ACCOUNTING FOR FACTORY

3 OVERHEADS COST

Learning objectives
After studying this chapter students will be able to understand the:
1. Definition of overheads costs
2. Computation of factory overheads cost per unit
3. Understand how to apply single absorption rate system
4. Understand how to apply departmental absorption rate system
5. Record journal entries related to factory overheads
 CHAPTER 3: ACCOUNTING FOR FACTORY OVERHEADS COST

LO 1: Definition of overheads cost

1.1) Definition of direct and indirect costs
A) Direct costs
A direct cost is a cost is specific cost incurred to manufacture product and its cost
can be traced easily for each unit of product, service, or department that is being
costed.
Examples
▪ Wood in manufacturing of chairs.
▪ Cloth for manufacturing a dress shirt.
▪ Leather for manufacturing of shoes.
B) Indirect costs
An indirect cost (also known as overheads cost) is a cost that is incurred in the course
of making or selling a product, providing a service or running a department, but which
cannot be traced directly and in full to the product, service or department.
It is also considered as common business expenses and to be shared among products, services,
departments and orders.
C) Production overheads costs (Factory overheads cost)

All costs of operating factory (other than direct material and direct labour cost) are
classified as production overheads cost. It is also known as:
▪ Factory overheads cost
▪ Factory burden
▪ Manufacturing overheads cost
▪ Indirect manufacturing cost
Examples:
▪ Indirect material cost
▪ Indirect labour cost
▪ Indirect factory expenses
D) Non-production overheads costs
All costs that are incurred outside the factory for administration of overall business
and to secure customer orders and proper delivery and it does not relates to
manufacturing of product or provision of service.
Examples:
▪ Selling, marketing & distribution costs
▪ Administration costs
 CHAPTER 3: ACCOUNTING FOR FACTORY OVERHEADS COST

1.2) Summary of Direct and indirect costs

Classification of costs

Direct costs Indirect costs

Directly charged to products Allocated and apportioned to products

using suitable bases

INCLUDE INCLUDE

Direct material, Overheads

direct labour
& direct expenses

Production Non-Production
Overheads Overheads

LO 2: Factory overheads cost per unit

Factory overheads cost is the common factory costs and available in total amount and there is
problem how to distribute this total amount of factory overheads cost among various products
andconvert on per unit basis.
2.1) Four Cases of distribution

Products One Production Multiple production

Department Departments
One product (1) Single FOH Rate (3) Departmental FOH Rate
Multiple (2) Single FOH Rate (4) Departmental FOH Rate
products
Case 1: One product and one production department
Example
Product A is normally manufactured in production department X of factory and following
details areavailable:
▪ Factory overheads cost of Department X = Rs. 100,000
▪ Units of product A = 10,000 units
▪ Direct material cost of product A = Rs. 25 per unit
▪ Direct labour cost of product A = Rs. 15 per unit
Required:
a) Calculate Factory overheads cost per unit
b) Calculate product cost per unit of product A
 CHAPTER 3: ACCOUNTING FOR FACTORY OVERHEADS COST

Case 2: Multiple products and one production department

Example
Alpha Limited (AL) manufactures two products A and B. Both of these products are
manufactured inone department of factory and following details are available:
▪ Factory overheads cost of department X = Rs. 100,000
▪ Normally 6,000 units of product A and 4,000 units of product B are manufactured.
▪ Other details are as:
Product A Product B
(Rs.) (Rs.)
Direct material cost per 25 20
unit
Direct labour cost per unit 15 18
Required:
c) Calculate Factory overheads cost per unit of product A and product B.
d) Calculate product cost per unit of product A and product B
Case 3: One product and multiple production departments
Example
Product A is manufactured from two departments i.e., department X and department
Y.10,000 unitsare manufactured initially in department X and transferred to Department Y
where only 8,000 units completed during the period.
Department Department
X Y
Factory overheads cost Rs. 60,000 Rs. 40,000
Units of product A 10,000 8,000
units units
Required:
a) Factory overheads cost per unit for product A
b) Product cost per unit of product A if direct material cost per unit is Rs. 25 and direct
labourcost is Rs. 15.
Case 3: One product and multiple production departments
Example
Company manufactures two products i.e., product A and product B. Each of the product is
initially manufactured in department X and then subsequently in department Y. Following
details are givenfor each department:
Department Department
X Y
Factory overheads cost Rs. 60,000 Rs. 40,000
Direct labour hours per unit 10,000 8,000 units
units
Product A 3 hours 1.5 hours
Product B 2 hours 2.5 hours
Company determines factory overheads cost per unit on the basis of direct labour hours. 5,000
unitsof product A and 10,000 units of product B are manufactured.
Required: Calculate
a) Factory overheads cost per unit for product A and product B
b) Product cost per unit of product A and product B if:
 CHAPTER 3: ACCOUNTING FOR FACTORY OVERHEADS COST
Product A Product B
(Rs.) (Rs.)
Direct material cost per unit 25 20
Direct labour cost per unit 15 18
Absorption Costing System
Absorption costing is a method for distribution of factory overheads cost between
different products on a fair basis using predetermined overheads absorption rate.
Predetermined overheads absorption rate is also useful for computation of product cost.

LO 3: Single Rate System

3.1) Purpose of Single Rate System
Single rate system uses single predetermined FOH absorption rate to include factory overheadscost in
production cost of product. It is also known as:
▪ Plant wide rate system
▪ Blanket rate system
3.2) Steps
Single rate system has three steps:
Step 1: Predetermined FOH absorption rate is computed at the START OF PERIOD by using
budgeted data.
FOH Absorption rate = Budgeted FOH cost
Budgeted Capacity
Notes:
i. FOH Absorption rate is also known as:
▪ FOH Applied Rate ▪ Plant wide Rate
▪ Predetermined FOH Rate ▪ Blanket Rate
▪ FOH recovery Rate ▪ Factory burden rate
ii. Budgeted FOH cost includes budgeted Fixed FOH cost and budgeted Variable FOH cost.
iii. Budgeted capacity can be anyone of the following bases:
▪ Budgeted total direct labour hours ▪ Budgeted direct material cost
▪ Budgeted total machine hours ▪ Budgeted direct labour cost
▪ Budgeted production units ▪ Budgeted prime cost
Step 2: FOH cost is included in the production cost of various products or orders DURING THE
PERIOD by using FOH Absorption rate.
FOH cost absorbed (charged) into product cost
= FOH Absorption rate x Actual capacity of product
Notes: Actual capacity can be anyone of the following:
▪ Actual direct labour hours ▪ Actual direct material cost
▪ Actual machine hours ▪ Actual direct labour cost
▪ Actual production units ▪ Actual prime cost
Step 3: FOH variance is computed at the END OF PERIOD by using FOH absorbed cost and FOH
actual cost.
FOH Variance = Actual FOH cost – Absorbed FOH cost
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS
COST
Example 4.1
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
Example 4.2
Rehman Ltd. estimates its factory 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 ofthese units will required 300,000 direct labour hours at an estimated wages cost
of Rs. 1,800,000. Themachines will run 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
Example 4.3
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 b) Direct material cost
c) Direct labour cost
2. Calculate total production cost of job No. 924 by using each absorption rate from
part (1), ifjob No. 924 requires:
▪ Direct material cost Rs. 20,000
▪ Direct labour cost (1,400 labour hours) Rs. 8,400
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
Example 4.4
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
c) Direct labour cost d) Machine hours
2. Calculate total production cost of job No. 110 by using each absorption rate from 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
Example 4.5
Rashid Ltd. produces three products. 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 Product Product
A B 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.
LO 4: Departmental Rate System
4.1) Comparison of Single Rate vs Departmental Rate system
In single rate system, it is assumed that all factory overheads cost depends upon single base (i.e., direct
labour hours or machine hours) but in departmental rate system, overheads cost of each department may
have different base.
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

4.2) Types of Departments (Cost Centers)

There are two types of departments or cost centers in a factory of manufacturing organisation:
Sr. Departments Description
No.
A Production Production departments are all those departmentswhich
Departments are engaged actively in manufacturing of product. For
example:
▪ Cutting department
▪ Assembly department
▪ Finishing department
▪ Machining department (Machines)
▪ Paint department
B Service Service departments don’t actively participate in
Departments production of product. These departments provide
assistance to production departments as well as to other
service departments. For example:
▪ Canteen
▪ Inspection and quality control department
▪ Maintenance department
▪ Storage department

4.3) Purpose of 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:
▪ 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.
▪ 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.

4.4) Steps of Departmental Rate System

Departmental rate system has following five steps:
i. Preparation of Budgeted FOH Distribution Sheet at start of period
✓ FOH cost distribution among all departments
✓ FOH cost of service department is reallocated
ii. Determination of Departmental FOH Absorption rate at start of period.
iii. Computation of FOH cost absorbed in production cost during the period.
iv. Preparation of Actual FOH Distribution sheet at the end of period.
v. Determination of FOH variance at the end of period
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
Step 1: Budgeted FOH Distribution Sheet is prepared at the START OF PERIOD by using budgeted
data to find out Budgeted Departmental FOH cost
Production
Service departments
Overheads Items Base Total departments
Dept. A Dept. B Dept. S1 Dept. S2
Rs. Rs. Rs. Rs. Rs.
Indirect material cost Given X x x x x
Indirect labour cost Given X x x x x
Factory Rent Floor X x x x x
Building related Expenses AreaFloor X x x x x
Lighting Expense Area X x x x x
# of Lighting
Labour welfare expenses Points X x x x x
Asset related expenses # of workers X x x x x
Power expenses Value of asset X x x x x
Leave encashment KWH X x x x x
Supervision Cost # of workers X x x x x
Total cost # of workers
X x x x x
Allocation of service
Department cost
S1 X x x (x)
S2 (x)
Budgeted FOH cost X x x
X X X -- --

Step 2: Departmental FOH absorption rate is computed at the START OF PERIOD by usingbudgeted
Departmental FOH cost from above sheet.

FOH Absorption Rate Budgeted FOH cost of department A Budgeted

(Dept. A) Direct labour hours of department A

FOH Absorption Rate Budgeted FOH cost of department B

(Dept. B) Budgeted Machine hours of department
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Note: It is assumed that Department A is labour intensive and Department B is machine

intensive.In actual exam question, it may be in vice versa situation.
Step 3: FOH cost is included in the production cost of various products or orders DURING THE
PERIOD by using FOH Absorption rate.

FOH cost absorbed (charged) into product cost

FOH absorbed cost Rs.
Department A
(FOH Absorption Rate per hour x Actual labour hours of department A) X
Department B
(FOH Absorption Rate per hour x Actual Machine hours of department B) X
= Total FOH cost absorbed in production cost X

Step 4: Actual FOH Distribution Sheet is prepared at the END OF PERIOD by using actual data to find out
Actual Departmental FOH cost
Production
Service departments
Overheads Items Base Total departments
Dept. A Dept. B Dept. S1 Dept. S2
Rs. Rs. Rs. Rs. Rs.
Indirect material cost Given X x x x x
Indirect labour cost Given X x x x x
Factory Rent Floor Area X x x x x
Building related Expenses Floor Area X x x x x
Lighting Expense # of Lighting X x x x x
Points
Labour welfare expenses # of workers X x x x x
Asset related expenses Value of asset X x x x x
Power expenses KWH X x x x x
Leave encashment # of workers X X x x x
Supervision Cost # of workers X X x x x
Total cost X X x x x
Allocation of service
Department cost
S1 X X x (x)
S2 X X x (x)
Actual FOH cost X X X -- --

Step 5: FOH variance is computed at the END OF PERIOD by using FOH absorbed cost and FOH actual
cost.
Dept. A Dept. B
Actual FOH cost (from step 4) X X
Less: Absorbed FOH cost (X) (X)
Under/ (over) absorbed X (X)

4.3) Explanation of FOH Distribution sheet

(A) Types of departments (cost centers)
There are two types of departments or cost centers in a factory of manufacturing organisation:
Departments Description
Production Production departments are all those departments which are engaged
departments actively in manufacturing of product. For example:
(Production cost ▪ Cutting department
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
center) ▪ Assembly department
▪ Finishing department
▪ Machining department (Machines)
▪ Paint department
Service departments Service departments don’t actively participate in production of product.
(Service cost centers) These departments provide assistance to production departments as well as
to other service departments. For example:
▪ Canteen
▪ Inspection and quality control department
▪ Maintenance department
▪ Storage department
(B) Distribution of FOH cost in Sheet
Distribution of FOH cost in sheet involves following 2 steps:
(i) FOH cost is distributed among all production and service departments.
(ii) FOH cost of service departments is allocated to production departments.
Step 1: FOH cost distribution to all departments
Initially, FOH cost is distributed to all production and service departments. If no clear distribution base is
given then FOH costs will be distributed by using following bases:
Sr. FOH cost 1st Base 2nd Base 3rd Base
No.
1. Building related expenses
(i) Depreciation of building Cost of building Floor Area
(ii) Insurance of building Cost of building Floor Area
(iii) Repair and maintenance of Maintenance hours Floor Area
building
(iv) Rent of building Floor Area
(v) Cleaning expense of building Floor Area
(vi) Cooling and heating expenses Floor Area
(vii) Air conditioning expenses Floor Area
Heat and light expenses Floor Area
(viii) Lighting expenses (General Lighting point Floor Area
lighting)
2. Machine related expenses
(i) Depreciation of machine Cost of machine Machine hours
(ii) Insurance of machine Cost of machine
(iii) Repair and maintenance of Maintenance hours Machine Cost of
machine hours machine
(iv) Power expenses KWH Horse power Machine
hours hours
3. Employees’ welfare related expenses
(i) Labour insurance
(ii) Canteen expenses
Total number of Direct wages
(iii) Leave encashment (Earned leaves)
employees cost
(iv) Hospital and dispensary charges
(v) Superintendence (Supervision)
(vi) Indirect labour cost Indirect number of Direct wages
employees cost
4. Other factory overheads costs
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
(i) Depreciation of equipment Cost of equipment
(ii) Depreciation of furniture Cost of furniture
(iii) Inspection & quality control cost Inspection hours for Inspected units
inspected units
(iv) Storeroom expenses (Warehouse No. of material Direct material
cost) requisitions cost
(v) Packing cost Packing hours

Step 2: FOH cost of service department is reallocated 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
(ii) Repeated distribution method
(iii) Algebraic distribution method
(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.

Example 1
Alpha Ltd. has following service structure:
Production departments Service departments
Service provided by: A B C X Y
X 25% 35% 40% -- --
Y 20% 30% 35% 15% --

There are 3 production departments (A, B & C) and 2 service departments (X & Y). X department provide
services to only production departments but Y department provides services to all departments. Now
department Y serves more than department X that is why it will be reallocated first and then department X will
be reallocated.
“Service department Y is providing large proportion of service to department X so it will be allocated first and
then department X will be allocated”.

(ii) Repeated (Continuous) 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.

Example 2
Alpha Ltd. has following service structure:
Production departments Service departments
Service provided by: A B C X Y
X 25% 35% 30% -- 10%
Y 20% 30% 35% 15% --

In above situation both service departments are providing services to each other in addition to production
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
departments that is why it is known as reciprocal services. We will reallocate service department X and Y again
and again to make figures near to zero without any specific sequence.

(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.

Example 3
Alpha Ltd. has following information regarding FOH cost and service structure:
Production departments Service departments
A B C X Y
Factory overheads cost 100,000 150,000 200,000 50,000 40,000
Service provided by: A B C X Y
X 25% 35% 30% -- 10%
Y 20% 30% 35% 15% --

If we want to use simultaneous equation method then two equations will be formed as follows:

X = Total FOH cost of department X

Y = Total FOH cost of department Y

X = 50,000 + 15% Y ---- (i)

Y = 40,000 + 10% X ---- (ii)
Now we can put equation (ii) in equation (i) and solve for value of X and Y. These values will be used for
service department’s overheads cost allocation.
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

PAST PAPER QUESTIONS

Question 1 ICAP COST ACCOUNTING - D10 - SPRING 2003 – Q 3
The following data of a period relates to a manufacturing department:
Budgeted Actual
Direct Material Cost Rs. 500,000 Rs. 750,000
Direct Labour Cost Rs. 500,000 Rs. 550,000
Production Overheads Rs. 750,000 Rs. 800,000

Direct Labour Hours 100,000 130,000

During the period a Job XY 54 was completed. Direct material costing Rs. 100,000 direct labour costat
the rate of Rs. 5 per hour totals to Rs. 21,000 and overhead costing Rs. 115,000 were incurred.
Required:
a) Calculate predetermined production overhead absorption rate on the following basis:
i. as a percentage to direct material cost
ii. direct labour hours (4)
b) Calculate the production overhead cost to be charged to XY54 based on rates calculated in answers
(a) above. (4)
c) Assume that the direct labour hour rate of absorption is used. Calculate the under or over absorbed
production overheads for the period and state an appropriate treatment in the accounts. (4)
d) If the production overheads (factory overhead) account has a credit balance at the end of the period,
was overhead over absorbed or under absorbed? (4)
Question 2 ICAP COST ACCOUNTING - D10 - AUTUMN 2003 – Q 3
The estimated overheads likely to be incurred relating to a cost center with two major machines
Rs.
Supervision cost 8,000
Indirect employees’ wages 10,000
Earned leave 5,000
Maintenance cost 15,000
Power expenses 20,000
Depreciation of machines 5,000
Rent of building 2,500
Details of various allocations of the cost centers are as under:
Machine-1 Machine-2 Total
Machine Running hours Hours 5,000 1,000 6,000
1) Supervision cost Rs. 4,000 4,000 8,000
2) Capital cost of machine Rs. 20,000 5,000 25,000
3) Indirect employees No. 8 2 10
4) Total employees No. 20 5 25
5) Maintenance hours Hours 600 120 720
6) Kilowatt hours Hours 100,000 20,000 120,000
7) Floor Space Sq. ft. 5,000 5,000 10,000
Required: Calculate machine hour rate for each machine.
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 3 ICAP COST ACCOUNTING - D10 - SPRING 2004 – Q 8

From the following information, allocate overheads of service departments to individual producing
departments by adopting algebraic method:
Departments Departmental overheads before Service provided by
distribution of service Departments Dept. Y Dept. Z

Production Dept. – A Rs. 6,000 40% 20%

Production Dept. – B Rs. 8,000 40% 50%
Service – Y Rs. 3,630 -- 30%
Service – Z Rs. 2,000 20% --
Total Overheads Rs. 19,630

Question 4 ICAP COST ACCOUNTING - D10 - AUTMN 2004 – Q 3

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:
Machine Machine
Assembly Canteen Maintenance
Total 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. Maintenance) (Rs.) 67,600 25,600 34,800 4,800 2,400
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 (Square feet) (Rs.) 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) 72020 16020 12410 43590
Machine Usage (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 5 ICAP COST ACCOUNTING - D10 - AUTMN 2005 – Q 4
The factory overhead budget of a manufacturing company for the year ending June 30, 2006 is asfollows:
Rupees
Indirect wages 1,627,920
Insurance – labour 114,240
Supervision cost 514,080
Machine maintenance wages 485,520
Supplies 257,040
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
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. 1,200and
the present method of absorption is used. (15)
Question 6 ICAP COST ACCOUNTING - D10 - AUTMN 2006 – 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
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

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. (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 7 ICAP COST ACCOUNTING - D10 - SPRING 2007 – Q 8
Jupiter Manufacturing Company Limited consists of two manufacturing departments and one servicedepartment.
The company applies factory overhead on the following basis
Manufacturing Department Overheads absorption Rate
A-1 70% of direct labour cost
A-2 Rs. 40 per direct labour hour
Following relevant information is available:
Manufacturing Dept. Service
A-1 A-2 Department
Direct materials (Rs.) 433,000 313,000
Direct labour (Rs.) 388,800 259,200
Direct labour hours 3,500 4,000
Number of employees 140 220 40
Floor space (Sq. ft.) 1500 1500 750
The other expenses are as under:
Rupees
Indirect labour cost 217,400
Factory office expenses 43,200
Depreciation of computer 45,000
Factory building expenses 54,000
Service department’s expenses 112,800
Indirect labour cost and service department’s all expenses are apportioned on the basis of direct labourcost.
Factory office expenses and computer depreciation are allocated in the ratio of number of employees to all
the departments including service department.
Required: Prepare a factory overhead distribution sheet showing over/under applied factory overheads for
each department. (13)
Question 8 ICAP COST ACCOUNTING - D10 - 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. (6)
b) On December 1, 2007 Zia Textile Mills Limited purchased a new cutting machine for Rs. 1,300,000to
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.
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

The related expenses of new machine, 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. 8.50per
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. 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 duringthe
year 2008 after purchase of new machine. (8)
Question 9 ICAP COST ACCOUNTING - D10 - AUTMN 2008 – Q 6
Ternary Engineering Limited produces front and rear fenders for a motorcycle manufacturer. It hasthree
production departments and two service departments.
Overheads are allocated on the basis of direct labour hours. The management is considering to changethe
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.
b) Compute the departmental overhead absorption rates in accordance with the following:
▪ The Maintenance Department costs are allocated to the production department on the basisof
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 whereasthe
overhead rates for Phosphate and Painting Departments is based on direct labour hours.
(10)
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question10 ICAP COST ACCOUNTING – D10 – SPRING 2009 – Q 5

The expenses of the production and service departments of a company for a year are as follows:
Departments Departmental overheads before Service Provided
distribution of service Departments Dept. X Dept. Y
(Rs.’000)
Production Dept. – A 500 50% 40%
Production Dept. – B 400 30% 50%
Service Dept. – X 100 -- 10%
Service Dept. – Y 60 20% --
Allocate the service departments expenses to production departments by:
▪ Repeated distribution method
▪ Simultaneous equation method. (13)
Question 11 ICAP COST ACCOUNTING - D10 -AUTMN 2009 – Q 5
Following information has been extracted from the records of RT Limited for August 2009.
Production Departments Service
P-1 P-2 P-3 S-1 S-2
Budgeted machine hours 60,000 100,000 120,000
Actual machine hours 60,500 110,000 100,000
Budgeted labour hours 50,000 200,000 75,000
Actual labour hours 55,000 190,000 75,000
Budgeted material cost (Rs. 50,000 40,000 3,000
‘000)
Actual material cost (Rs. ‘000) 50,000 42,000 3,200
Budgeted overheads (Rs. ‘000) 1,200 2,000 2,250
Actual overheads (Rs. ‘000) 1,250 2,000 1,800 500 750
Services provided by S-1 20% 30% 40% -- 10%
Services provided by S-2 30% 40% 20% 10% -
Basis of overhead application Machin Labour Material
e Hours cost
Hours
Overheads absorption rate ? ? 75% of
material cost
Required:
a) Allocate the actual costs of service departments using repeated distribution method.
b) Compute department wise over / under applied (absorbed) overheads. (12)
Question 12 ICAP COST ACCOUNTING - D10 -AUTMN 2010 – Q 1
Ahsan Enterprises (AE) produces three products Alpha, Beta and Gamma. The management has some
reservations on the method of costing because the junior cost accountant currently calculates single
absorption rate by using actual data of the year. Consequently, the senior cost accountant has reviewed the
records and gathered the following information.
a) The costs incurred during the latest year were as follows:
Rupees
Direct material cost 240,000
Direct labour cost 1,680,000
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Indirect wages cost

– machine maintenance 600,000
– stores 360,000
– quality control 468,000
– cleaning and related services 400,000
Fuel and power 2,800,000
Depreciation on plant, machinery and building 1,560,000
Insurance on plant and machinery 240,000
Insurance on building 60,000
Stores, spares and supplies consumed 1,800,000
Rent, rates and taxes 1,200,000

The production report for the latest year depicts the following information:
Production Direct labour Machine hours Inspection
(units) hours per unit per unit hours per unit
Alpha 12,000 20.00 6.00 2.00
Beta 20,000 5.00 8.00 3.00
Gamma 45,000 4.00 10.00 4.00
Other relevant details are as follows

Alpha Beta Gamma

Factory space utilization 40% 35% 25%
Cost of machinery (Rs. in thousands) 6,000 4,000 3,000
Stores consumption (Rs. in thousands) 720 270 810
No. of units inspected 600 400 1,350
The rate of depreciation for plant and machinery is 10% per annum.
Required:
a) Determine the factory overhead cost per unit for products Alpha, Beta and Gamma by using
single factory overhead rate based on direct labour hours.
b) Recalculate the factory overhead cost per unit, for each product, by allocating individual
expenses on the basis of specific utilization of related facilities. (13)
Question 13 ICAP COST ACCOUNTING - D10 -SPRING 2011 – Q 2
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.
Material Labour Machine
Department Rs. in 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
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

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. Overheads are allocated on the
following basis:

Department-A Machine hours

Department-B Labour hours
Department-C % of prime cost
Actual overheads for department A, B and C are Rs. 5.35 million, Rs. 8.90 million and Rs. 7.45 million
respectively. 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)
Question 14 ICAP COST ACCOUNTING - D10 -AUTMN 2011 – Q 1
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 overheadexpenses for the
month of August 2011 were as follows
Rupees
Electricity 2,238,000
Rent 1,492,000
Operational expenses of machine M1 5,500,000
Operational expenses of machine M2 3,200,000
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
The area occupied by the two machines M1 and M2 and the two service departments is as follows:
Square feet
Machine M1 5,500
Machine M2 4,800
Inspection department 12,000
Packing department 15,000
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. (18)
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 15 ICAP COST ACCOUNTING - D10 -SPRING 2012 – Q 2

Nitrate Limited (NL), producing industrial chemicals, has three production and two service departments.
The annual overheads are as follows:
Production departments Service departments
A B C X Y
56,000 50,000 38,000 16,500 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.(10)
Question 16 ICAP COST ACCOUNTING - D10 -AUTMN 2013 – Q 7
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 August2013:

Rupees
Rent and rates 85,000
Indirect wages of production departments 60,000
General lighting 75,000
Power 150,000
Following furthe Depreciation machinery 50,000
r information relating Production
to the departments is
departments also ava ilable: Service departments
Selection Jam Bottling Storage Distribution
making
Direct wages (Rs.) 60,000 80,000 32,000 --- ---
Indirect wages (Rs.) ? ? ? 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 Labour hours 1,533 3,577 1,815 - -
Labour hours per bottle 0.10 0.25 0.15 - -
Cost of (Rs.)
600,000 1200,000 900,000 300,000 -
machinery

After production, the jam bottles are finally packed in a carton consisting of 12 bottles. The service
departments’ costs are apportioned as follows:
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 labour cost of Rs. 25 is incurred on each bottle.
Required: Calculate the cost of each carton of jam bottles. (16)
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 17 ICAP COST ACCOUNTING - D10 - SPRING2014 – Q 2

Alpha Limited is preparing its departmental budgets and product cost estimates for the next year. Thecosts
and related data for the year ending 31 December 2014 have been estimated as follows:

Machining Assembly Finishing Maintenance Total

Costs: ------------------------------- Rs. in 000 ----------------------
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 data:
Direct labour 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 ) 1,000 400 300 300 2,000
Net book value of fixed 20,000 8,000 3,000 4,000 35,000
assets (Rs. 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)
Question 18 ICAP COST ACCOUNTING – CAF 8 –AUTMN 2014 – Q 7
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
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 Direct labour
hours hours
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
SL allocates the costs of service departments applying repeated distribution method. Details ofservices
provided by SD-1 and SD-2 to the other departments are as follows:
Service Departments 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 19 ICAP COST ACCOUNTING – CAF 8 –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:
Fabrication Finishing Quality Logistics Total
control
--- Rs. in ‘000 ---
Indirect labour 1,500 1,200 500 400 3,600
Factory rent 2,000
Power 1,200
Depreciation of plant 9,000
Other information:
Cost of plant 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 1,00,0
00
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. (06)
b) Prepare journal entries to record:
i. Applied production overheads; and (03)
ii. Under/over absorbed production overheads (03)
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 20 ICAP COST ACCOUNTING – CAF 8 – 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:
Overheads cost Direct labour hours
Departments
*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 apportionments of overheads costs of support departments

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 usingrepeated
distribution method. (05)
b) Compute under/over applied overheads for the month of June 2017. (03)

Question 21 ICAP Past Papers CAF(08) – Spring 2021 - Q5

 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 22 ICAP Past Papers CAF-03 – Spring 2022 - Q5

Question 23 ICAP Past Papers CAF-03 – Autumn 2022 – Q4

 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 24 ICAP Past Papers CAF-03 – SPRING 2023 – Q 9

CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
SOLUTIONS
Example 4.1
Predetermined FOH Absorption Rate
Budgeted FOH cost Rs. 800,000
(a) Budgeted Direct labour hours 25,600 labour hours
= Rs. 31.25 per direct labour hour

Budgeted FOH cost Rs. 800,000

(b)
Budgeted Machine hours 80,000 machine hours
= Rs. 10 per machine hour

Budgeted FOH cost Rs. 800,000

(c)
Budgeted units of output 500,000 units
= Rs. 1.60 per unit of product

Budgeted FOH cost x 100 Rs. 800,000 x 100

(d) Budgeted direct labour cost Rs. 640,000
= 125% of direct labour cost

(e) Budgeted FOH cost x 100 Rs. 800,000 x 100

Budgeted direct material cost Rs. 1,000,000
= 80% of direct material cost

(f) Budgeted FOH cost x 100 Rs. 800,000 x 100

Budgeted prime cost Rs. 1,640,000
= 48.78% of prime cost
Example 4.2
Predetermined FOH Absorption Rate
Budgeted FOH cost Rs. 1,500,000 = Rs. 5 per direct labour hour
(a)
Budgeted Direct labour hours 300,000 labour hours

(b) Budgeted FOH cost Rs. 1,500,000 = Rs. 3 per machine hour
Budgeted Machine hours 500,000 machine hours

(c) Budgeted FOH cost Rs. 1,500,000 = Rs. 3.75 per unit of product
Budgeted units of output 400,000 units

(d) Budgeted FOH cost x 100 Rs. 1,500,000 x 100 = 83.33% of direct labour cost
Budgeted direct labour cost Rs. 1,800,000

(e) Budgeted FOH cost x 100 Rs. 1,500,000 x 100 = 250% of direct material cost
Budgeted direct material cost Rs. 600,000

(f) Budgeted FOH cost x 100 Rs. 1,500,000 x 100 = 62.5% of prime cost
Budgeted prime cost Rs. 2,400,000
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Example 4.3
1. Predetermined FOH Absorption Rate
Budgeted FOH cost Rs. 525,000
(a) Budgeted Direct labour hours 60,000 labour hours
= Rs. 8.75 per direct labour hour
Budgeted FOH cost x 100 Rs. 525,000 x 100
(b) Budgeted direct material cost Rs. 640,000
= 70% of direct material cost
(c) Budgeted FOH cost x 100 Rs. 525,000 x 100
Budgeted direct labour cost Rs. 300,000
= 175% of direct labour cost
2. Total production cos to job No. 924
(a) (b) (c)
Direct material cost 20,000 20,000 20,000
Direct labour cost 8,400 8,400 8,400
= Prime cost 28,400 28,400 28,400
FOH cost absorbed
(Rs. 8.75 x 1400 hours) 12,250 (70% x Rs. 20,000) 14,000 (175% x Rs. 8,400) 14,700
40,650 42,400 43,100

Example 4.4
1. Predetermined FOH Absorption Rate
Budgeted FOH cost Rs. 800,000
(a) Budgeted Direct labour hours 80,000 labour hours
= Rs. 10 per direct labour hour
Budgeted FOH cost x 100 Rs. 800,000 x 100
(b) Budgeted direct material cost Rs. 1,200,000
= 66.67% of direct material cost

(c) Budgeted FOH cost x 100 Rs. 800,000 x 100

Budgeted direct labour cost Rs. 1,000,000
= 80% of direct labour cost

(d) Budgeted FOH cost Rs. 800,000

Budgeted Machine hours 50,000 machine hours
= Rs. 16 per direct machine hour
2. Total production cos to job No. 110
(a) (b)
Direct material cost 72,000 72,000
Direct labour cost 64,000 64,000
= Prime cost 136,000 136,000
FOH cost absorbed
(Rs. 10 per hour x 2,500 hours) 25,000 (66.67% x Rs. 72,000) 48,000
161,000 184,000
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
(c) (d)
Direct material cost 72,000 72,000
Direct labour cost 64,000 64,000
= Prime cost 136,000 136,000
FOH cost absorbed
(80% x 64,000 hours) 51,200 (Rs. 16 per hour x 2,800 hours) 44,800
187,200 180,800

Example 4.5
Req. (i): Factory overheads Absorption Rate
= Estimated (Budgeted) total Factory Overheads costEstimated
(Budgeted) total Machine hours
= Rs. 100,000 = Rs. 2 per machine hour
50,000 Machine hours
(W – 1) Budgeted total machine hours
Machine
hours
Product A: (2 Machine hours per unit x 5,000 units) 10,000
Product B: (2.5 Machine hours per unit x 10,000 units) 25,000
Product C : (1 Machine hour per unit x1 5,000 units) 15,000
= Budgeted total machine hours 50,000
Req. (ii & iii): Calculation of Cost per unit and Sales price per unit
Product Product Product
A (Rs.) B (Rs.) C (Rs.)
Direct Material cost per unit 10 12 8
Add: Direct Labour cost per unit 9 6 7
= Prime Cost 19 18 15
Add: Factory overheads absorbed
(Rs. 2/machine hour x 2 machine hours per unit) 4
(Rs. 2/machine hour x 2.5 machine hours per unit) 5
(Rs.2/machine hour x 1 machine hour per unit) 2
= Cost per unit 23 23 17
Add: Profit per unit (20% x cost per unit) 4.6 4.6 3.4
= Sales price per unit 27.6 27.6 20.4

Question 1 ICAP COST ACCOUNTING - D10 - SPRING 2003 – Q 3

a) Production Overheads Absorption rate

Budgeted FOH cost x 100 Rs. 750,000 x 100 = 150% of direct material cost
(i) Budgeted direct material cost Rs. 500,000

Budgeted FOH cost Rs. 750,000 = Rs. 7.5 per direct Labour hour
(ii) Budgeted Labour hours 100,000 labour hours
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

b) Production Overheads Absorbed to Job XY 54

(i) FOH cost absorbed to Job XY 54
= Overheads absorption rate x Actual direct material cost of Job XY 54
= 150% x Rs. 100,000 = Rs. 150,000
(ii) FOH cost absorbed to Job XY 54
= Overheads absorption rate x Actual direct Labour hours of Job XY 54
= Rs. 7.5 per hour x 4,200 hours = Rs. 31,500
(W – 1) Direct Labour hours of Job XY 54
Direct Labour cost = Direct labour hours x Direct labour wages rate per hour
Rs. 21,000 = Direct labour hours x Rs. 5 per labour hour
Direct labour hours = Rs. 21,000 ÷ Rs. 5 per hour = 4,200 hours
c) Production Overheads variance for the period
Production overheads absorbed – Production overheads actual
(130,000 hours x Rs. 7.5 per hour) – Rs. 800,000
Rs. 975,000 – Rs. 800,000 = Rs. 175,000 over absorbed
▪ Production overhead account should be debited and cost of goods sold should be credited.
▪ However, it is suggested that the same should be credited to respective items the value of which have
been distorted by over application of production overhead i.e. closing value of finished goodsand WIP.
d) If production overhead control account has a credit balance then it represents over absorbed
production overheads.
Question 2 ICAP COST ACCOUNTING - D10 - AUTUMN 2003 – Q 3
Step 1: Budgeted FOH Distribution Sheet
FOH costs Basis Total Machine Machine
(Rs.) 1 (Rs.) 2 (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 Capital 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)
Machine 1 Absorption rate = Budgeted FOH cost of machine 1
Budgeted machine hours
Machine 1 Absorption rate = Rs. 50,417 = Rs. 10.08 per machine hour
5,000 machine hours
Machine 2 Absorption rate = Budgeted FOH cost of machine 2
Budgeted machine hours
Machine 1 Absorption rate = Rs. 15,083 = Rs. 15.08 per machine hour
1,000 machine hours
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 3 ICAP COST ACCOUNTING - D10 - SPRING 2004 – Q 8

Allocation of Service Department cost

A B Y Z
(Rs.) (Rs.) (Rs.) (Rs.)
Production overheads cost 6,000 8,000 3,630 2,000
Allocation of Service Department’s cost:
Cost of Y (W – 1) - 40%, 40%, 20% 1,800 1,800 (4,500) 900
Cost of Z (W – 1) - 20%, 50%, 30% 580 1,450 870 (2,900)
8,380 11,250 0 0
(W – 1) Algebraic Method
Let
Y = Total production overheads cost of Department YZ
= Total production overheads cost of Department Z
i. Y = Rs. 3,630 + 30% Z
ii. Z = Rs. 2,000 + 20% Y
Put equation (ii) in equation (i)
Y = 3,630 + 0.3(2,000 + 0.2 Y)
Y = 3,630 + 600 + 720 + 0.06 YY
– 0.06 Y = Rs. 4,230
0.94 Y = Rs. 4,230
Y = Rs. 4,230 ÷ 0.94 = Rs. 4,500
Put the value of Y in equation (ii)
Z = 2,000 + 0.2 (Rs. 4,500)Z
= Rs. 2,900
Question 4 ICAP COST ACCOUNTING - D10 – AUTUMN 2004– Q 3
Budgeted production overheads Distribution Sheet
FOH costs Basis Total Machine Machine Assembly Canteen Maintenance
(Rs.) A (Rs.) B (Rs.) (Rs.) (Rs.) (Rs.)
Indirect wages Given 313,820 34,344 36,760 62,696 118,600 61,420
Given
Consumables 67,600 25,600 34,800 4,800 2,400 0
Rent expense Area 66,800 14,844 17,813 22,267 8,907 2,969
Building
insurance Area 9,600 2,133 2,560 3,200 1,280 427
Heat & Light Area 13,600 3,022 3,627 4,533 1,813 605
Power Power % 34,400 18,576 13,760 1,032 344 688
Value of
Depreciation machine 160,800 76,000 71,600 8,800 1,200 3,200
666,620 174,519 180,920 107,328 134,544 69,309
Allocation of
Service Dept.
Maintenance 45:40:13:2 31,189 27,724 9,010 1,386 (69,309)
135
135,930
Canteen Dept. Direct wages 33,655 26,100 76,175 (135,930)
666,620 239,363 234,744 192,513 -- --
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 5 ICAP COST ACCOUNTING - D10 – AUTUMN 2004 – Q 4

a) Step 1: Budgeted Factory overheads Distribution Sheet

Cost Basis Total (Rs.) A (Rs.) B (Rs.) C (Rs.) D (Rs.)
Indirect wages Indirect workers 1,627,920 610,470 610,470 203,490 203,490
Labour insurance Total workers 114,240 34,944 45,696 20,160 13,400
Supervision Given 514,080 159,340 145,471 111,877 97,392
Machine Maintenance
maintenance wages hours 485,520 145,656 97,104 194,208 48,552
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 1,785
Insurance of
machine Capital cost 399,840 152,320 114,420 47,600 85,680
Depreciation of
machinery Capital cost 856,800 326,400 244,800 102,000 183,600
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 hour rate (Absorption rate based on machine hours)

Machine
Budgeted FOH cost Rs. 2,242,147
A
Machine running hours 30,000 machine hours
= Rs. 74.74 per machine hour
Budgeted FOH cost Rs. 1,753,556
Machine B
Machine running hours 60,000 machine hours
= Rs. 29.23 per machine hour

Machine C Budgeted FOH cost Rs. 895,155

Machine running hours 25,000 machine hours
= Rs. 35.81 per machine hour

Machine D Budgeted FOH cost Rs. 863,982

Machine running hours 10,000 machine hours
= Rs. 86.40 per machine hour
b) Overheads 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. 35.81 per MH x 1 MH per unit) 36
Machine D (Rs. 86.30 per MH x 4 MH per unit) 345
1,067
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

c) Overheads 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
Question 6 ICAP COST ACCOUNTING - D10 – AUTUMN 2006 – Q 1
a) Predetermined Departmental FOH absorption rate
Budgeted FOH cost x 100 Rs. 216,000 x 100
Dept. A
Budgeted Direct labour cost Rs. 192,000
= 112.5% of direct labour cost
Budgeted FOH cost Rs. 225,000
Dept. B
Budgeted machine hours 10,000 machine hours
= Rs. 22.50 per machine hour
b) Total and per unit cost of Job No. CNG-01
Dept. A Dept. B Total
(Rs.) (Rs.) (Rs.)
Direct material cost 1,500 2,250 3,750
Direct labour cost 1,800 1,250 3,050
FOH cost absorbed (W – 1) 2,025 3,375 5,400
Total cost of 50 units 5235 6,875 12,200
Per unit cost
Per unit cost = Total Cost of units
Units produced
Per unit cost = Rs. 12, 200 = Rs. 244 per unit50
units

(W – 1) FOH cost absorbed

Department A = FOH absorption rate of Dept. A x Actual labour cost of Dept. A
= 112.5 % x Rs. 1,800
= Rs. 2,025
Department B = FOH absorption rate of Dept. B x Actual machine hours of Dept. B
= Rs. 22.5 per machine hour x 150 hours
= Rs. 3,375
c) Under (over) absorbed Factory overheads
Dept. A Dept. B
(Rs.) (Rs.)
Actual Factory Overhead 240,000 207,000
Absorbed Factory Overhead:
(Rs. 222,000 x 112.5%) (249,750)
(9,000 hours x Rs. 22.5 per machine hour) (202,500)
= Under/(Over) absorbed factory overheads (9,750) 4,500
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 7 ICAP COST ACCOUNTING - D10 – SPRING 2007 – Q 8

Step 1: Actual FOH Distribution Sheet

Dept. A-1 Dept. A-2 Service
Cost Basis (Rs.) (Rs.) Dept. (Rs.)
Service department expense 112,800
Indirect labour Direct labour cost 130,440 86,960 -
Factory office expenses No. of Employees 15,120 23,760 4,320
Depreciation of computers No. of Employees 15,750 25,750 4,500
Factory building expenses Floor space 21,600 21,600 10,800
182,910 157,070 132,420
Allocation of service dept. Direct labour cost 79,452 52,968 (132,480)
Total Actual Overheads cost 262,362 210,038 --

Step 2: Under/(over) absorbed Factory overheads

Dept. A-1 (Rs.) Dept. A-2 (Rs.)
Actual Factory Overhead 262,362 210,038
Absorbed Factory Overhead:
(Rs. 388,800 x 40%) (272,160)
(4,000 labor hours x Rs. 40 per labour hour) (160,000)
Under/Over absorbed factory overheads (9,798) 50,038
Question 8 ICAP COST ACCOUNTING - D10 – SPRING 2008 – Q 2

a) The under or over applied overhead may be:

▪ Treated as period cost by closing it to Cost of Goods Sold Account or directly to Income
Statement
▪ Apportioned between inventories and cost of goods sold.
Reasons for Under/ Over applied Factory Overhead
▪ The actual hours worked may be more or less than the estimated hours.
▪ The estimates may not be accurate.
▪ Actual overhead costs and actual activity levels are different from budgeted costs and
activity levels.
▪ Changes in the methods of production.
▪ Abnormal changes in the component prices of factory overheads.
▪ Extraordinary expenses might have been incurred during the accounting period.
▪ Major changes might have taken place. For example, replacement of general purpose
machine with automatic high speed machines.
b) Calculation of Annual charges of new machine
Budgeted running and overheads cost of all machines Rs.
Total budgeted costs of existing five machines 4,524,000
Rs. 390 per productive hour x (12,500 hours – 900 hours)
Add: Costs of new machines
(i) Depreciation (Rs.1,300,000 – Rs. 100,000)/10 years x 11months/12 months 110,000
(ii) Electricity (2,480 hours x 10 units per hour x Rs. 8.5 per unit) 210,800
(iii) Cost of maintenance (Rs. 25,000 x 11 months) 275,000
(iv) Part replacement (Rs. 10,000 x 11 months) 110,000
(v) Operator wages (Rs. 9,000 x 11 months 99,000
(i) Departmental expenses (Rs. 5,000 x 11 months) 55,000
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
= Budgeted overheads cost of all machines 5,383,800

Productive machine hours

Productive hours of existing five machines (12,500 – 900) = 11,600
Add: Productive hours of new machine (2,600 – 120) = 2,480 14,080
Revised machine hour rate (Rs.) 382.37

Question 9 ICAP COST ACCOUNTING - D10 – AUTUMN 2008 – Q 6

a) Single overhead absorption rate

Rs.
Indirect material (30 + 75) 105,000
Other variable overheads (200 + 70 + 100 + 30 + 15) 415,000
Fixed overheads (480 + 65 + 115 + 150 + 210) 1,020,000
Total overheads 1,540,000

Total direct labour hours (24,000 + 9,600 + 12,000) 45,600

Single overheads absorption rate Rs. 33.77 per hour

Step 1: Budgeted Production overheads Distribution Sheet

Production department (Rs.) Service Department (Rs.)
Fabrication Phosphate Painting Inspection Maintenance
Total overhead 680,000 135,000 215,000 210,000 300,000
Allocation of service department
Maintenance cost 180,000 78,000 42,000 --- (300,000)
(based on maintenance hours)
Inspection cost 70,000 35,000 105,000 (210,000)
(based on inspection hours)
Total departmental 930,000 248,000 362,000 --- ---
factoryoverhead

Step 2: Deaprtmental FOH Absorption Rates for each production department

Fabrication department = Rs. 930,000 ÷ 9,000 machine hours = Rs. 103.33 per machine hour
Phosphate department = Rs. 248,000 ÷ 9,600 labour hours = Rs. 25.83 per labour hour
Painting department = Rs. 362,000 ÷ 12,000 labour hours = Rs. 30.17 per labour hour

Question 10 ICAP COST ACCOUNTING - D10 – SPRING 2009 – Q 5

Allocation of service department by using Repeated Distribution Method
Production Department (Rs.) Service Department (Rs.)
A B C D
Overheads before allocation 500,000 400,000 100,000 60,000
Allocation of service dept. cost
Dept. X (50%, 30%, 20%) 50,000 30,000 (100,000) 20,000
Dept. Y (40%, 50%, 10%) 32,000 40,000 8,000 80,000
Dept. X (50%, 30%, 20%) 4,000 2,400 (8,000) 1,600
Dept. Y (40%, 50%, 10%) 640 800 160 (1,600)
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
Dept. X (50%, 30%, 20%) 80 48 (160) 32
Dept. Y (40%, 50%, 10%) 13 16 3 (32)
Dept. X (50%, 30%, 20%) 2 1 (3)
Total Production overheads 586,735 473,265 -- --

Allocation of service department by using Simultaneous Equation Method

A (Rs.) B (Rs.) C (Rs.) D (Rs.)
Overheads before allocation 500,000 400,000 100,000 60,000
Allocation of service department:
Cost of X (50%, 30%, 20%) (W-1) 54,082 32,449 (108,163) 21,632
Cost of Y (40%, 50%, 10%) (W-1) 32,653 40,816 8,163 (81,632)
Total Production overheads 586,735 473,265 -- --

(W-1) Simultaneous Equation Method

X= Rs. 100,000+ 10% Y (i)
Y = Rs. 60,000 + 20% X (ii)
Put (ii) in (i)
X = 100,000 + 0.1(60,000 + 0.2 X)
X = 100,000 + 6,000 + 0.02 X
0.98X = Rs. 108,163
X = Rs. 4,500
Put value of X in (ii)
Y= 60,000+ 0.2 (108,163)
Y =Rs. 81,632
Question 11 ICAP COST ACCOUNTING - D10 – AUTUMN 2009 – Q 5

a) Step 1: Allocation of Service department - Repeated distribution method

Production Dept. Service Dept.
P-1 P-2 P-3 S-1 S-2
----------Rupees In thousand ---------
Actual overheads as given 1,250 2,000 1,800 500 750
Allocation of S2 cost (30:40:20:10) 225 300 150 75 (750)
Allocation of S1 cost (20:30:40:10) 115 172 230 (575) 58
Allocation of S2 cost (30:40:20:10) 17 23 11 6 (58)
Allocation of S1 cost (20:30:40:10) 1 2 3 (6) 0
Total Actual Factory overheads 1,608 2,497 2,194 -- --

Step 2: Departmental FOH absorption rates for each production department

P-1 department = Rs. 1,200,000 ÷ 60,000 machine hours = Rs. 20 per machine hour
P-2 department = Rs. 2,000,000 ÷ 200,000 labour hours = Rs. 10 per labour hour
P-3 department = (Rs. 2,250,000 ÷ Rs. 3,000,000) x 100 = 75% of direct material cost

b) Under/Over Absorbed Factory overheads

P-1 P-2 P-3
(Rs. In 000) (Rs. In 000) (Rs. In 000)
Actual Factory Overheads 1,608 2,497 2,194
Absorbed Factory Overheads (1,210) (1,900) (2,400)
Under/(over) absorbed FOH 408 597 (206)
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
ICAP COST ACCOUNTING - D10 – AUTUMN 2010 – Q 1
Question 12
a) Single Overhead absorption rate
Rs.
Indirect wages:
- Machine maintenance 600,000
- Stores 360,000
- Quality control 468,000
- Cleaning and related services 400,000
Fuel and power 2,800,000
Depreciation on plant, machinery and building 1,560,000
Insurance on plant and machinery 240,000
Insurance on building 60,000
Stores, spares and supplies consumed 1,800,000
Stores, rates and taxes 1,200,000
Total Factory overheads cost (Rs.) 9,488,000
÷ Total Direct labour hours 520,000
= Single FOH rate per labour hour (Rs.) 18.25
(W1) Total direct labour hours
Labour
hours
Alpha (12,000 units x 20 hours per unit) 240,000
Beta (20,000 units x 5 hours per unit) 100,000
Gamma (45,000 units x 4 hours per unit) 180,000
520,000
Factory Overheads cost per unit
Alpha Rs. 18.25 per labour hour x 20 labour hour per unit Rs. 365 per unit
Beta Rs. 18.25 per labour hour x 5 labour hour per unit Rs. 19.25 per unit
Gamma Rs. 18.25 per labour hour x 4 labour hour per unit Rs. 73 per unit

b) Actual Overhead distribution sheet

Total Alpha Beta Gamma
Cost Basis (Rs.) (Rs.) (Rs.) (Rs.)
Indirect wages:
- Machine maintenance Machine hours 600,000 63,343 140,762 395,895
- Stores Stores cons. 360,000 144,000 54,000 162,000
- Quality control Inspection hours 468,000 72,000 72,000 324,000
- Cleaning & services Floor space 400,000 160,000 140,000 100,000
Fuel & Power Machine hours 2,800,000 295,601 656,892 1,847,507
Dep. Of machinery Capital cost 1,300,000 600,000 400,000 300,000
Dep. Of building Floor space 260,000 104,000 91,000 65,000
Insurance of machine Capital cost 240,000 110,769 73,846 55,385
Building insurance Floor space 60,000 24,000 21,000 15,000
Stores consumed Given 1,800,000 720,000 270,000 810,000
Rent expense Floor space 1,200,000 480,000 420,000 300,000
FOH cost 9488,000 2,773,713 2,339,500 4,374,787
÷ Production units 12,000 20,000 45,000
FOH cost per unit (Rs.) 231.14 116.98 97.22
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 13 ICAP COST ACCOUNTING - D10 – 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 hours = Rs. 18 per labour hour
Department C = (Rs. 7.5 million ÷ Rs. 150 million) x 100 = 7.5% of prime cost

b) Total and departmental actual cost per unit

A B C Total

Direct material cost 80,000 150,000 120,000 350,000

Labour cost @ Rs. 120 per hour 26,400 63,600 28,800 118,800
Prime cost 106,400 213,600 148,800 468,800
Actual Factory overheads 5,350 8,900 7,450 21,700
Total cost (Rs.’000) 111,750 222,500 156,250 490,500
÷ Units produced 35,700 35,700 35,700 35,700
= Actual cost per unit 31.30 62.32 43. 77 137.39

c) FOH variance for each department

A B C Total

Absorbed Factory overheads 4,250 9,450 7,440 21,230

Actual Factory overheads (5,350) (8,900) (7,450) (21,700)
=Over/(under) absorbed (Rs.’000) (1,100) 640 (10) (470)
Note: It is assumed that actual labour wages rate and budgeted labour rate is same.
Question 14 ICAP COST ACCOUNTING - D10 – AUTMN 2011 – Q 1

Step 1: Allocation of actual cost to the machines

Total (Rs.) M1 M2 Inspection Packing
(Rs.) (Rs.) (Rs.) (Rs.)
Operational expenses 8,700,000 5,500,000 3,200,000 -- --
Electricity (based on area) 2,238,000 330,000 288,000 720,000 900,000
Rent (based on area) 1,492,000 220,000 192,000 480,000 600,000
12,430,000 6,050,000 3,680,000 1,200,000 1,500,000

Step 2 – Allocation of cost to products

Product A Product B Total

(Rs.) (Rs.) (Rs.)
M1 cost (based on units) (W-1) 2,207,166 3,824,834 6,050,000
M2 cost (based on units) (W-1) 1,899,355 1,780,645 3,680,000
Inspection dept. cost (based on inspection hours) (W-1) 579,310 620,690 1,200,000
Packing dept. cost (based on packing hours) (W-1) 708,861 791,139 1,500,000
5,384,692 7,035,308 12,430,000
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

(W1) Product wise units, inspection hours and packing hours

Product A Product B Total
Units produced 5,600 units 7,500 units 13,100 units
Units on M1 (50% of A and 65% of B) 2,800 units 4,875 units 7,675 units
Units on M2 (50% of A and 35% of B) 2,800 units 2,625 units 5,425 units
Inspection hours @ 15 and 12 minutes:
A= 5,600 units x 15 minutes/60 minutes 1,400 hours
B = 7,500 units x 12 minutes/ 60 minutes 1,500 hours 2,900 hours
Packing hours @ 12 and 10 minutes:
A = 5,600 units x 12 minutes/ 60 minutes 1,120 hours
B = 7,500 units x 10 minutes/60 minutes 1,250 hours 2,370 hours
Question 15 ICAP COST ACCOUNTING - D10 – SPRING 2012 – Q 2

Allocation of Service department cost

Production department Service department (Rs.)
(Rs.)
A B C X Y
Cost before allocation 56,000 50,000 38,000 16,500 10,600
Allocation of:
Cost of X 3,800 7,600 5,700 (19,000) 1,900
Cost of Y 5,000 2,500 2,500 2,500 (12,500)
Total Factory overheads 64,800 60,100 46,200 -- --

(W-1) Simultaneous equation

X= Rs. 16,500+ 20% Y (i)
Y = Rs. 10,600 + 10% X (ii)
Put (ii) in (i)
X = 16,500 + 0.2(10,600 + 0.1 X)
X = 16,500 + 2,120 + 0.02 X
0.98X = Rs. 18.620
X = Rs. 19,000
Put value of X in (ii)
Y= 10,600+ 0.1 (19,000) = Rs.12,500
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 16 ICAP COST ACCOUNTING - D10 – AUTUMN 2013 – Q 7

Cost of each Carton

Rs.
Raw and packing material (Rs. 36 x 12 jam bottle) 36.000
Direct labor (Rs. 25x 12 jam bottle) 25.000
FOH cost per bottle:
Selection (0.1 labour hours per bottle x Rs. 60.92/labour hour) 6.092
Jam making (0.25 labour hour per bottle x Rs. 63.99/labour hour) 16.000
Bottling (0.15 labour hour per bottle x Rs. 69.26/labour hour) 10.389
= Cost per bottle 93.481
Cost of Carton (Rs. 93.481 x 12 bottles in carton) = Rs. 1,121.772 = Rs. 1,122

(W-1) – Departmental FOH Absorption Rates

Step 1: Budgeted FOH Distribution Sheet
Cost Basis Total Production dep. (Rs.) Service dep. (Rs.)
(Rs.)
Selection Jam Bottling Storage Distribution
making
Rent and rates Floor area 85,000 20,400 27,200 17,000 13,600 6,800
Indirect wages of Direct 60,000 20,930 27,907 11,163 -- --
production wages
Indirect wages of 28,000 8,000 20,000
service
General lightening Light 75,000 12,500 25,000 18,750 6,250 12,500
points
Power expense Power 150,000 15,000 90,000 30,000 15,000 --
consumed
Dep. of machinery Cost of 50,000 10,000 20,000 15,000 5,000 --
machinery
448,000 78,830 190,107 91,913 47,850 39,300
Allocation of Service
Storage Dept. 10:30:40:20 4,785 14,355 19,140 (47,850) 9,570

Distribution Dept. 20:50:30 9,774 24,435 125,714

93,389 228,897 125,714 0 0

Step 2: Departmental FOH Absorption Rates

Selection Jam making Bottling
Total Factory Overheads Rs. 93,389 Rs. 228,897 Rs. 125,714
Total labour hours 1,533 labour hours 3,577 labour hours 1,815 labour hour
= FOH Absorption rate = Rs. 60.92/LH = Rs. 63.99 /LH = Rs. 69.26/LH
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 17 ICAP COST ACCOUNTING - D10 – SPRING 2014 – Q 2

Step 1: Budgeted Production overheads Distribution Sheet
Cost Basis Total Machining Assembly Finishing Mainte-
(Rs.) (Rs.) (Rs.) (Rs.) (Rs.)
Indirect wages Given 246,000 46,000 27,000 36,000 137,000
Indirect material Given 213,000 68,000 18,000 36,000 91,000
Power Machine hours 465,000 413,000 21,000 31,000 --
Light and heat Floor area 46,000 23,000 9,000 7,000 7,000
Depreciation Book value 108,000 62,000 25,000 9,000 12,000
Rent and rates Floor area 114,000 57,000 23,000 17,000 17,000
Warehousing cost Direct 98,000 83,000 11,000 4,000 --
materials
Total factory overheads 1,290,000 752,000 134,000 140,000 264,000
Allocation of maintenance cost:
80% based on machine hours 188,000 9,000 14,000 (211,000)
20% based on floor area 31,000 13,000 9,000 (53,000)
Total 971,000 156,000 163,000 --

Step 2: Absorption Rate for each department

Machining Assembly Finishing
Total Factory Overheads Rs. 971,000 Rs. 156,000 Rs. 163,000
Total machine hours/labour hours 40,000 labour 8,000 labour 16,000 labour
hours hours hour
= Factory Overhead Absorption rate = Rs. 24.28 per = Rs. 19.50 per = Rs.10.19 per
machine hour labour hour labour hour

Question 18 ICAP COST ACCOUNTING - D10 – AUTUMN 2014 – Q 7

Step 1: Budgeted Production overheads Distribution Sheet
Cost Basis Total (Rs.) PD-A (Rs.) PD-B (Rs.) SD-1 SD-2
(Rs.) (Rs.)
Indirect labor Given 2,570,000 1,900,000 600,000 50,000 20,000
Indirect material Given 2,205,000 900,000 1,100,000 150,000 55,000
Factory rent Floor Area 1,340,000 670,000 536,000 67,000 67,000
Power cost Kilowatt hours 1,515,000 758,000 568,000 47,000 142,000
Depreciation Machine hours 3,500,000 1,925,000 1,225,000 280,000 70,000
11,130,000 6,153,000 4,029,000 594,000 354,000
Allocation of service department cost:
SD-1 30:65:5 178,000 386,000 (594,000) 30,000
SD-2 55:35:10 211,000 134,000 39,000 (384,000)
SD-1 30:65:5 12,000 25,000 (39,000) 2,000
SD-2 55:35:10 1,000 1,000 -- (2,000)
Total Budgeted Overheads 6555,000 4576,000 - -

Step 3: Absorption Rate for each department

PD-A PD-B
Total Budgeted Factory Overheads Rs. 6,555,000 Rs. 4,576,000
Total machine hours/labour hours 19,250 machine hours 800 units x 38 labour hours per unit
= Factory Overhead Absorption rate Rs. 340.52 per machine hour Rs. 150.53 per labor hour
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
Question 19 ICAP COST ACCOUNTING - D10 – SPRING 2016 – Q5
a) Step 1: Production overheads Distribution Sheet
Cost Basis Total (Rs.) Fabrication Finishing Quality Logistics
(Rs.) (Rs.) control (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 thousand ------
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)
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 20 ICAP COST ACCOUNTING – CAF 8 – AUTUMN 2017 – Q 3

Req (a) – Actual FOH Distribution Sheet

Processing Finishing Logistics Maintenance
(Rs.) (Rs.) (Rs.) (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
Departmental FOH variance
Processing Finishing
Dept. 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) (574,000) (313,600)
= under/(over) applied FOH 13,617 (5,517)

Question 21

(a) Bright Limited

Product-wise actual overheads for Shine and Glow
Step 1 – Allocation of actual overheads cost to production departments (Rs.’000)
FOH expenses Base Total Dept. A Dept. Dept. Dept.
B X Y
Salaries and wages No. of 115,000 69,000 23,000 11,500 11,500
employees
Depreciation of Cost of 80,000 50,000 30,000 - -
machinery machine
Building insurance Floor area 25,000 12,500 5,000 5,000 2,500
Electricity Floor area 60,000 30,000 12,000 12,000 6,000
280,000 161,500 70,000 28,500 20,000
Service departments:
Dept. Y 75:15:10 15,000 3,000 2,000 (20,000)

Dept. X 80:20 24,400 6,100 (30,500) -

Departmental FOH 200,900 79,100 0 0
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST
Step 2 – Allocation of actual cost to Shine and Glow
Departments Base Total Dept. A Dept.
B
Department A Units produced 200,900 125,563 75,337
Department B Units produced 79,100 49,437 29,663
280,000 175,000 105,000
(b) Product-wise under/over absorbed production overheads (Rs.’000)
Shine Glow
FOH absorbed @ Rs. 1800 per unit & Rs. 1,700 per unit 180,000 102,000
FOH actual cost (175,000) (105,000)
FOH over/(under) absorbed variance 5,000 (3,000)

Question 22 ICAP Past Papers CAF-03 – Spring 2022 - Q5

California Limited
Departmental FOH absorption rates
Step 1 – Allocation of budgeted overheads cost to production departments (Rs.’000)
FOH expenses Base Total Dept. Dept. Dept. Dept.
AB AC SA SB
Factory rent Floor area 2,500 1,250 938 187 125
Fuel cost @ Rs. 45 Machine 1,800 990 810 - -
per machine hour hours
Depreciation Machine 2,000 1,294 706 - -
hours
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 thousands) 22 10
FOH rate per hour 196.14 308.49
(W1) Fuel cost per machine hour
Total Fuel cost = Rs. 1,800,000
Fuel cost per machine hour for dept. AB = X
Fuel cost per machine hour for dept AC = 1.50X
Machine hours for AB = 22,000
Machine hours for AC = 12,000

(22,000X) + (12,000 x 1.5X) = 1800,000

X = 45 or Rs. 45 per machine hour
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

(W2) Simultaneous equation

Let X = Cost of service department SA
Let Y = Cost of service department SB
X = 270 + 0.15Y
Y = 180 + 0.20 X
Solve the equation simultaneously then
X = 306
Y = 242
Question 23 ICAP Past Papers CAF-03 – Autumn 2022 – Q4
a) Venus Limited
Examples of bases of absorption may include:
➢ Direct labour hours ➢ Machine hours
➢ Units of product ➢ Direct labour cost
➢ Direct material cost ➢ Prime cost
How bases are selected?
The selected base for overheads absorption rate depends upon nature of business and it
may vary from company to company, department to department and cost center to cost
center
Note: Only two examples were required so you may write any two bases.
b) Revised overheads absorption rate for next year
Revised overheads absorption rate = Budgeted factory overheads cost of all machines (W2)
Budgeted productive machine hours of all machines (W1)
= Rs 5,140,800
7,010 Machine hours
=Rs. 733.35 per machine hour
(W1) Budgeted productive machine hours
Hours
Productive machine hours of existing machines (7,500 hours – 450 hours) 7,050
Less: Productive machine hours of one old machine (2,500 hours – 150 hours) (2,350)
Add: Productive machine hours of one new machine (2,500 hours – 190 hours) 2,310
= Budgeted productive machine hours (after new machine) 7,010
(W2) Budgeted factory overheads costs of all machines
Rs.
Factory overheads cost of existing machines (Rs. 850 per hour x 7,050 hours) 5,992,500
Less: Factory overheads cost of existing old machine (Rs. 850 per hour x 2,350 hrs) (1,997,500)
3,995,000
Add: Factory overheads cost of new machine
Salary of production line manager (Rs. 30,000 x 12) 360,000
Electricity consumption cost (Rs. 80 per hour x 2,310 hours) 415,800
Annual maintenance cost 200,000
Indirect labour cost 50,000
Depreciation of new machine (Rs. 1200,000/10 years) 120,000
= Budgeted productive machine hours 5,140,800
 CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST

Question 24 ICAP Past Papers CAF-03 – Spring 2023 – Q9

CHAPTER 2: ACCOUNTING FOR FACTORY OVERHEADS COST