X Corp. produces two products, X and Y. The production division is made up of two manufacturing departments, P1 and P2, along with two support…

CA Intermediate · Cost and Management Accounting · RTP · May 2025
X Corp. produces two products, X and Y. The production division is made up of two manufacturing departments, P1 and P2, along with two support departments, S1 and S2. Pre-determined Overhead Rates are applied in the production departments to allocate factory overhead costs to the products. The rate for Department P1 is determined by direct machine hours, while Department P2's rate is based on direct labor hours. A technical assessment of the apportionment of expenses of service departments is as under: Production Department P1 P2 Service Dept. 'S1' (ratio) 3 3 Service Dept. 'S2' (ratio) 30 15 Following budgeted data is available: Factory overheads for the year: Production Departments Service Departments P1 P2 S1 S2 2,80,50,000 2,39,25,000 66,00,000 49,50,000 Details relating to production of the Products X and Y is as follows: Products X Y Budgeted output (units) 1,00,000 60,000 Budgeted raw-material cost per unit (All materials are used in Department P₁ only.) 660 825 P1: 1.5 machine hours P1: 1.0 machine hours Budgeted time required for production per unit P2: 2 Direct labour hours P2: 2.5 Direct labour hours Average wage rate budgeted in Department P2 396 per hour 412.50 per hour Following actual data is available (for the month of December, 2024): Products X Y Actual output (units) 8,000 6,000 Actual hours worked for production P1: 12,200 machine hours P2: 16,400 Direct labour hours P1: 8,300 machine hours P2: 14,800 Direct labour hours Raw materials cost 53,79,000 50,16,000 Wages paid 65,10,900 60,72,000 Actual factory overheads incurred is as follows: Production Departments Service Departments P1 P2 S1 S2 25,41,000 22,44,000 6,60,000 5,28,000 You are required to: (i) COMPUTE the pre-determined overhead rate for department P1 and P2. (ii) PREPARE a comparative statement reflecting Budgeted cost and Actual cost for production of the Products X and Y during the month of December, 2024. (iii) CALCULATE the amount of under/ over-absorption of production overheads

Suggested Answer and Working Notes:

(i) Computation of predetermined overhead rate for each production departments from budgeted data Production Department Service Department P1 P2 S1 S2 Budgeted factory overheads for the year (₹) 2,80,50,000 2,39,25,000 66,00,000 49,50,000 Allocation of service department S₁'s costs to production departments P₁ and P2 equally (₹) 33,00,000 33,00,000 (66,00,000) — Allocation of service department S2's costs to production departments P1 and P2 in the ratio of 2:1 (₹) 33,00,000 16,50,000 — (49,50,000) Total 3,46,50,000 2,88,75,000 — — Budgeted machine hours in department P1 (working note 1) 2,10,000 — Budgeted labour hours in department P2 (working note 1) — 3,50,000 Budgeted machine/ labour hour rate (₹) 165 82.50 (ii) Comparative statement reflecting Budgeted cost and Actual cost for production of the Products X and Y during the month of December, 2024 (When 8,000 and 6,000 units of products X and Y respectively were actually produced) Budgeted (₹) Actual (₹) Raw materials used in Dept. P1: X: 8,000 units × ₹ 660 52,80,000 53,79,000 Y: 6,000 units × ₹ 825 49,50,000 50,16,000 Direct labour cost (on the basis of labour hours worked in department P2) X: 8,000 units × 2 hrs. × ₹ 396 63,36,000 65,10,900 Y: 6,000 units × 2.5 hrs. × ₹ 412.50 61,87,500 60,72,000 Overhead absorbed on machine hour basis in Dept. P1: X: 8,000 units × 1.5 hrs. × ₹ 165 19,80,000 19,18,084* Y: 6,000 units × 1 hr. × ₹ 165 9,90,000 13,04,926* Overhead absorbed on labour hour basis in Dept. P2: X: 8,000 units × 2 hrs. × ₹ 82.50 13,20,000 14,45,496** Y: 6,000 units × 2.5 hrs. × ₹ 82.50 12,37,500 13,04,472** * (Refer to working note 4) ** (Refer to working note 5) (iii) Amount of under/ over-absorption of production overheads Overhead absorbed Overhead actually incurred Overhead under/ over-absorbed Overhead in Dept. P1 Product X 19,80,000 19,18,084 61,916 over-absorbed Product Y 9,90,000 13,04,926 3,14,926 under-absorbed Overhead in Dept. P2 Product X 13,20,000 14,45,496 1,25,496 under-absorbed Product Y 12,37,500 13,04,472 66,972 under-absorbed Working notes: 1. Budgeted output and hours Product X Product Y Total Budgeted output (in units) 1,00,000 60,000 Budgeted machine hours in Dept. P1 1,50,000 (1,00,000×1.5 hrs.) 60,000 (60,000×1 hr.) 2,10,000 Budgeted labour hours in Dept. P2 2,00,000 (1,00,000×2 hrs.) 1,50,000 (60,000×2.5 hrs.) 3,50,000 2. Actual output and hours Product X Product Y Total Actual output (in units) 8,000 6,000 Actual machine hours utilized in Dept. P1 12,200 8,300 20,500 Actual labour hours utilised in Dept. P2 16,400 14,800 31,200 3. Computation of actual overhead rates Production Department Service Department P1 P2 S1 S2 Actual factory overheads for the month of December, 2024 (₹) 25,41,000 22,44,000 6,60,000 5,28,000 Allocation of service Dept. S₁'s costs to production Dept. P1 and P2 equally (₹) 3,30,000 3,30,000 (6,60,000) Allocation of service Dept. S2's costs to production Dept. P₁ and P2 in the ratio of 2:1 (₹) 3,52,000 1,76,000 (5,28,000) Total 32,23,000 27,50,000 -- -- Actual machine hours in Dept. P1 (working note 2) 20,500 Actual labour hours in Dept. P2 (working note 2) 31,200 Actual machine/ labour hour rate (₹) 157.22 88.14 4. Actual overheads absorbed in Department P₁ (based on machine hours) X: 12,200 hrs × ₹ 157.22 = 19,18,084Y: 8,300 hrs × ₹ 157.22 = 13,04,926 5. Actual overheads absorbed in Department P2 (based on labour hours) X: 16,400 hrs × ₹ 88.14 = 14,45,496Y: 14,800 hrs × ₹ 88.14 = 13,04,472

Topics: Overheads - Absorption Costing Method

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