Allurgy Ltd. is into metallic tools manufacturing. It has four production departments. The work performed in every department is fairly uniform,…

CA Intermediate · Cost and Management Accounting · MTP · September 2024
Allurgy Ltd. is into metallic tools manufacturing. It has four production departments. The work performed in every department is fairly uniform, thus the manager of the company created a policy to recover the production overheads of the entire company by adopting a single blanket rate. The relevant data for a month are given below: Departments Direct Materials (₹) Direct Wages (₹) Factory Overheads (₹) Direct Labour Hours Machine Hours Budget: Operating 64,35,000 7,92,000 35,64,000 1,98,000 7,92,000 Assembly 9,66,000 24,15,000 69,000 Quality Control 4,20,000 10,50,000 30,000 Packing 12,37,500 6,93,000 4,95,000 Actual: Operating 77,22,000 9,50,400 38,61,000 2,37,600 9,50,400 Assembly 9,38,400 18,63,000 5,79,600 6,21,000 75,900 Quality Control 4,08,000 8,10,000 2,52,000 2,70,000 33,000 Packing 11,88,000 8,91,000 13,36,500 5,94,000 Additional details relating to one of the jobs during the month are also provided below: Job No. 157 Departments Direct Materials (₹) Direct Wages (₹) Direct Labour Hours Machine Hours Operating 11,880 2,376 594 1,782 Assembly 4,140 2,484 828 207 Quality Control 1,800 1,080 360 90 Packing 2,970 594 396 - During Quality Control phase of this particular Job, the company incurred certain additional expenditure of 495on direct wages as there were certain production that was not as perfect as the saleable product. The defective units were normal in nature and after rectification have been brought to the required degree of perfection. The company adds 25% on the factory cost to cover administration overheads and profit. You are required to figure out the following: COMPUTE the overhead absorption rate as per the blanket rate based on the percentage of total factory overheads to total factory wages and determine the selling price of the Job No. 157.The new manager thinks that the machinery is used to a varying degree in the different departments. Thus, it is not appropriate to follow one blanket rate for the whole company. Therefore, suggest an alternative method of absorption of the factory overheads and CALCULATE the overhead rates based on the method so suggested.DETERMINE the selling price of Job 157 based on the overhead rates calculated in (b) above.CALCULATE the department-wise under or over recovery of overheads based on the company's current policy and the method suggested in (b) above.

Suggested Answer and Working Notes:

(a) Computation of overhead absorption rate (as per the blanket rate) Department Budgeted factory Overheads (₹) Budgeted direct wages (₹) Operating 35,64,000 7,92,000 Assembly 9,66,000 24,15,000 Quality Control 4,20,000 10,50,000 Packing 12,37,500 6,93,000 Total 61,87,500 49,50,000 Overhead absorption rate = (Budgeted factory Overheads / Budgeted direct wages) × 100 = (61,87,500 / 49,50,000) × 100 = 125% of Direct wages Selling Price of the Job No. 157 Particulars Operating (₹) Assembly (₹) Quality Control (₹) Packing (₹) Total (₹) Direct Materials 11,880 4,140 1,800 2,970 20,790 Direct Wages 2,376 2,484 1,080 594 6,534 Rectification cost of normal defectives 495 495 Overheads [(125% x (6,534 + 495)] 8,786.25 Total Factory Cost 36,605.25 Add: Mark-up (25% x 36,605.25) 9,151.31 Selling Price 45,756.56 (b) As the machinery is used to a varying degree in different departments, the use of departmental rates is to be preferred. The overhead recovery rates in different departments would be as follows: (i) Operating Department: The use of machine hours is the predominant factor of production in Operating Department. Hence, machine hour rate should be used to recover overheads. The overhead recovery rate based on machine hours would be calculated as follows: Machine hour rate = Budgeted factory Overheads / Budgeted machine hours = 35,64,000 / 7,92,000 = 4.50 per hour (ii) Assembly Department: Direct labour hours is the main factor of production in Assembly Department. Hence, direct labour hour rate should be used to recover overheads. The overhead recovery rate based on direct labour hours would be calculated as follows: Direct labour hour rate = Budgeted factory Overheads / Budgeted direct labour hours = 9,66,000 / 6,90,000 = 1.40 per hour (iii) Quality Control Department: Direct labour hours is the main factor of production in Quality Control Department. Hence, direct labour hour rate should be used to recover overheads. The overhead recovery rate based on direct labour hours would be calculated as follows: Direct labour hour rate = Budgeted factory Overheads / Budgeted direct labour hours = 4,20,000 / 3,00,000 = 1.40 per hour (iv) Packing Department: Direct labour hours is the main factor of production in Packing Department. Hence, direct labour hour rate should be used to recover overheads. The overhead recovery rate based on direct labour hours would be calculated as follows: Direct labour hour rate = Budgeted factory Overheads / Budgeted direct labour hours = 12,37,500 / 4,95,000 = 2.50 per hour (c) Selling Price of Job No. 157 [based on the overhead rates calculated in (b) above] Particulars Operating (₹) Assembly (₹) Quality Control (₹) Packing (₹) Total (₹) Direct Materials 11,880 4,140 1,800 2,970 20,790 Direct Wages 2,376 2,484 1,080 594 6,534 Rectification cost of normal defectives 495 495 Overheads (refer working note) 10,672 Total Factory Cost 38,491 Add: Mark-up (25% x 38,491) 9,622.75 Selling Price 48,113.75 Working note: Overhead Statement Department Basis Hours Rate (₹) Overheads (₹) Operating Machine hour 1,782 4.50 8,019 Assembly Direct labour hour 828 1.40 1,159 Quality Control Direct labour hour 360 1.40 504 Packing Direct labour hour 396 2.50 990 Total 10,672 (d) Department-wise statement of under or over recovery of overheads (i) As per the current policy Particulars Operating (₹) Assembly (₹) Quality Control (₹) Packing (₹) Total (₹) Direct wages (Actual) 9,50,400 18,63,000 8,10,000 8,91,000 45,14,400 Overheads recovered @ 125% of Direct wages: (A) 11,88,000 23,28,750 10,12,500 11,13,750 56,43,000 Actual overheads: (B) 38,61,000 5,79,600 2,52,000 13,36,500 60,29,100 (Under)/Over recovery of overheads: (A-B) (26,73,000) 17,49,150 7,60,500 (2,22,750) (3,86,100) (ii) As per the method suggested Machine hours (Operating) Direct labour hours (Assembly) Direct labour hours (Quality Control) Direct labour hours (Packing) Total (₹) Hours worked 9,50,400 6,21,000 2,70,000 5,94,000 Rate/hour (₹) 4.50 1.40 1.40 2.50 Overhead recovered (₹): (A) 42,76,800 8,69,400 3,78,000 14,85,000 70,09,200 Actual overheads (₹): (B) 38,61,000 5,79,600 2,52,000 13,36,500 60,29,100 (Under)/Over recovery: (A-B) 4,15,800 2,89,800 1,26,000 1,48,500 9,80,100

Topics: Overheads - Absorption Costing Method

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