A machine shop has 6 identical drilling machines manned by 4 operators. The machine cannot be worked without an operator wholly engaged on it. The…

CA Intermediate · Cost and Management Accounting · PYQS · January 2026
A machine shop has 6 identical drilling machines manned by 4 operators. The machine cannot be worked without an operator wholly engaged on it. The original cost of all these machines works out to 3,00,000. These particulars are furnished pertaining to a period of 4 months: Normal available hours per month 156 hrs. Absenteeism (without pay) hours 9 hrs. Leave (with pay) hours 10 hrs. Normal idle time unavoidable hours 5 hrs. Average rate of wages per worker for 6 hours a day 450 Production bonus estimated 20% on wages Value of power consumed 20,500 Supervision and indirect labour 8,500 Lighting and electricity 4,500 These particulars are furnished for a year: Repairs and maintenance including consumables - 2% per annum of value of machines. Depreciation - 15% per annum of original cost. Other sundry works expenses -12,000 p.a. General management expenses allocated -24,000 p.a. The machine shop has taken an annual insurance for all 6 machines also. Given that the comprehensive machine hour rate for 4 months period is 125 per machine hour. You are required to find out the total amount of annual insurance premium.

Suggested Answer and Working Notes:

Computation of Amount of Annual Insurance Premium Particulars Amount (₹) Operator's wages (Refer Working Note 2) 1,84,500 Production bonus (20% on wages) 36,900 Power consumed 20,500 Supervision and indirect labour 8,500 Lighting and electricity 4,500 Repairs & maintenance (2% × ₹ 3,00,000 × 1/3) 2,000 Depreciation (15% × ₹ 3,00,000 × 1/3) 15,000 Other sundry works expenses (₹ 12,000 × 1/3) 4,000 General management expenses (24,000 × 1/3) 8,000 Total Overhead of Machine shop without Insurance Premium 2,83,900 Total Insurance Premium for 4 months (B.F.) 16,100 Total Overhead of Machine shop for 4 months 3,00,000 Machine hour rate = Total overheads of machine shop / Hours of machines operation Total Overhead of Machine shop = 125 x 2,400 hrs = 3,00,000 Annual Insurance Premium = 16,100 x 3 = 48,300 Working notes 1. Computation of hours, for which 4 operators are available for 4 months. For 4 months and 4 operators Normal available hours (156 x 4 months x 4 operators) 2,496 Less: Absenteeism hours (9 x 4 operators) (36) Paid hours 2,460 Less: Leave hours (10 x 4 operators) (40) Less: Idle time hours (5 x 4 operators) (20) Effective working hours 2,400 As machines cannot be worked without an operator wholly engaged on them therefore, hours for which 4 operators are available for 4 months are the hours for which machines can be used. Hence 2,400 hours represent effective working hours. 2. Computation of operator's wages Average rate of wages:450 / 6hours = 75 per hour Total wages paid to 4 operators for 4 months = 2,460 hours × ₹ 75 = 1,84,500

Topics: Overheads - Absorption Costing Method

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