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    Overheads & ABC - Questions Test 1

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    Overheads & ABC - Questions Test 1

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    3. Overheads & ABC - Questions Test 1

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    Overheads & ABC - Questions Test 1

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    of 4

    MINDSPARK ACADEMY

    CA INTERMEDIATE
    OVERHEADS & ABC COSTINg
    Marks : 50 Time : 1.5 hours

    Q1. Sandy Ltd is a manufacturing company having 3 production departments, ‘A’,


    ‘B’ and ‘C’ and 2 service departments ‘X’ and ‘Y’. The following is the budget for
    December 2022:

    Particulars Total (₹) A (₹) B (₹) C (₹) X (₹) Y (₹)


    Direct Material 1,60,000 3,20,000 6,40,000 3,20,000 1,60,000
    Direct Wages 8,00,000 3,20,000 12,80,000 1,60,000 3,20,000
    Factory Rent 6,40,000
    Power 4,00,000
    Depreciation 1,60,000
    Other Overheads 14,40,000
    Area (Sq. Ft.) 800 400 800 400 800
    Capital Value of 32 64 32 16 16
    Assets (₹ lakhs)
    Machine Hours 1,600 3,200 6,400 1,600 1,600
    Horsepower of 80 64 32 24 40
    machines

    Apportionment of expenses of service department is as under:


    Service Dept A B C X Y
    X 72 24 48 - 16
    Y 96 56 - 8 -
    Required:
    (i) Prepare a statement showing distribution of overheads to various departments.
    (ii) Prepare a statement showing re-distribution of service departments expenses to
    production departments using Repeated Distribution Method. Also Calculate
    machine hour rate of the production departments ‘A’, ‘B’ & C
    (10 marks)
    Q2. Hygiene Care Ltd is a manufacturer of a range of goods. The cost structure of its
    different products is as follows:
    Cost per unit Handwash Detergent Dishwasher
    Powder
    Direct Materials 150 120 120
    Direct Labour @ ₹10 per hour 45 60 75
    Production Overheads 40 50 40
    Total Cost 235 230 235

    1 MINDSPARK ACADEMY
    CA Mayur Sanghavi (CFA (USA), FRM)
    CA INTERMEDIATE – OVERHEADS & ABC COSTING

    Quantity Produced (Units) 30,000 60,000 90,000


    Hygiene Care Ltd was absorbing overheads on the basis of direct labour hours.
    Management accountant has suggested that the company should introduce ABC
    System and has identified cost drivers and cost pools as follows:

    Activity Cost Pool Cost Driver Associated


    Cost (₹)
    Goods Receiving Number of Dispatch Order 8,88,000
    Inspecting & Testing Number of Production Runs 26,82,000
    Costs
    Dispatching Number of Dispatch Orders 6,30,000
    Storage Cost Number of Batches of material 36,00,000
    Required:
    Calculate activity-based production cost of all the 3 products (10 marks)

    Q3. A work-shop has 8 identical machines operated by 6 operators. The machine


    cannot work without an operator wholly engaged on it. The original cost of all the 8
    machines works out to ₹64,00,000. The following particulars are furnished for a six
    months period:
    Normal available hours per operator 1,248
    Absenteeism(without pay) hours per operator 18
    Leave(with pay) hours per operator 20
    Normal unavoidable idle time-hours per operator 10
    Production bonus estimated 10% on wages
    Power consumed ₹ 80,500
    Supervision and Indirect Labour ₹ 33,000
    Lighting and Electricity ₹ 12,000
    Average rate of wages per day of 8 hours per operator ₹ 200

    The following particulars are given for a year:


    Insurance ₹ 7,20,000
    Sundry Work Expenses ₹ 1,00,000
    Management Expenses allocated ₹ 10,00,000
    Depreciation 10% on the original cost
    Repairs and Maintenance (including 5% of the value of all the
    consumables) machines
    Prepare a statement showing the comprehensive machine hour rate for the machine
    shop. (10 marks)

    Q4. SMD Ltd manufactures four products namely A, B, C & D using the same
    production and process facilities. The company has been following conventional
    method of costing and wishes to shift to activity-based costing system.

    2 MINDSPARK ACADEMY
    CA Mayur Sanghavi (CFA (USA), FRM)
    CA INTERMEDIATE – OVERHEADS & ABC COSTING

    The data pertaining to 4 products are:

    Product Units Material Labour Hours Machine Hours


    Produced Per Unit per unit per unit
    A 1,500 140 1 3
    B 2,500 90 3 2
    C 10,000 180 2 6
    D 6,000 150 1.5 4

    The following activity volumes are associated to the production process for the
    relevant period –
    No. of No. of Material No. of
    Inspections Movements Set-ups
    A 200 15 100
    B 250 20 125
    C 900 100 600
    D 650 85 400

    The Cost data also states that:


    • Direct Labour cost ₹ 60 per hour
    • Machine hour rate ₹ 280 per hour
    • Production overheads are absorbed on machine hour basis
    For activity-based costing, a thorough analysis of the production process revealed that:
    • Costs relating to set-ups and inspection bears the equal percentage while costs
    relating to machinery accounts for 20% of the production overhead.
    • Costs relating to material handling stands at 50% of costs relating to
    machinery.
    You are required to:
    (i) Prepare a statement showing the unit costs and total costs of each product
    using the absorption costing method.
    (ii) Prepare a statement showing the unit costs and total costs of each product
    using activity-based costing system. (10 marks)

    Q5. Madhu Ltd has calculated a pre-determined overhead rate of ₹22 per machine
    hour for its Quality check (QC) department. This rate has been calculated for the budgeted
    level of activity and is considered as appropriate for absorbing overheads. The following
    overhead expenditures at various activity levels had been estimated
    Total Overheads Number of Machine Hours
    ₹ 3,38,875 14,500
    ₹ 3,47,625 15,500
    ₹ 3,56,375 16,500

    3 MINDSPARK ACADEMY
    CA Mayur Sanghavi (CFA (USA), FRM)
    CA INTERMEDIATE – OVERHEADS & ABC COSTING

    You are required to:


    (i) COMPUTE the variable overhead absorption rate per machine hour.
    (ii) COMPUTE the estimated total fixed overheads.
    (iii) CALCULATE the budgeted level of activity in machine hours.
    (iv) CALCULATE the amount of under/over absorption of overheads if the actual
    machine hours were 14,970 and actual overheads were ₹3,22,000.
    (v) ANALYSE the arguments for and against using departmental absorption rates as
    opposed to a single or blanket factory wide rate
    (5 marks)
    Q6. SNS Trading Company has 3 main departments and 2 service departments. The data for
    each department is given below:
    Departments Expenses Area in No. of
    Main Department: (in ₹) Sq Mtrs Employees
    Purchase 5,00,000 12 800
    Packing 8,00,000 15 1700
    Distribution 3,50,000 7 700
    Service Depts:
    Maintenance 6,40,000 4 200
    Personnel 3,20,000 6 250
    The cost of Maintenance Department & Personnel Department is distributed on the basis of
    ‘Area in Square Metres’ and ‘Number of Employees’ respectively:
    You are required to:
    (i) Prepare a Statement showing the distribution of expenses of Service Departments
    to the Main Departments using the “Step Ladder Method” of Overheads.
    (ii) Compute the rate per hour of each main department, given that the Purchase
    Department, Packing Department and Distribution Department works 12 hours a
    day, 24 hours a day and 8 hours a day respectively. Assume that there are 365 days
    in a year and there are no holidays. (5 marks)

    4 MINDSPARK ACADEMY
    CA Mayur Sanghavi (CFA (USA), FRM)

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