Strategic Cost Management – 22MBAFM303
Module II
Overheads: Classification and Collection, Difference between Cost Allocation and Cost
Apportionment, (Full-fledged Problems on Primary and secondary distribution,
Simultaneous equations, Absorption of Overhead, Theory on Under and Over absorption of
Overhead). Demerits of Traditional Costing, Activity Based Costing, Cost Drivers, Cost
Analysis Under ABC (Unit level, Batch Level and Product Sustaining Activities), Benefits
and weaknesses of ABC. (Theory & Problems).
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Bases of apportionment of overhead
SL No. Overhead Costs Basis of apportionment
(i) Rent & other building expenses
(ii) Lighting & heating
1 Floor area or Volume of department
(iii) Fire precautionary services
(iv) Air conditioning
(i) Fringe benefits
(ii) Labour welfare expenses
(iii) Time-keeping
2 Number of workers / Employees
(iv) Personnel Office expenses
(v) Supervision
(vi) Canteen Expenses
(i) Compensation to workers
(ii) Holiday pay
3 (iii) ESI & PF Contribution Direct wages
(iv) Fringe benefits
(v) Indirect Wages
(i) General overhead Direct Labour hours / Direct wages /
4
(ii) Sundry expenses/ other expenses machine hours
(i) Repairs of plant & machinery
(ii) Repairs of any fixed assets
5 Depreciation of plant & machinery Capital value or value of assets
(iii)
or any other fixed assets
(iv) Insurance on assets
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
(i) Power or steam consumption
6 (ii) Internal transport Technical Estimates
(iii) Managerial Salary
7 (i) Lighting Number of light points
HP hours machine / no. of machine
8 (i) Electric power
hours /volume of machine
Material handling / direct material /
9 (i) volume of material / weight of material
stores overhead
STEPS IN OVERHEAD DISTRIBUTION
Step 1:- Classification & Collection of Overhead
Step 2 :- Allocation & Apportionment of O/h to production & service department
{Primary Distribution}
Step 3 :- Re-apportionment of service department cost to production department
{Secondary Distribution}
Step 4 :- Absorption of each production department on cost unit
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
PRIMARY DISTRUBUTION
1. XYZ industry limited has 4 departments A, B, C are production departments & “D” is
service department. The actual expenses for the month of July are as follows.
Particulars Amount
Rent & Rates 15,000
Indirect wages 1,800
Depreciation of Plant & Machinery 12,000
Power 2,500
Lighting 800
Sundry Expenses 10,000
Following are the additional information
Production Department Service Department
Particulars
A B C D
Floor Space 4,000 5,000 6,000 4,000
Light Points 20 30 40 20
Direct wages 3,000 2,000 3,000 1,500
HP hours of machine 60 30 50 10
Value of machinery 60000 80,000 1,00,000 50,000
Apportion expenses to 4 departments on most equitable basis.
2. The following are obtained from PQR Ltd., for half year ended on 30 th September 2019.
Prepare departmental distribution summary.
Particulars Amount
Stores Overhead 400
Power 1,500
Lighting 200
Labour Welfare 3,000
Depreciation on fixed assets 6,000
Repairs & Maintenance 1,200
General expenses 10,000
Rent & taxes 600
Following are the base of cost apportionment.
Production Department Service Department
Particulars
A B C X Y
Direct wages 77,000 6,000 5,000 1,000 1,000
Direct material 3,000 2,500 2,000 1,500 1,000
Number of employees 400 300 300 100 100
HP hours of machine 8,000 6,000 6,000 2,000 3,000
Light Points 10 15 15 5 5
Asset Value 50,000 30,000 20,000 10,000 10,000
Area Occupied 8 600 600 200 200
Machine hours 10 5 8 5 10
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
3. Mohan Lal Co. Ltd., has 3 production departments. P, Q & R & 2 service departments A
& B. the following figures are extracted from the records of the company
Particulars Amount
Rent & taxes 5,000
Indirect wages 6,000
Depreciation on Machinery 10,000
Labour Welfare 2,000
PF Contribution 8,000
Lighting & Heating 5,000
Sundries 4,500
Insurance 10,500
Time keeping 1,500
Lighting expenses 2,600
Power 12,000
Material handling 6,800
Following are the base of cost apportionment.
Production Department Service Department
Particulars
A B C X Y
Direct wages 8,000 7,000 5,000 2,000 1,000
Direct material 3,000 2,500 2,000 1,500 1,000
Number of employees 30 40 30 20 20
Horse power of machine 8,000 6,000 6,000 2,000 3,000
Light Points 10 15 15 5 5
Value of machinery 5,000 3,000 2,000 1,000 1,000
Floor Area 600 600 500 300 300
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
Re-apportionment/ Secondary Distribution / Re-distribution of O/H
Apportionment to Production Apportionment to Production
Departments Departments as well as service Depts.
Reciprocal Method Non-Reciprocal Method
Step Ladder Method
Simultaneous Equation Method Repeated Distribution Method
Apportionment of Overhead to only production department
4. XYZ electronic limited have been collected following information
Production Department Service Dept.
Particulars
A B C X Y
Direct Wages 2000 3000 4000 1000 2000
Direct Material 1000 2000 2000 1500 1500
Number of Staff 100 150 150 50 50
Electricity Kilo wats 4000 3000 2000 1000 1000
Light points 10 16 4 6 4
Asset Value 60000 40000 30000 10000 10000
Area Occupied 150 250 50 50 50
Expenses for the period as follows
Expenses Amount
Motive power 550
Lighting 100
Stores Overhead 400
Amenities to staff 1500
Depreciation 15000
Repairs & Maintenance 3000
General Overhead 6000
Rent & taxes 275
Apportion of cost of service department “Y” under the basis of direct wages & the
department “X” based on the ratio [Link] for production department A, B & C.
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
5. In an engineering factory, the following particulars have been extracted for the year ended
31/3/2020
Production Department Service Dept.
Particulars
P Q R X Y
Direct Wages 30000 45000 60000 15000 30000
Direct Material 15000 30000 30000 22500 22500
Number of Staff 1500 2250 2250 750 750
Electricity Kilo wats 6000 4500 3000 1500 1500
Light points 10 16 4 6 4
Asset Value 60000 40000 30000 10000 10000
Area Occupied 150 250 50 50 50
Expenses for the period as follows
Expenses Amount Expenses Amount
Power 1100 Depreciation on assets 30000
Lighting 200 Insurance on assets 6000
Stores Overhead 800 General Overhead 12000
Welfare to staff 3000 Rent & taxes 550
Apportion of cost of service department “X” under the basis of direct material & the
department “Y” based on the ratio [Link] for production department P, Q & R.
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
Apportionment of Overhead to production department & Service Department
I. NON-RECIPROCAL METHOD - STEP LADDER METHOD
6. Calculate the overhead applicable to production departments A & B, there are also 2
service departments X & Y. X render service worth ₹ 12000 to “Y” & balance to A & B
as 3:2. “Y” renders service to A & B as 9:1 using step ladder method.
Production Department Service Dept.
Particulars
A B X Y
Floor Space 5,000 4,000 1,000 2,000
Asset Value 10,00,000 5,00,000 3,00,000 1,00,000
HP. Of machine 1,000 500 400 100
Number of workers 100 50 50 25
Light points 50 30 20 20
Following expenses are provided for the current year.
Expenses Amount
Depreciation 1,90,000
Insurance 15,200
Rent, rate & taxes 36,000
Power 20,000
Canteen Expenses 10,800
Electricity 4,800
7. The manufacturing company has 2 production departments X & Y & 3 service
departments, time keeping, store & maintenance departments. The departmental summary
showed for the month of August -2020
Particulars Amount Amount
Production Departments
X 16,000
Y 10,000 26,000
Service Departments
Time Keeping 4,000
Store 5,000
Maintenance 3,000 12,000
TOTAL 38,000
Other information is as follows
Production Department Service Dept.
Particulars
X Y Time Keeping Store Maintenance
Number of workers 40 30 20 16 10
Number of stores requisitions 24 20 ---- ---- 6
Machine hours 2400 600 ---- ---- ----
You are required to make departmental allocation of expenses.
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
8. MN manufacturing Ltd., has 3 production departments & 4 service departments. Service
department costs are distributed to production department using step ladder method of
distribution. Estimate the factory overhead cost to be incurred by each department in the
forthcoming year as follows. Data required for distribution is also shown against each
department.
Factory Direct labour No. of Area in Sq.
Department
Overhead Hours employees meter
Production:
X 1,93,000 4,000 100 3,000
Y 64,000 3,000 125 1,500
Z 83,000 4,000 85 1,500
Service:
P 45,000 1,000 10 500
Q 75,000 5,000 50 1,500
R 1,05,000 6,000 40 1,000
S 30,000 3,000 50 1,000
The Overhead costs of the 4 service departments are distributed in the same order viz., P,
Q, R & S respectively on the following basis: -
Department Basis
P No. of employees
Q Direct labour hours
R Area in Sq. meter
S Direct labour hours
(i) You are required to prepare a schedule showing the distribution of overhead costs
of the four service departments to the 3 production departments.
(ii) Calculate the overhead recovery rate per direct labour hour for each of the 3
production departments.
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
RECIPROCAL METHOD
a) REPEATED DISTIBUTION METHOD/ CONTINUOES / RE-DISTRIBUTION
b) SIMULTANEOUS EQUATION METHOD
9. The following information related to PQR. It consists of 3 production departments 2
service departments. The total department overhead as per primary distribution as on
31/3/2020 are as follows.
Department Overhead
Production:
A 6,300
B 7,400
C 2,800
Service:
P 4,500
Q 2,000
The company has to charge service department cost on the basis of following percentage
using reciprocal methods.
Department A B C P Q
P 40 30 20 --- 10
Q 30 30 20 20 ----
10. Vishnu Ltd., has 3 production departments i.e., P, Q & R & 2 service departments M &
N. The total primary overhead distributions for the department as on 31/12/2019 are as
follows.
Department Overhead
Production:
P 16,000
Q 13,000
R 14,000
Service:
M 4,000
N 6,000
Service department costs are charged to production departments & service departments
on the basis of following basis
Department P Q R M N
M 25 30 15 --- 30
N 20 30 30 20 ----
You are required to re-apportion primary overhead under
(i) Repeated Distribution Method
(ii) Simultaneous Equation Method
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
11. A factory has of 3 production departments 2 service departments. The overhead
departmental distribution summary shows the following
Department Overhead
Production:
A 6,50,000
B 6,00,000
C 5,00,000
Service:
P 1,20,000
Q 1,00,000
The service department expenses are allotted on a percentage basis as follows
Department A B C P Q
P 30 40 15 --- 15
Q 40 30 25 5 ----
Show how the expenses of the 2 service departments are to be charged to production
departments under Repeated Distribution Method & under Simultaneous Equation Method.
12. Onida manufacturing company has 3 production departments’ i.e., P, Q & R & 2 service
departments M & N. The following is the budget for August 2020.
Production Department Service Dept.
Particulars Total
P Q R M N
Direct Material 1,000 2,000 4,000 2,000 1,000
Direct Wages 5,000 2,000 8,000 1,000 2,000
Factory rent 4,000
Power 2,500
Depreciation 1,000
Other Overhead 9,000
Additional information is given as under
Production Department Service Dept.
Particulars
P Q R M N
Area sq. ft. 500 250 500 250 500
Capital Value of asset (₹ in lakhs) 20 40 20 10 10
Machine hours 1000 2000 4000 1000 1000
Horse power of machine 50 40 20 15 25
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
A technical assessment for apportionment of the costs of service departments is as under
Department P (%) Q (%) R (%) M (%) N (%)
M (%) 45 15 30 ---- 10
N (%) 60 35 ---- 5 ----
You are required to distribute overheads to various departments & re-distribute
service department costs to production department under reciprocal method. Also compute
machine hour rate for production departments.
13. DK Company has 5 department X, Y, Z are production department & A, B are service
department. The actual cost for the period are as follows.
Particulars Amount Particulars Amount
Power 5,000 Employee Lab insurance 7,000
Supervision 10,000 Depreciation on P&M 20,000
Lighting 6,000 Repairs of building 5,000
Insurance on P &M 5,000 Insurance on land & building 6,000
Insurance on Stock 6,000 Canteen expenses 7,500
Rent 15,000 Medical expenses 3,000
Other overheads 9,000
Following are the additional information
Production Department Service Dept.
Particulars
X Y Z A B
Area Occupied 200 300 400 500 200
No. of workers 150 75 100 25 50
Direct wages 25,000 30,000 40,000 20,000 25,000
Value of P & M 30,000 60,000 90,000 30,000 -----
Value of L & B 40,000 80,000 1,00,000 20,000 40,000
Direct material 3,000 4000 ,2000 3,000 2,000
Value of stock 25,000 1,00,000 75,000 50,000 75,000
HP hours of machine 45 55 65 35 25
Working hours 4,500 3,020 3,150 ----- ------
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
Technical assistants are suggested apportionment of service department cost to production
department under following basis:
Department X Y Z A B
A 20 30 40 ---- 10
B 40 20 30 10 ----
You are required to calculate: -
(i) Primary overhead distribution
(ii) Secondary Overhead under (a) Repeated Distribution Method & (b) Simultaneous
Equation Method.
(iii) Calculate the overhead absorption rate per hour in respect of 3 production
department
(iv) Total cost of article if raw material is Rs. 28, labour cost is Rs.35 & it passes 3
production departments X, Y & Z for 5 hour, 4 hours & 8 hours.
14. Alpha Ltd., has 3 production departments i.e., P, Q & R & 2 service departments M & N.
The following are the expenses of Alpha ltd for the year ended 31/3/ 2020.
Particulars Amount Particulars Amount
Rent & Rates 10,000 Medical expenses 8,000
Lighting 1,200 Insurance on P&M 28,000
Indirect wages 3,000 Employee PF 12,000
Power 3,000 Repairs of L & B 36,000
Depreciation on P&M 20,000 Supervision 10,000
Sundry expenses 20,000
Following are the additional information
Production
Service Dept.
Particulars Department
P Q R M N
Floor Space 2,000 2,500 3,000 2,000 500
Light Points 20 30 40 20 10
Direct wages 6,000 4,000 6,000 3,000 1,000
HP hours of machine 120 60 100 20 ----
Cost of P & M 24,000 32,000 40,000 2,000 2,000
Direct material 18,000 15,000 12,000 8,000 6,000
Value of L & B 28,000 18,000 32,000 12,000 10,000
No. of workers 80 40 20 30 20
Working hours 4,670 3,020 3,050
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
Strategic Cost Management – 22MBAFM303
Expenses of service department M & N are allocated on the following basis
Department P Q R M N
M 20 30 40 ---- 10
N 40 20 30 10 ----
You are required to calculate: -
(a) Primary overhead distribution
(b) Secondary Overhead under (a) Repeated Distribution Method & (b) Simultaneous
Equation Method.
(c) Calculate the overhead absorption rate per hour in respect of 3 production
department
(d) Total cost of article if raw material is Rs. 15, labour cost is Rs.30 & it passes 3
production departments X, Y & Z for 4-hour, 5 hour & 3 hours.
SUJATHA S.L
Assistant Professor
Department of MBA-BIT
Bangalore-04
