Arnav Ltd. has three production departments M, N and O and two service departments P and Q. The following particulars are available for the month of…

CA Intermediate · Cost and Management Accounting · MTP · May 2025
Arnav Ltd. has three production departments M, N and O and two service departments P and Q. The following particulars are available for the month of September, 2024: (₹) Lease rental 35,000 Power & Fuel 4,20,000 Wages to factory supervisor 6,400 Electricity 5,600 Depreciation on machinery 16,100 Depreciation on building 18,000 Payroll expenses 21,000 Canteen expenses 28,000 ESI and Provident Fund Contribution 58,000 Followings are the further details available: Particulars M N O P Q Floor space (square meter) 1,200 1,000 1,600 400 800 Light points (nos.) 42 52 32 18 16 Cost of machines (₹) 12,00,000 10,00,000 14,00,000 4,00,000 6,00,000 No. of employees (nos.) 48 52 45 15 25 Direct Wages (₹) 1,72,800 1,66,400 1,53,000 36,000 53,000 HP of Machines 150 180 120 - - Working hours (hours) 1,240 1,600 1,200 1,440 1,440 The expenses of service department are to be allocated in the following manner: M N O P Q P 30% 35% 25% - 10% Q 40% 25% 20% 15% - You are required to CALCULATE the overhead absorption rate per hour in respect of the three production departments.

Suggested Answer and Working Notes:

Primary Distribution Summary Item of cost Basis of apportionment Total (₹) Production Dept. M (₹) N (₹) O (₹) Service Dept. P (₹) Q (₹) Lease rental Floor space (6:5:8:2:4) 35,000 8,400 7,000 11,200 2,800 5,600 Power & Fuel HP of Machines x Working hours (93: 144: 72) 4,20,000 1,26,408 1,95,728 97,864 - - Supervisor's wages* Working hours (31:40:30) 6,400 1,964 2,535 1,901 - - Electricity Light points (21:26:16:9:8) 5,600 1,470 1,820 1,120 630 560 Depreciation on machinery Value of machinery (6:5:7:2:3) 16,100 4,200 3,500 4,900 1,400 2,100 Depreciation on building Floor space (6:5:8:2:4) 18,000 4,320 3,600 5,760 1,440 2,880 Payroll expenses No. of employees (48: 52:45: 15: 25) 21,000 5,448 5,903 5,108 1,703 2,838 Canteen expenses No. of employees (48:52:45: 15: 25) 28,000 7,265 7,870 6,811 2,270 3,784 ESI and PF contribution Direct wages (864: 832: 765: 180: 265) 58,000 17,244 16,606 15,268 3,593 5,289 6,08,100 1,76,719 2,44,562 1,49,932 13,836 23,051 * Wages to supervisor is to be distributed to production departments only. Let 'P' be the overhead of service department P and ‘Q' be the overhead of service department Q. P = 13,836 + 0.15 Q Q = 23,051 + 0.10 P Substituting the value of Q in P we get P = 13,836 + 0.15 (23,051 + 0.10 P) P = 13,836 + 3,457.65 + 0.015 P 0.985 P = 17,293.65 P = 17,557 Q = 23,051 + 0.10 × 17,557 Q = 24,806.70 or 24,807 Secondary Distribution Summary Particulars Total (₹) M (₹) N (₹) O (₹) Allocated and Apportioned over-heads as per primary distribution 5,71,213 1,76,719 2,44,562 1,49,932 P (90% of 17,557) 15,801 5,267 6,145 4,389 Q (85% of 24,807) 21,086 9,923 6,202 4,961 1,91,909 2,56,909 1,59,282 Overhead rate per hour M N O Total overheads cost (₹) 1,91,909 2,56,909 1,59,282 Working hours 1,240 1,600 1,200 Rate per hour (₹) 154.77 160.57 132.74

Topics: Overheads - Absorption Costing Method

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