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PAN African eNetwork Project

Master of Finance & Control


Cost Accounting Semester - II
Dr. Adarsh Arora
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Topics Covered Stock valuation methods Labour and overhead costing Types of labour Difference between direct and indirect labour Labour costs Control over labour costs Causes of labour turnover Idle time Over time Wage systems Piece work Incentive wage plans

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Definition and classification of overheads Functional classification of overheads Types of departments Overhead allocation Bases of apportionment Machine hour rate Advantages and disadvantages of overheads Application of cost accounting Job costing, advantages and disadvantages Job cost sheets MCQs

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PRICING/VALUATION OF INVENTORIES There are different ways of valuing the inventories and knowledge of these methods of valuing stocks is essential for an efficient inventory management process. The following methods can be adopted to value the raw material: First-In-First-Out (FIFO): When a firm adopts the FIFO method to price its raw material, the issue of material from the stores will be in the order which it was received. Thus the pricing will be based on the cost of material that was obtained first. Last-In-First-Out (LIFO): In the LIFO method, the material issued will be priced based on the material that
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has been purchased recently. Weighted Average Cost Method: The pricing of materials will be done on weighted average basis (weights will be given based on the quantity). Standard Price Method: Material is priced based on a standard cost which is predetermined. When the material is purchased the stock account will be debited with the standard price. The difference between the purchase price and the standard price will be carried into a variance account. Replacement/Current Price Method: In this method, material is priced at the value that is realizable at the time of the issue.
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Illustration:The following information is extracted from the stores ledger of M/s Meena Ltd. Material: X Opening Stock: NIL Purchases: July 1 175 units @ Re.1 per unit July 12 175 units @ Re.2 per unit Issues: July 21 105 units July 30 70 units

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Complete the receipts and issues valuation by adopting the FIFO, LIFO and Weighted Average Method. If the standard price is Rs.1.25 per unit for the year and the replacement costs of the material on July 21 and July 30 are Rs.1.25 and Rs.1.75 respectively, then show the stock ledger account using the standard price method and the replacement price method.

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FIFO

Receipts Date Particulars Qty Rate Value Qty

Issues Rate Value Qty

Balance Value

1-Jul

Purchase

175 units

Re 1

175

175

175

12-Jul

Purchase

175 units

Re 2

350

350

525

21-Jul

Issue

105 units

105

105

245

420

30-Jul

issue

70 units

70

70

175

350

Value of Closing stock:- 175 Units of Rs 350


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LIFO

Receipts

Issues

Balance

Date

Particulars

Qty

Rate

Value

Qty

Rate

Value

Qty

Value

1-Jul

Purchase

175 units Re 1

175

175

175

12-Jul

Purchase

175 units Re 2

350

350

525

21-Jul

Issue

105 units

105

210

245

315

30-Jul

issue

70 units

70

140

175

175

Value of Closing stock:- 175 Units of Rs 175


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Weighted Average Method

Receipts Date 1-Jul 12-Jul 21-Jul Particulars Purchase Purchase Issue Qty Rate Value 175 350 105 Qty

Issues Rate Value Qty 175 350 1.5 157.5 245

Balance Rate 1 1.5* 1.5 Value 175 525 367.5

175 units Re 1 175 units Re 2 105 units

30-Jul

issue

70 units

70

1.5

105

175

1.5

262.5

* Wighted Average Rate:

= 1.5

Value of Closing stock:- 175 Units of Rs 262.5

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Standard Price Method

Receipts

Issues

Balance

Date

Particulars

Qty

Rate

Value

Qty

Rate

Value

Qty

Value

1-Jul

Purchase

175 units

Re 1

175

175

175

12-Jul

Purchase

175 units

Re 2

350

350

525

21-Jul

Issue

105 units

105

1.25

131.25

245

393.75

30-Jul

issue

70 units

70

1.25

87.5

175

306.25

Value of Closing stock:- 175 Units of Rs 306.25

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Current Price/Replacement Method


Receipts Issues Balance

Date

Particulars

Qty

Rate

Value

Qty

Rate

Value

Qty

Value

1-Jul

Purchase

175 units

Re 1

175

175

175

12-Jul

Purchase

175 units

Re 2

350

350

525

21-Jul

Issue

105 units

105

1.25

131.25

245

393.75

30-Jul

issue

70 units

70

1.75

122.5

175

271.25

Value of Closing stock:- 175 Units of Rs 271.25

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Q3 The Ganges Pump Company uses about 75,000 valves per year and the usage is fairly constant at 6250 per month. The valves cost Rs 1.50 per unit when bought in quantities and the carrying cost is estimated to be 20% of average inventory investment on the annual basis. Cost of placing an order is Rs 18. It takes 45 days to receive delivery from the date of an order and a safety stock of 3250 valves is desired. You are required to determine: The most economic order quantity and frequency of order The order point The most economic order quantity if the valves cost Rs 4.50 each instead of Rs 1.50 each.
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Solution:(i) EOQ = 2*75000*18 = 27,00,000 1.50*20% 0.30 =90,00,000 = 3,000 Units or 25 orders per year. (ii) Order Point = Safety Stock + (Average Rate of consumption * Lead Time) = 3,250 + (6250 units p.m. *1.5 months) = 3,250 + 9,375 = 12,625 units (iii) EOQ when cost per valve is Rs 4.50 EOQ = 2*75000*18 = 27,00,000 4.50*20% 0.90 = 30,00,000 = 1733 units approx., or 43 orders approx. per year.
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Q4 From the following details of stores receipts & issues of Material EXA in a manufacturing unit, prepare the stock ledger using LIFO and FIFO of valuing the issues: Nov,1 Opening stock 200 units @ Rs 5 each Nov, 3 Issues 1500 units to production Nov, 4 Received 4500 units @ Rs 6 Nov, 8 Issued 1600 units to production Nov, 9 Returned to stores 100 units by production department (from the issue of Nov, 3) Nov, 16 Received 2400 units @6.5 each Nov, 19 Returned to the supplier 200 units out of the quantity received received on Nov, 4. Nov, 20 Received 1000 units @ Rs 7 each
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Nov, 24 Issued to production 2100 units. Nov, 27 Received 1200 units @ Rs 7.50 each. Nov, 29 Issued to production 2800 units.

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LABOUR & OVERHEAD COSTING INTRODUCTION Labour cost is a second major element of cost. Under the present political conditions with a restive labour in organized industry, it is very difficult to reduce labour cost. Therefore, proper control and accounting for labour cost is one of the most important problems of business enterprise. But control of labour cost presents certain practical difficulties unlike the control of material cost. Labour is the most perishable commodity and as such should be effectively utilized immediately. Labour, once lost, cannot be recouped and is bound to increase the cost of production. On the other hand, materials, being
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durable, can be used as and when required and can be stored without having to incur immediate loss. TYPES OF LABOUR Just like materials, labour is also two types (a) direct labour, and (b) (b) indirect labour. Direct Labour Direct labour is that labour which is directly engaged in the production of goods or services and which can be conveniently allocated to the job, process or commodity unit. For example, labour engaged in making the bricks in a kiln
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is direct labour because charges paid for making, 1,000 bricks can be conveniently allocated to the cost of 1,000 bricks. Indirect Labour Indirect labour is that labour which is not directly engaged in the production of goods and services but which indirectly helps the direct labour engaged in production. The examples of indirect labour are mechanics, supervisors, chowkidars, sweepers, foremen, watchmen, timekeeper, cleaners, repairers etc. the cost of indirect labour cannot be conveniently allocated to a particular job, order, process or article.

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It may be mentioned that it may not always be possible to classify individual workers as direct labour or indirect labour. For example, a worker who is engaged in actual production may sometime required to do supervisory work. In such a case, the time devoted to actual production should be treated as direct labour and that spent on supervisory work taken as indirect labour.

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Distinction between direct and indirect labour The distinction between direct and indirect labour must be observed carefully because payment of direct labour is a direct expenditure and is a part of prime cost whereas payment of indirect labour is an item of indirect expenditure and is shown as works, office, selling and distribution expenditure according to the nature of the time spent by the indirect worker.

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LABOUR COSTS Labour costs represent the various items of expenditure incurred on workers by the employer and would include the following: Monetary Benefits e.g. : (i) Basic Wages (ii) Dearness Allowance; (iii) Employers Contribution to Provident Fund; (iv) Employers Contribution to Employees State Insurance (ESI) Scheme; (v) Production Bonus; (vi) Profit Bonus; (vii) Old Age Pension; (viii) Retirement Gratuity. Fringe Benefits or Labour Related Costs e.g.: (i) Subsidised Food; (ii) Subsidised Housing; (iii) Subsidised Education to the children of workers; (iv) Medical Facilities; (v) holidays pay; (vi) Recreational Facilities. Copyright Amity University

Fringe benefits are indirect forms of employee compensation. The total of these benefits given to workers should be sufficient enough to attract and retain the labour force. In other words, the will to work among workers should be created with the consequent increase in efficiency.

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CONTROL OVER LABOUR COSTS Labour costs constitute a significant portion of the total cost of a product. Labour cost may be excessive due to inefficiency of labour, high labour turnover, idle time and unusual overtime work, inclusion of bogus workers in the wages sheet and many other related factors. Inefficiency of labour is also a cause of excessive material and overhead costs. Therefore, economic utilization of labour is a need of the present day industry to reduce the cost of production of the products manufactured or services rendered. Management is interested in labour costs on account of the following: To use direct labour cost as a basis for increasing the
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efficiency of workers; To identify direct labour cost with products, orders, jobs or processes for ascertaining the cost of every product, order, job or process; To use direct labour cost as a basis for absorption of overhead, if percentage of direct labour cost to overhead is to be used as a method of absorption of overhead; To determine indirect labour cost to be treated as overhead; and To reduce the labour turnover.

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Hence, control of labour costs is an important objective of management and the realization of this objective depends upon the cooperation of every member of the supervisory force from the top executive to the foreman. From functional point of view, control of labour costs is effected in a large industrial concern by the coordinated efforts of the following six departments: Personnel Department, Engineering Department, Rate or Time and Motion Study Department, Time-keeping Department, Pay-roll Department, and Cost Accounting Department.
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ILLUSTRATION 1. From the following information, calculate the labour turnover rate and labour flux rate: Number of workers at the beginning of the year 3800 Number of workers at the end of the year 4,200 During the year 40 workers leave while 160 workers are discharged. 600 workers are required during the year, of these 150 workers are recruited because of leavers and the rest are engaged in accordance with an expansion scheme.

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SOLUTION:Average number of workers during the year = 3,800 +4,200 = 4,000 2 Labour Turnover Rate = Number of workers replaced during the year x 100 Average number of workers during the year 150 x100 4,000 = 3.75%

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Labour Flux Rate = Number of additions + separations during the year x 100 Average number of employees during the year 600+200 x100 4,000 = 20%

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Causes of Labour Turnover The various causes of labour turnover can be classified under the following three heads: 1. Personal causes; 2. Unavoidable causes ; and 3. Avoidable causes. Personal Causes:- Workers may leave the organization purely on personal grounds, e.g. Domestic troubles and family responsibilities. Retirement due to old age. Accident making workers permanently incapable work. Women workers may leave after marriage in order to take up household duties.
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Dislike for the job or place. Death. Workers finding better jobs at some other places. Workers may leave just because of their roving nature. Causes involving moral turpitude.

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Unavoidable Causes. In certain circumstances it becomes necessary for the management to ask some of the workers to leave the organization. These circumstances be as follows: Workers may be discharged due to insubordination or inefficiency. Workers may be discharged due to continued or ling absence. Workers may be retrenched due to shortage of work.

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Avoidable Causes:(a) Low wages and allowances may induce workers to leave the factory and join after factories where higher wages and allowances are paid. (b) Unsatisfactory working conditions e.g., bad environment, inadequate ventilation etc. leading to strained relations with the employer. (c) Job dissatisfaction on account of wrong placement of workers may become a cause of leaving the organization. (d) Lack of accommodation, medical, transport and recreational facilities. (e) Long hours of work. (f) Lack of promotion opportunities.
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(g) Unfair methods of promotion. (h) Lack of security of employment. (i) Lack of proper training facilities. (j) Unsympathetic attitude of the management may force the workers to leave.

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IDLE TIME As already observed, there is bound to be some difference between the time booked to different jobs or work orders & gate time. The difference of this time is known as idle time. Idle time is that time for which the employer pays, but from which he obtains no production. For example, if out of eight hours that a worker is supposed to put in the factory, the workers job card shows only seven hours spent on jobs, one hour will be idle time in such a case. Idle time is of two types: Normal Idle Time , and Abnormal Idle Time.

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Normal Idle time:- It is unavoidable, of normal nature and is inherent in production environment. This may be due to: Time lost in moving from one job to another Time lost in waiting for materials or instructions Temporary absence from duty because of minor accidents, personal breaks tea breaks etc. Time taken in traveling form one dept to another dept. Abnormal Idle Time:- This is not caused by usual production routine. It may be: Time lost through the break down of machinery Time lost through lack of materials Bottlenecks in production, resulting in a temporary absence of parts for further processing.
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Strikes, lockout, fire etc. OVERTIME:- According to Factories Act, 1948, every worker is to be paid overtime at a higher rate, generally at double the normal wage rate, if he is required to work more than 8 hrs a day. Accounting Treatment: Where the overtime work becomes necessary to complete a job within a specified time limit, the overtime premium should be directly charges to the job concerned by way of direct wages. Where the overtime work becomes necessary to meet the increased seasonal demand, then it is directly charged to the job.
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Where overtime work becomes necessary on account of faulty planning in a dept, the cost should be treated as an item of dept overheads. Methods of Remuneration Time Wage System Piece Wage System Incentive/Bonus System WAGE SYSTEMS An important aspect of labour cost control is a wage system designed primarily for exercising management control over labour.
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The following objectives should be considered in the selection of a wage system: Acceptance by employees to avert slowdowns and work stoppages. Provision for flexibility. Provision for economy in administration. Supplying of labour statistics for use in industrial relations and for trade associations, government agencies, and competitors. Stabilisation of labour turnover. Minimising of absenteeism. Provision for incentive plans.
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PIECE WORK Under this method, a fixed rate is paid for each unit produced, job performed or number of operations completed, and the workers wages thus depend upon his output and not upon time he spends in the factory. Piece-rates are of advantage to management in the following respects: Managerial supervision is not much needed for production, since each worker assumes responsibility for his own time output. Higher production reduces overhead costs per unit of output. Labor costs can be computed in advance of production with the aid of fixed rate unit or job.
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Labor control becomes easier by isolating workers whose work is inefficient and below the minimum standard requirements.

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INCENTIVE WAGE PLANS The basic purpose of an incentive wage is to induce a worker to produce more so that he can earn a higher wage and, at the same time, unit costs can be reduced. Incentive wage plans aim to ensure greater output to help control over labour costs by minimization of total coat for a given volume of production and to have a basis for reward from hours served to work accomplished. Incentive wage scheme has the following objectives: Un-interrupted and higher production without any dispute between the labour and management. Stability in labour turnover. Reducing labour absenteeism.
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Developing cooperation, mutual trust, attitude of team work among workers and between workers and supervisory staff. Control of labour cost and reduction in labour cost unit of output. Improving administrative efficiency. Accurate budgeting through reliable labour cost information. Generating workers satisfaction by avoiding work stoppages, slow down, and by providing incentive schemes.

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Incentive wage plans involve wage rates based upon various combinations of output and time and are known as differential piece-rates and bonus-plans as well. Generally, the following types of incentive plans are used: Taylor Differential Piece-rate System Merrick Differential Piece-rate System Gantt Task Bonus Plan Premium Bonus Plans ( Halsey, Halsey-Weir, Rowan, Bedaux, Emersion, etc )

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ILLUSTRATION:Illustration 1: Q4 Find out wage per hour based on the following information:Name Sohan Annual Wages 2400 Annual Bonus @ 20% of A Wages Employer contribution of P.F. @ 10% of A wages Employer contribution of E.S.I.@ 5% of A wages Total Leave permitted during the year 60 day Cost of labour welfare activities including canteen subsidy 8000/Number of workers 200
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Normal idle time 80 hrs Working days per annum 320 days of 8 hrs How will you treat, if Sohan had lost 60 hrs on some days on account of failure of power supply? Solution: Calculation of total Labour Cost for the year Wages 2,400 Bonus (20% of 2,400) 480 P.F. Contribution (10% of 2400) 240 ESI contribution (5% of 2400) 120 Gross wages (Total) 3240

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Cost of Amenities per head (8000/200) 40 Total Labour cost 3280 Calculation of effective working hour per annum Total Working days 320 Less Total leave days 60 Effective working days 260 Total Hors per day (260*8) 2,080 Less: Normal idle time (in hours) 80 effective hours per annum 2,000 Labour cost per hour = Rs 3,280/2,000= Rs 1.64 Loss due to idle time = 60hours @ RS 1.64 p.h. = Rs 98.40 Loss of working hours due to failure of power supply in an
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abnormal loss & hence Rs 98.40 will be charged to costing Profit & Loss Account.

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DEFINITION & CLASSIFICATION OF OVERHEAD The costs attributable to a cost center or cost unit can be classified into two categories direct and indirect. The costs which can be directly identified with a cost unit or cost center is called as Direct/Prime Cost. The aggregate of indirect costs such as material cost, indirect wages and indirect expenses is called overhead. In other words, any expenditure over and above prime cost is known as overhead. Cost classification It involves two steps: (i) the determination of the class or groups into which the overhead costs are subdivided; (ii) the actual process of classification of the various
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expenses. The classification of overhead costs depends on the type and size of business, nature of product or services rendered and the management policy. The various types of classifications are: Functional Classification, Classification with regard to behavior of the expenditure, and Element-wise classification. FUNCTIONAL CLASSIFICATION OF OVERHEADS Classification of overhead expenses with reference to major activity centers of a concern is called functional classification. As per this classification the overhead expenses can be classified as follows:Copyright Amity University

1. Manufacturing or Production or Works Overhead All the indirect expenses incurred by the operations of the manufacturing divisions of a concern are classified as manufacturing overhead. Examples of such expenses are depreciation, insurance charges on fixed assets like plant and machinery, stores, repairs and maintenance of fixed assets, electricity charges, fuel charges, factory rent, etc. 2. Administration Overhead All the expenses incurred towards the control and administration of an undertaking are called Administration Overhead. Example:- Office rent, salaries and wages of clerks, secretaries and accountants, postage, telephone,
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general administration expenses, depreciation and repairs of office building, etc. 3. Selling and Distribution Overhead The cost incurred towards marketing, distribution and sales is called selling and distribution overhead. It includes sales, office expenses, salesmens salaries and commission, showroom expenses, advertisement charges, samples and free gifts, warehouse rent, packaging expenses, transportation cost, etc. 4. Research and Development Expenses The costs incurred for researching on new and improved products, new application of materials or improved methods is called research costs. Development costs are incurred towards commercial application of the discoveries made. Copyright Amity University

CLASSIFICATION WITH REGARD TO BEHAVIOR OF EXPENDITURE Based on the behavior, the overheads can be classified into (a) Fixed overhead, (b) Variable overhead, and (c) Semi-variable overhead. 1. Fixed overhead Those costs remain constant regardless of the changes in the volume of activity. Examples: rent, depreciation, etc. 2. Variable overhead Variable overhead cost varies with changes in volume of activity. Example, material cost, labor cost, etc. Copyright Amity University

3. Semi variable overhead Semi variable overhead remains fixed up to a certain activity level, but once that level is exceeded, they vary with the volume. Examples: salary of an employee (fixed amount plus overtime depending on the overtime hours), telephone charges.

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TYPES OF DEPARTMENTS The main departments of a manufacturing concern are: Production departments:- The process of manufacturing is carried on in these department. Service departments:- Service departments render a particular type of service to the other departments. For example, repairs and maintenance, electricity, etc. Partly producing departments:- A department may normally be service department, but sometimes does some productive work, so it becomes partly producing department. For example, a carpentry shop which is mainly responsible for the repairs and upkeep of sundry fixtures and fittings may occasionally be required to manufacture packing boxes for direct charges to outturn, will be a partly producing department. Copyright Amity University

OVERHEAD ALLOCATION The next step is primary distribution of overhead, that is the allocation and apportionment of expenses to cost centers. Tracing and assigning accumulated cost to one or more cost centers or cost units is called cost allocation. For example, the cost of repairs and maintenance of a particular machine is charged to that particular department wherein such machine is located. Certain costs cannot be traced to a particular cost unit or cost center. The proportionate allotment of costs (which cannot be identified wholly with a particular department) over two or more cost centers or units is called cost apportionment.
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Bases of Apportionment Apportionment of overhead costs to production and service departments and then reapportionment of service departments costs to other service and production departments should be done on some suitable equitable basis. The following are the main bases of overhead apportionment used in manufacturing concerns: Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses incurred for each department respectively. Examples are overtime premium of workers engaged in a particular department, power when separate meters are available, jobbing repairs, etc.
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Direct Labor Hours: Under this basis, the overhead expenses are distributed to various departments in the ratio of total number of labor hours worked in each department. For example, administrative salaries and particularly salaries of the supervisors are apportioned on the basis of labor hours worked. This is so because time is an element of cost in these cases. Direct Wages: According to this basis, expenses are distributed amongst the departments in the ratio of direct wage bills of the various departments. Examples are holiday pay , Fringe benefits, ESI and PF contribution to workers etc. Number of Workers: The total number of workers working in each department is taken as a basis for
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apportioning overhead expenses amongst departments. Examples are supervision costs, time keeping expenses etc. Relative Areas of Departments Capital Values Light Points Kilowatt Hours Technical Estimates

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Reapportionment of Service Department Costs to Production Departments. The reapportionment of service department costs to the production departments or the cost centers is known as Secondary Distribution. Basis of apportionment of service cost can be tabulated as follows:Service Department Cost 1. 2. Maintenance Department Payroll or timekeeping Basis of Apportionment Hours worked for each department Total labor or machine hours or number of employees in each department Rate of labor turnover or number of employees in each department

3.

Employment or personnel department

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4. 5. 6. 7. 8.

Storekeeping department Purchase department

No. of requisitions or value of materials of each department No. of purchase orders or value of materials for each department

Welfare, ambulance, canteen service, No. of employees in each recreation room expenses department Building service department Relative area in each department Internal transport service or overhead Weight, value graded product crane service handled, weight and distance traveled Transport department Crane hours, truck hours, truck mileage, truck tonnage, truck tonne-hours, tonnage handled, number of packages Power House (Electric power cost) Wattage, horse power, horse power machine hours, number of electric points, etc.

9.

10.

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Machine Hour Rate Machine hour rate is the cost of running a machine per hour. This method is suitable when the job is predominantly performed by machines. Machine hour rate is calculated by dividing the total running expenses of a machine during a particular period by the number of hours the machine is estimated to work during the period. Machine hour rate should be calculated for a machine or group of machines as a cost center. Calculation of Machine Hour Rate All the overheads relating to machine or machines, treated as a separate cost center, are identified.

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Overheads relating to a machine can be divided into two parts, fixed or standing overhead and variable overheads. Standing charges are those expenses which remain constant irrespective of the usage of the machine. For example, Rent and Rates, Insurance, etc. Variable expenses such as power, fuel, repairs, etc. vary with the use of the machine. Fixed charges estimated for a period for a machine is divided by the total number of normal working hours of that machine during the period in order to arrive at the hourly rate for fixed charges. The total of standing charged and the variable expenses will give the machine hour rate. Comprehensive machine hour rate can be calculated by adding the wages of the machine operators to the machine hour rate.
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Sometimes, supplementary rate is used for the calculation of machine hour rate. This method is used for correcting any error in the calculation of machine hour rate.
Expenses Standing Charges
1.

Basis

Rent and rates

Floor area occupied by each machine including the surrounding space. The number of points used plus cost of special lighting or heating for any individual machine, or according to floor area occupied by each machine. Estimated time devoted by the supervisory staff to each machine.

2.

Heating and Lighting

3.

Supervision

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4. Lubricating Oil and Consumable Stores 5. Insurance 6. Miscellaneous expenses Machine Expenses 1. Depreciation

On the basis of past experience. Insurance value of each machine Equitable basis depending upon facts.

2. Power

3. Repairs

Cost of machine (including cost of any standby equipment such as spare motors, switchgears, etc.) less residual value spread over its working life. Actual consumption as shown by meter readings or estimated consumption ascertained from past experience. Cost of repairs spread over its working life.

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Advantages It is more scientific, practical and accurate method of recovery of manufacturing overheads. Comparison of relative efficiencies and cost of operating different machines can be made by this method. It helps the management in decision-making. Idle time of machines, if any, can be detected. Disadvantages The use of this method increases the cost of accounting procedure. This method is not useful when blanket rate is used. It gives inaccurate results if the use of labor is equally important.
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It does not take into account expenses that are not proportionate to the working hours of machine. Illustration 5 A Compute comprehensive machine hour rate from the following data:a. Cost of machine to be depreciated Rs.2,00,000; Life 10 years; Depreciation on straight line. b. Departmental overheads (annual):
Rs. Rent Heat and Light Supervision
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40,000 20,000 1,30,000

c.

Departmental Area 60,000 square meters Machine Area 2,500 square meters 25 machines in the department Annual cost of reserve equipment for the department = Rs.1,500 Hours run on production each machine (annual) = 1,750 Hours for setting and adjusting a machine (annual) = 250 Power cost Re.0.50 per hour of running time Labor: When setting and adjusting, full time attention When machine is producing, one man can look after 3 machines. Labor rate Rs.6 per hour.

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Using the machine hour rate as calculated value work out the amount of factory overhead to be absorbed on the following:
Total hours Job No. 610 Job No. 580 100 100 Production hours 70 80 time Setting up time hours 30 20

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Solution:Computation of Comprehensive Machine Hour Rate


Rs. Standing Charges: Rent, Heat and Light Supervision = 5,200 Depreciation 10% of Rs.2,00,000 Reserve Equipment Cost Labor Cost during adjustment 250 Hrs. @ Rs.6 Hourly Rate for Standing Charges setting and = 20,000 = 60 = 1,500 29,260 16.72 = 2,500 Rs.

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Machine Charges: Power Labor (1/3 of Rs.6) Comprehensive Machine Hour Rate 0.50 2.00 19.22

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APPLICATION OF COST ACCOUNTING The methods used for the ascertainment of cost of production primarily depend on the manufacturing process and the methods of measuring the departmental and finished goods. Basically, there are two methods of costing: Specific Order Costing: This method is applicable where the work consists of separate jobs, batches or contracts authorized by a specific order. Job costing, batch costing and contract costing belong to this category. Operation Costing: This method is applicable where standardized goods or services result from a sequence of repetitive and more or less continuous process or
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operation, to which costs are charged. These costs are averaged over the units produced during the period. Process costing, service costing can be included in this category.

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JOB COSTING A type of specific order costing where work is undertaken as an identifiable unit and manufactured according to customers specific requirement is known as Job Costing. Under job costing method cost of an individual job or work order is ascertained separately. Job costing is ideal where the products are dissimilar and non-repetitive in nature. It is suitable for ship building, printing, interior decoration and advertising industries. The main objectives of job costing are to establish the profit or loss on each job and to provide a valuation of WIP.

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Advantages of Job Costing The main advantages of job costing are as follows: It provides detailed analysis of costs which enable the management to determine the operating efficiency of the different factors of production. Profitability of a job can be known by following this method. It provides a useful basis for making estimates for similar jobs in the future. It is very useful in cost plus contracts. It facilitates comparison. It helps the management in minimizing the spoilage.
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Disadvantages of Job Costing It is expensive as it involves great deal of clerical work. It does not facilitate control of costs unless it is used with standard costing.

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Job Cost Sheet A job cost sheet is prepared for every job undertaken. Job cost sheet shows components of the total cost of executing a job in detail. The total cost of the job as indicated by the job cost sheet consists partly of direct cost and partly of costs arrived at by assignment, allocation, apportionment and by absorption. The bases of collection of costs are:Materials Material requisition, bill of materials or material issue analysis sheet. Wages Job card or wage analysis sheet, operation schedule.

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Direct Expenses Direct expenses vouchers. Overheads Standing order numbers or cost account numbers.

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MCQs
Q1 Depreciation charged on Plant & Machinery is 1. Future cost 2. Discretionary cost 3. Committed cost 4. Programmed cost

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Q2 Costs that are not relevant for decision-making and are not affected by increase or decrease in volume are 1. Out of pocket cost 2. Sunk cost 3. Differential cost 4. Imputed cost

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Q3 Direct Labour means: 1. Labour which can be conveniently associated with a particular cost unit 2. labour which completes the work manually. 3. Permanent labour of the production department 4. none of the above

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Q4 Labour turnover is measured by: 1. No of workers joining/No of workers in the beginning of the period. 2. No of workers left/No of works in the beginning plus at the end 3. No of workers replaced/Average no of workers 4. All of these

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Q5 The time wage system 1. Satisfies trade unions 2. Increases cost of production 3. Benefits the less efficient workers 4. None of the above

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Q6. Which of the following industries does not use process costing? 1. Oil Refineries 2. Distilleries 3. sugar 4. Aircraft Manufacturing

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Thank You
Please forward your query To: aarora@amity.edu CC: manoj.amity@panafnet.com

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