100 = 80% of diect material cost
Rs 800,000
(f) OAR = Rs 1,640,000
x 100 = 48.78% of prime cost
Solution 7
420,000
(i) OAR = 2,500
= Rs. 168 per labour hour
420,000
(ii) OAR = 3000
= Rs. 140 per machine hour
420,000
(iii) OAR = = Rs. 420 per unit
1000
420,000
(iv) OAR = 1,000,000
= 42% of labour cost
420,000
(v) OAR = 600,000
= 70% of material cost
420,000
(vi) OAR = 1,600,000 x 100 = 26.25% of prime cost

Solution 8
Rs 1,500,000
(a) OAR = = Rs. 5 per direct labour hour
300,000
Rs 1,500,000
(b) OAR = 500,000
= Rs. 3 machine hour
Rs 1,500,000
(c) OAR = 400,000
= Rs. 3.75 per unit
Rs 1,500,000
(d) OAR = 1,800,000
x 100 = 83.33% of direct labour cost
Rs 1,500,000
(e) OAR = x 100 = 250% of direct material cost
600,000
Rs 1,500,000
(f) OAR = 2,400,000
x 100 = 62.5% of prime cost

Solution 9
Part 1
Rs 800,000
(a) OAR (labour hour) = 80,000 = Rs. 10 of direct labour hour
Rs 800,000
(b) OAR (material cost) = 1,200,000
x 100 = 67% of direct material cost
Rs 800,000
(c) OAR (labour cost) = 1,000,000
x 100 = 80% of direct labour cost
Rs 800,000
(d) OAR (machine hour) = 50,000
= Rs. 16 per machine hours

Crescent College of Accountancy Page 77

CAF-03 Overheads

Solution-11 (Autumn 2022, Q-4)

Budgeted Total FOH cost of 3 machine
Revised OH absorption Rate =
Budgeted total productive machine hour of 3 machine
Rs 5,140,800 (w−2)
= = Rs. 733.35 per machine hour
7,010 hours (w−1)

(W-1) Revised budgeted total productive machine hour of 3 machine: Hours

Budgeted hours of remaining 2 machines (5,000 – 300) 4,700
Budgeted hours of new machine (2,500 – 80 – 110) 2,310
7,010
(W-2) Revised budgeted total FOH of 3 machines
Total budgeted FOH of 2 existing machines (Rs850 × 4,700) 3,995,000
Total budgeted FOH of 1 new machine:
Depreciation [1,200,000 / 10] 120,000
Electricity [2,310 hours x Rs 180] 415,800
Annual maintenance 200,000
Indirect labour cost 50,000
Managers salary [12 months x Rs30,000] 360,000
1,145,800
5,140,800

Solution-13 (Autumn 2003, Q-3)

Step 1: Budgeted FOH Distribution sheet
FOH costs Basis Total (Rs) Machine (Rs) Machine2(Rs)
Supervision Given 8,000 4,000 4,000
Indirect wages cost No. of indirect employees 10,000 8,000 2,000
Earned leave Total No. of employees 5,000 4,000 1,000
Maintenance cost Maintenance hours 15,000 12,500 2,500
Power cost Kilowatt hours 20,000 16,667 3,333
Depreciation of machines Capita cost of machines 5,000 4,000 1,000
Rent of building Floor space 2,500 1,250 1,250
65,500 50,417 15,083
Step 2: Machine hour rate (FOH Absorption rate based on machine hours)
Budgeted FOH cost of machine 1
Machine 1 Absorption rate = budgeted machine hours
Rs. 50,417
Machine 1 Absorption rate = = Rs. 10.08 per machine hour
5,000 machine hours

Budgeted FOH cost of machine 2

Machine 2 Absorption rate = budgeted machine hours
Rs. 15,083
Machine 1 Absorption rate = = Rs.15.08 per machine hour
1,000 machine hours

Crescent College of Accountancy Page 78

CAF-03 Overheads

Solution-15 (Autumn 2005, Q-4)

Step 1 : Budgeted Factory Overhead Distribution Sheet
Cost Basis Total (Rs) A (Rs) B (Rs) C (Rs) D (Rs)
Indirect wages Indirect worker 1,627,920 610,470 610,470 203,490 203,490
Labour insurance Total workers 114,240 39,944 45,696 20,160 13,400
supervision Given 514,080 159,340 145,471 111,877 97,392
Machine Maintenance hours 485,520 145,656 97,104 194,208 48,552
maintenance wages
Supplies Given 257,040 118,634 79,809 19,772 39,545
Power Horse power hours 828,240 433,840 212,976 63,104 118,320
Tooling Cost Given 258,600 115,958 88,042 55,382 25,768
Building insurance Floor space 14,280 5,355 4,284 2,856 1,786
Insurance of Capital cost 399,840 152,320 114,420 47,600 85,680
machine
Depreciation of Capital cost 856,800 326,400 244,800 102,000 183,600
machinery
Rent Floor space 371,280 139,230 111,384 74,256 46,410
Total Budgeted Overhead 5,754,840 2,242,147 1,753,556 895,155 863,982
Step 2: Machine Hours rate (Absorption rate based on machine hours)
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻 𝑐𝑜𝑠𝑡 𝑅𝑠 2,242,147
Machine A 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑟𝑢𝑛𝑛𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠
=30,000 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠
=Rs.74.74 per machine hours
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻 𝑐𝑜𝑠𝑡 𝑅𝑠 1,753,55
Machine B =
𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑟𝑢𝑛𝑛𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠 60,000 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠
=Rs 29.23 per machine hours
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻 𝑐𝑜𝑠𝑡 𝑅𝑠 85,155
Machine C =
𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑟𝑢𝑛𝑛𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠 25,000 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠
=Rs 35.81 per machine hours
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻 𝑐𝑜𝑠𝑡 𝑅𝑠 863,982
Machine D 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 𝑟𝑢𝑛𝑛𝑖𝑛𝑔 ℎ𝑜𝑢𝑟𝑠
= 10,000 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠
=Rs 86.40 per machine hour
b) overhead absorbed to product No.123 by using machine hour rate
FOH absorbed to product 123 Rs
Machine A (Rs.74.74 per MH x 8 MH per unit) 598
Machine B (Rs.29.23 per MH x 3 MH per unit) 88
Machine C (Rs.35.31 per MH x 1MH per unit) 36
Machine D (Rs.86.30 per MH x 4 MH per unit) 345
1,067
C) overhead absorbed to product No.123 under present method
FOH cost absorbed =present FOH absorption rate x Actual labour cost
= 70% of Direct Labour cost
= 0.7 x Rs.1200
= Rs.840
Answer-19 [Spring 2004, Q-8]
A (Rs) B (Rs) Y (Rs) Z (Rs)
Production overhead cost 6,000 8,000 3,630 2,000
Allocation of Service Department cost
Cost of Y (W-1) – 40%,40%,20% 1,800 1,800 (4,500) 900
Cost of Z (W-2) – 20%,50%,30% 580 1,450 870 (2,900)
8,380 11,250 0 0

Crescent College of Accountancy Page 79

CAF-03 Overheads

(W–1) Algebraic Method

Y = Rs. 3,630 + 0.3Z
Z = Rs. 2,000 + 0.20Y
Y = Rs. 4,500
Z = Rs. 2,900
Answer-20 [Autumn 2014, Q-7(b)]
Allocation Total PD-A PD-B SD-1 SD-2
basis ------------------------------------Rs. in 000-----------------------------------
Indirect labour Given 2,570 1,900 600 50 20
Indirect materials Given 2,205 900 1,100 150 55
Factory rent Floor area 1,340 670 536 67 67
Power Kilowatt hrs. 1,515 758 568 47 142
Depreciation Machine hrs. 3,500 1,925 1,225 280 70
11,130 6,153 4,029 594 354
Allocation of service departments cost:
SD-1 30:65:5 178 386 (594) 30
SD-2 55:35:10 211 134 39 (384)
SD-1 30:65:5 12 25 (39) 2
SD-2 55:35:10 1 1 0 (2)
6,555 4,576 - -
Direct labour
Base Machine hrs.
hrs.
Machine / Direct labour hours 19,250 30,400 (800 x 38)
Overhead absorption rate per hour Rs. 340.52 150.53
Answer-21 [Spring 2012, Q-2]
Simultaneous equations method
Allocation of service department cost:
A B C X Y
Cost before allocation 56,000 50,000 38,000 16,500 10,600
Allocation of:
Cost of X (20:40:30:10) 3,800 7,600 5,700 (19,000) 1,900
Cost of Y (40:20:20:20) 5,000 2,500 2,500 2,500 (12,500)
64,800 60,100 46,200 - -
Workings:
X = 16,500 + 0.2Y
Y = 10,600 + 0.1X
X = 19,000
Y = 12,500
Repeated Distribution Method
A B C X Y
Cost before allocation 56,000 50,000 38,000 16,500 10,600
Allocation of:
Cost of X (20:40:30:10) 3,300 6,600 4,950 (16,500) 1,650
Cost of Y (40:20:20:20) 4,900 2,450 2,450 2,450 (12,250)
Cost of X (20:40:30:10) 490 980 735 (2,450) 245
Cost of Y (40:20:20:20) 98 49 49 49 (245)
Cost of X (20:40:30:10) 10 20 15 (49) 5
Cost of Y (40:20:20:20) 2 1 1 - (5)
64,800 60,100 46,200 - -

Crescent College of Accountancy Page 80

CAF-03 Overheads

Answer-25 [Spring 2011, Q-2]

(a) Budgeted FOH application rate
Department A = Rs.5 million / 0.4 million machine hours = Rs.12.5 per machine hour
Department B = Rs.9 million / 0.5 million labour hour = Rs. 18 per labour hour
Department C = (Rs.7.5 million / Rs.150 million) x 100 = 5% of prime cost
(b) Total and departmental actual cost per unit
Department A B C Total
-----------------Rs. In ‘000’-----------------
Material 80,000 150,000 120,000 350,000
Labour @ Rs.120 per hour 26,400 63,600 28,800 118,800
Prime cost 106,400 213,600 148,800 468,800
Actual FOH 5,350 8,900 7,450 21,700
Total cost (Rs in 000) 111,750 222,500 156,250 490,500
Units produced (Rs in 000) 35,700 35,700 35,700 35,700
Actual cost per unit of production 31.30 62.32 43.77 137.39

(c) Over or under applied FOH for each department

Department A B C Total
Rs. in'000’
Applied FOH 4,250 9,540 7,440 21,230
Actual FOH 5,350 8,900 7,450 21,700
Over / (Under) applied FOH (Rs in 000) (1,100) 640 (10) (470)
Note: It is assumed that actual labour wages rate and budgeted labour rate is same.
Answer-26 [Spring 2022, Q-5]
Departmental FOH absorption rates
Step 1 – Allocation of budgeted overheads cost to production departments (Rs.’000)
FOH expenses Base Total Dept. AB Dept. AC Dept. SA Dept. SB
Factory rent Floor area 2,500 1,250 938 187 125
Fuel cost @ Rs. 45 per Machine hours 1,800 990 810 - -
machine hour
Depreciation Machine hours 2,000 1,294 706 - -

Electricity cost Floor area 1,100 550 412 83 55

7,400 4,084 2,866 270 180
Service departments:
Dept. SA 40:40:20 122 122 (306) 62
Dept. X 45:40:15 109 97 36 (242)
Departmental FOH 4,315 3,085 0 0
Machine/Labour hours (in
000) 22 10
FOH rate per hour 196.14 308.49

(W1) Fuel cost per machine hour (W2) Simultaneous equation

Total Fuel cost = Rs. 1,800,000 Let X = Cost of service department SA
Fuel cost per machine hour for dept. AB = X Let Y = Cost of service department SB
Fuel cost per machine hour for dept AC = 1.50X X = 270 + 0.15Y
Machine hours for AB = 22,000 Y = 180 + 0.20 X
Machine hours for AC = 12,000 Solve the equation simultaneously then
X = 306
(22,000X) + (12,000 x 1.5X) = 1800,000 Y = 242
X = 45 or Rs. 45 per machine hour

Crescent College of Accountancy Page 81

CAF-03 Overheads
Solution-28 (Spring 2016, Q-5)
Actual overheads Distribution Sheet
Cost Basis Total (Rs.) Fabrication Finishing Quality control Logistics
(Rs.) (Rs.) (Rs.) (Rs.)
Indirect labor Given 3,600,000 1,500,000 1,200,000 500,000 400,000
Factory rent Floor area 2,000,000 1,000,000 500,000 300,000 200,000
Power cost KWH 1,200,000 600,000 480,000 48,000 72,000
Depreciation Plant cost 9,000,000 4,800,000 3,000,000 300,000 900,000
Total Budgeted Overheads 15,800,000 7,900,000 5,180,000 1,148,000 1,572,000
Allocation of service dept:
Quality control (40:60) 943,000 550,000 79,000 (1,572,000)
Logistics (60:35:5) 491,000 736,000 (1,227,000) --
9,334,000 6,466,000
Step 2: Allocation to product Alpha and Beta

Alpha Beta Total

Actual no. of units 8,000 10,000
------Rs.in 000------
Overheads allocation on the basis of hours worked: Fabrication
dept. in the ratio of 70:30 6,534 2,800 9,344
Finishing dept. in the ratio of 60:40 3,880 2,586 6,466
10,414 5,386 15,800
Accounting entries for absorption of overheads
Debit Credit
Rs. In ‘000
1 Work in process (8,000 Rs. 1,300) + (10,000 Rs. 500) 15,400
Factory overhead control account 15,400
(Overhead charged to production at predetermined rate)
2 Cost of sales (Rs. 15,800 – Rs. 15,400) 400
Factory overhead control account 400
(Overheads under applied charged to cost of sales)

Solution-29 (Autumn 2017, Q-3)

Req (a) – Actual FOH Distribution Sheet
Processing (Rs.) Finishing (Rs.) Logistics (Rs.) Maintenance (Rs.)
Actual overheads 536,000 258,000 56,700 45,000
Allocation of service:
Logistics 28,350 22,680 (56,700) 5,670
50,670
Maintenance 17,735 22,801 10,134 (50,670)
Logistics 5,067 4,054 (10,134) 1,013
Maintenance 355 456 202 (1,013)
Logistics 101 81 (202) 20
Maintenance 7 9 4 (20)
Logistics 2 2 (4) --
587,617 308,083 -- --
Req (b) –FOH under/over applied
Departmental FOH absorption rates
• Processing Department FOH Rate = Rs. 560,000 ÷ 14,000 = Rs 40 per labour hour
• Finishing Department FOH Rate = Rs. 320,000 ÷ 10,000 = Rs. 32 per labour hour

Crescent College of Accountancy Page 82

CAF-03 Overheads

Departmental FOH variance

Processing Dept. Finishing
Dept.
Actual FOH cost (Rs.) 587,617 308,083
Applied FOH cost (Rs.)
(Rs. 40/hour x 14,350 hours) (Rs. 32/hour x 9,800 hours) = under/(over) (574,000) (313,600)
applied FOH 13,617 (5,517)

Solution-30 (Spring 2023, Q-9)

Faisal Enterprises Limited
Total Production Services Basis
A B C R&M Stores
----------------------- Rs. in '000 ---------------------
Indirect material 1,500 180 240 120 930 30
Indirect labour 600 160 210 150 60 20
Fuel and electricity 1,520 400 480 640 - - Machine hours
Air conditioning& lighting 150 30 45 60 9 6 Area
Depreciation & insurance – machine 665 175 210 280 - - Machine hours
Depreciation & insurance – building 50 10 15 20 3 2 Area
Other insurance 270 120 90 60 - - Raw material cost
4,755 1,075 1,290 1,330 1,002 58
M = 1,002 + 0.2S ------------ (i)
S = 58 + 0.1M --------------- (ii)
Putting equation of
‘S’ in (i) M = 1,002 +
0.2 × (58 + 0.1M)
M = 1,034
Putting value of
‘M’ in (ii) S = 58 +
0.1 × 1,034 = 161
Total A B C R&M Stores
------------------------------- Rs. in '000 -------------------------------
Cost as above 4,755 1,075 1,290 1,330 1,002 58
Maintenance - 259 310 362 (1,034) 103
Store - 49 40 40 32 (161)
1,383 1,640 1,732 0 0
Computation of cost per unit:
Total A B C
---------------------------------- Rs. in '000 ---------------------------------
Raw material cost 135,000 60,000 45,000 30,000
600 900 1,200
Labour cost 2,700
(2,000×300) (3,000×300) (4,000×300)
Factory overheads (as above) 4,755 1,383 1,640 1,732
Total production cost 61,983 47,540 32,932

Units produced 5,000 6,000 4,000

(5,500+1,500–2,000) (5,000+3,000–2,000) (4,500+2,000–2,500)
Cost per unit (in Rs.) 12,397 7,923 8,233

Crescent College of Accountancy Page 83