Omega Engineering Pvt. Ltd., a company manufacturing precision components for the automotive sector, operates three major CNC machines in its…

CA Intermediate · Cost and Management Accounting · RTP · May 2026
Omega Engineering Pvt. Ltd., a company manufacturing precision components for the automotive sector, operates three major CNC machines in its machining department—Machines X, Y, and Z. Due to a surge in customer demand and rising input costs, the company plans to revise its predetermined machine hour rates for the next financial year. The management has provided the following annual cost data for the three machines: Preliminary Estimates of Annual Expenses Particulars Total (₹) Machines X (₹) Y (₹) Z (₹) Depreciation 3,00,000 1,20,000 1,00,000 80,000 Spare parts 1,50,000 60,000 50,000 40,000 Power 5,50,000 — — — Consumable stores 1,20,000 50,000 40,000 30,000 Insurance of machinery 1,00,000 — — — Indirect labour 2,40,000 — — — Building maintenance 2,50,000 — — — Annual interest on capital outlay 1,20,000 50,000 40,000 30,000 Additional monthly information: Rent & rates:30,000 per monthSalary of Production Supervisor:60,000 per monthSalary of Machine Operator:18,000 per month The supervisor and operator oversee all three machines and spend equal time on each. The following additional information is also available: Machine Estimated Direct Labour Hours K.W. Rating Ratio Floor Space (sq. ft.) X 1,20,000 4 50,000 Y 1,60,000 3 40,000 Z 1,40,000 2 30,000 Working Conditions The plant operates 8 hours per day.Saturdays are half-days.There are 15 holidays besides Sundays, of which 3 fall on Saturdays.Machines run at 92% capacity.A 3% allowance for breakdown is considered reasonable. Management expects the following increases for the coming financial year: 1. 10% increase in spare parts prices. 2. 30% increase in spare parts consumption for Machines Y & Z only. You are required to : CALCULATE the predetermined machine hour rates for Machines X, Y, and Z after incorporating all the revisions.

Suggested Answer and Working Notes:

(a) Computation of Machine Hour Rate (A) Standing Charges Particulars Basis of Apportionment Total (₹) Machine X (₹) Machine Y (₹) Machine Z (₹) Insurance Depreciation Basis (6:5:4) 1,00,000 40,000 33,333 26,667 Indirect Labour Direct Labour Hours (6:8:7) 2,40,000 68,571 91,429 80,000 Building Maintenance Floor Space (5:4:3) 2,50,000 1,04,167 83,333 62,500 Rent & Rates Floor Space (5:4:3) 3,60,000 1,50,000 1,20,000 90,000 Salary of Supervisor Equal 7,20,000 2,40,000 2,40,000 2,40,000 Salary of Operator Equal 2,16,000 72,000 72,000 72,000 Total Standing Charges 6,74,738 6,40,095 5,71,167 Hourly Rate (Standing) 345.49 327.75 292.46 (B) Machine Expenses Particulars Basis of Apportionment Total (₹) Machine X (₹) Machine Y (₹) Machine Z (₹) Depreciation Direct 1,20,000 1,00,000 80,000 Spare Parts Revised Estimates 66,000 71,500 57,200 Power KW Rating (4:3:2) 5,50,000 2,44,444 1,83,333 1,22,222 Consumable Stores Direct 1,20,000 50,000 40,000 30,000 Total Machine Expenses 4,80,444 3,94,833 2,89,422 Hourly Rate (Machine) 246.00 202.17 148.19 Total (A + B) Machine Machine Hour Rate (₹) X 591.49 Y 529.92 Z 440.65 Working Notes: (i) Calculation of effective working hours: No. of full off-days = No. of Sunday + No. of holidays = 52 + 15 = 67 days No. of half working days = 52 days – 3 holidays = 49 days No. of full working days = 365 days – 67 days – 49 days = 249 days Total Working Hours = {(249 days × 8 hours) + (49 days × 4 hours)} = 1,992 + 196 = 2,188 hours Effective Working Hours = Total working hours × 92% - 3% for breakdown = 2,188 × 92% – 3% × (2,188 × 92%) = 2,012.96 – 60.39 = 1,953 hours (ii) Amount of spare parts is calculated as under: Machine X Y Z Preliminary estimates 60,000 50,000 40,000 Add: Increase in price @ 10% 6,000 5,000 4,000 66,000 55,000 44,000 Add: Increase in consumption @ 30% — 16,500 13,200 Estimated cost 66,000 71,500 57,200 (iii) Interest on capital outlay is a finance cost, therefore it has been excluded from the cost accounts.

Topics: Overheads - Absorption Costing Method

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