The following information are available for the three machines of a manufacturing department of KBC Ltd.: Preliminary estimates of expenses (per…

CA Intermediate · Cost and Management Accounting · MTP · May 2024
The following information are available for the three machines of a manufacturing department of KBC Ltd.: Preliminary estimates of expenses (per annum) Total Machines (₹) P (₹) Q (₹) R (₹) Depreciation 20,000 7,500 7,500 5,000 Spare parts 10,000 4,000 4,000 2,000 Power 40,000 Consumable stores 10,000 4,000 3,000 3,000 Insurance of machinery 8,000 Indirect labour 20,000 Building maintenance expenses 20,000 Annual interest on capital outlay 60,000 25,000 25,000 10,000 Monthly charge for rent and rates 10,000 Salary of foreman (per month) 20,000 Salary of Attendant (per month) 5,000 (The foreman and the attendant control all the three machines and spend equal time on them.) The following additional information is also available: Machines P Q R Estimated Direct Labour Hours 1,00,000 1,50,000 1,50,000 Ratio of K.W. Rating 3 2 3 Floor space (sq. ft.) 40,000 40,000 20,000 There are 14 holidays besides Sundays in the year, of which two were on Saturdays. The manufacturing department works 8 hours in a day but Saturdays are half days. All machines work at 85% capacity throughout the year and 2% is reasonable for breakdown. You are required to : CALCULATE predetermined machine hour rates for the above machines after taking into consideration the following factors: An increase of 15% in the price of spare parts.An increase of 25% in the consumption of spare parts for machine 'Q' & 'R' only.20% general increase in wages rates.An 10% decrease in the consumption of consumable stores.

Suggested Answer and Working Notes:

Computation of Machine Hour Rate Basis of apportionment Total (₹) Machines P (₹) Q (₹) R (₹) (A) Standing Charges Insurance Depreciation Basis 8,000 3,000 3,000 2,000 Indirect Labour Direct Labour 24,000 6,000 9,000 9,000 Building Maintenance expenses Floor Space 20,000 8,000 8,000 4,000 Rent and Rates Floor Space 1,20,000 48,000 48,000 24,000 Salary of foreman Equal 2,40,000 80,000 80,000 80,000 Salary of attendant Equal 60,000 20,000 20,000 20,000 Total standing charges 4,72,000 1,65,000 1,68,000 1,39,000 Hourly rate for standing charges 90.36 92.00 76.12 (B) Machine Expenses: Depreciation Direct 20,000 7,500 7,500 5,000 Spare parts Final estimates 13,225 4,600 5,750 2,875 Power K.W. rating 40,000 15,000 10,000 15,000 Consumable Stores Direct 9,000 3,600 2,700 2,700 Total Machine expenses 82,225 30,700 25,950 25,575 Hourly Rate for Machine expenses 16.81 14.21 14.01 Total (A + B) 5,54,225 1,95,700 1,93,950 1,64,575 Machine Hour rate 107.17 106.22 90.13 Working Notes: (i) Calculation of effective working hours: No. of holidays 52 (Sundays) + 14 (other holidays) = 66Saturday (52 – 2) = 50No. of days (Work full time) = 365 – 66 – 50 = 249 Hours Full days work 249 × 8 = 1,992 Half days work 50 × 4 = 200 2,192 Hours Effective capacity 85% of 2,192 1,863 (Rounded off) Less: Normal loss of time (Breakdown) 2% 37 (Rounded off) Effective running hour 1,826 (ii) Amount of spare parts is calculated as under: P (₹) Q (₹) R (₹) Preliminary estimates 4,000 4,000 2,000 Add: Increase in price @ 15% 600 600 300 4,600 4,600 2,300 Add: Increase in consumption @ 25% 1,150 575 Estimated cost 4,600 5,750 2,875 (iii) Amount of Indirect Labour is calculated as under: Particulars ₹ Preliminary estimates 20,000 Add: Increase in wages @ 20% 4,000 24,000 (iv) Amount of Consumables Stores is calculated as under: Particulars ₹ Preliminary estimates 10,000 Less: Decrease in consumption @ 10% 1,000 9,000 (v) Interest on capital outlay is a financial matter and, therefore it has been excluded from the cost accounts.

Topics: Overheads - Absorption Costing Method

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