8

Overhead Rates

8.1 INTRODUCTION

For a proper understanding of the topic, overheads are split into overhead analysis and overhead rates. In overhead rates, the calculations done are cost per unit, cost per hour, cost per machine or cost per machine hour rate (MHR). These rates are calculated to find out the method of recovery of overheads.

Overhead rates are fixed in order to absorb the overhead to cost units on equitable basis.

 

 

1. Actual Overhead Rate (AOHR): It is the rate of overhead absorption, which is calculated by dividing the actual overheads to be absorbed by the actual quantity or value of the base selected.

    

   

    

2. Predetermined Overhead Rate (POHR): It is the rate of overhead absorption, which is calculated in advance of occurrence of overhead.

    

   

    

3. Blanket Overhead Rate: Single overhead rate computed for the factory, as a whole is known as blanket rate.

    

   

    

4. Multiple Overhead Rate (MOHR): It is the different overhead rate that is computed for each producing department and service department is known as multiple rate.

    

   

8.2 ABSORPTION OF OVERHEADS

Charging of overheads to specific product is known as absorption. Overhead absorption is also known as application of overheads. In other words, absorption refers to charging of overheads of a department to different cost units in a way that each cost unit bears an appropriate portion of its share of overheads.

Absorption of overheads is done in the following ways.

1. Raw material consumed
2. Wages
3. Prime cost
4. Units produced
5. Labour hours
6. Machine hours

8.2.1 Underabsorption of overheads and overabsorption of overheads

Generally, overheads are charged on the basis of actual rate or estimated rate. When overheads are charged on actual rate, then there is no difference between the charged and incurred overheads. But when overheads are charged on estimated rate, there is a difference between the charged and incurred overheads. Such difference is known as underabsorption or overabsorption.

Absorption of overhead using predetermined rate may cause either underrecovery or overrecovery of overheads. If the actual overheads work out to be different from the budgeted overheads or if the actual base becomes different from the budgeted base, this results in either underrecovery or overrecovery.

Underabsorption– If the amount estimated is less than the amount actually incurred, it is said to be underabsorption. In other words, if the amount applied is the shortfall of the actual overhead in production, it is said to be the underabsorption of overheads.

The over or underabsorption of overheads is termed as overhead variance.

When the overheads charged is less than the overheads incurred, it is known as underabsorption, that is, estimated overheads are less than the actual overheads.

 

 

Overabsorption– If the amount estimated is more than the amount actually incurred, it is said to be overabsorption. In other words, if the amount applied exceeds, the actual overhead, it is said to be an overabsorption of overheads. When the overheads charged is more than the overheads incurred, it is known as overabsorption, that is, estimated overheads are more than the actual overheads.

Overabsorption = Actual expenses < estimated/absorbed expenses

Causes of under or overabsorption of overheads

1. Error in estimating overhead expenses
2. Unexpected changes in the production methodsM08

3. Unexpected changes in the production capacity
4. Seasonal fluctuation in the overhead expenses

Methods of absorption of overheads

1. Cost Unit Rate: It is calculated by dividing the overheads to be absorbed by the number of units produced. It is suitable for industries producing a single product. This method is also known as production unit or output method.

    

   

    

2. Direct Material Cost Percentage Rate (DMCPR): It is calculated by dividing the amount of overhead to be absorbed by the direct material cost incurred or expected to be incurred.

    

   

    

3. Direct Wages Percentage Rate (DWPR): It is calculated by dividing the overhead to be absorbed by the direct wages to be incurred. This rate is suitable where the rates of pay and the grades of labour remain constant.

    

   

    

4. Prime Cost Percentage Rate (PCPR): It is calculated by dividing the overheads to be absorbed by prime cost. It is a simple method and takes into account both material and labour element. Its disadvantage is it ignores the time factor.

    

   

    

5. Direct Labour Hour Rate (DLHR): It is calculated by dividing the overhead to be absorbed by the labour hours expected. It is applicable where labour is the main factor of production.

    

   

    

   Effectively working hours = Number of average workers employed during a period Number × of hours for which the factory works durinng each day

   While calculating effective working hours of the factory, normal idle time must be considered.

6. Machine Hour Rate: In simple words, MHR means the cost or expenses incurred in running a machine for one hour. The MHR is obtained by dividing the amount of factory overheads concerning a machine by the number of machine hours. For example

    Overheadsofmachine x = Rs5,000

       No. of machine hours = 2,500

    

   

8.3 MACHINE HOUR RATE

This is one of the most scientific methods for the absorption of factory overheads. However, this method is not applicable in the case of limited operation of machines.

There are two methods of calculating MHR. They are (a) ordinary MHR and (b) composite MHR.

8.3.1 The advantages of MHR

1. It helps to compare the effective deficiencies and the cost of operating different machines.
2. It brings light to the existence of the idle time of machine.
3. It is the most scientific practical and accurate method of recovery of manufacturing overheads.
4. It provides useful data for estimating the cost of production setting of standards and for fixing the selling prices for quotations.
5. It enables management to decide how far the machine work is preferable over manual work.

    

   

8.3.2 Ordinary MHR

Only the indirect expenses that are directly connected with the running of the machine are considered. For example, depreciation, power, repairs and maintenance, oiling and insurance cleaning are considered.

8.3.3 Composite MHR

In addition to the indirect expenses, other expenses such as supervisory labour, rent, lighting and heating are also included, and a composite rate is set up covering both the type of expenses.

8.3.4 Disadvantages of MHR

1. It is costly because it involves additional work in finding out the working hours.
2. It does not consider certain expenses that are not proportional to the working hours of machines.
3. It does not give accurate results in which labour is predominantly used.
4. It is difficult to estimate the machine hours when information related to production is not available in advance.
5. Blanket rate cannot be used and it makes the method more costly.

8.3.5 Computation of MHR

1. Machine overheads are of two types: fixed and variable.
2. Fixed charges are rent, rates, supervision, cost of reserve equipment, insurance etc.
3. Variable charges are depreciation, repairs, electric power, maintenance etc.
4. Fixed charges are estimated for a given period for every machine. The estimated charges are divided by the total working hours of the period.
5. Variable charges are estimated separately and then divided by the normal working hours.
6. Normal working hours are calculated by giving allowance for idle time, maintenance, setting up etc.
7. The sum of the fixed charges rate and the variable charges rate will give MHR.
8. Fixed charges are known as standing charges.
9. Variable charges are also known as running charges or machine charges.

Bases for the appointment of expenses for the computation of MHR

Expenses	Bases
1. Consumable stores	Store requisition slips
2. Depreciation	Value of machines
3. Insurance	Value of machines and assets
4. Lighting and heating	No. of points or floor area
5. Power	Horse power of machines
6. Repairs	Value of machines
7. Rent and rates	Floor area occupied
8. Supervision	Time spent on each machine

Illustration 1

Calculate the MHR for machine no. 33 from the following particulars.

Cost of machine	Rs 10,000
Estimated scrap value	Rs 250
Estimated working life	15,000 hours
Working hours per year	2,000 hours
Cost of repairs per year	Rs 1,500
Wages of operator per month	Rs 150
Chemical per month	100
Overheads chargeable to this machine per month	Rs 200
Power per hour	20 units at 7 paise per unit
No. of operators looking after 4 machine	2 persons

 

Solution: Computation of MHR

 

 

Illustration 2

A machine costing Rs 20,000 is expected to run for 10 years. At the end of 10 years, its scrap value is estimated to be Rs 2,000. Its installation charges are Rs 200.

Estimated cost of repairs for a 10-year life	Rs 1,800
No. of hours the machine is expected to run in a year	2,190
Its power consumption would be 15 units per hour	Rs 5 per 100 units

The machine occupies ¼th of the area of the department and has 2/10 points for lighting.

The foreman has to spend about one-third of his time to this machine.

The rent for the department	Rs 300 per month
The charges for lighting	Rs 80 per month
Salary paid for the foreman	Rs 960 per month

Find out the hourly rate, assuming insurance is at 1% per annum and expenses on oil etc. are Rs 9 per month.

Solution: Computation of MHR

 

 

Illustration 3

Calculate the MHR for the recovery of overheads for a group of three machines from the following data.

Original cost of three machines	Rs 60,000
Depreciation at 10% per annum (straight line method)
Repairs and average maintenance cost	Rs 20 per day
Power	30 paise per running hour per machine
Supervision for the group of machines	Rs 1,200 per month
Allocation of rent for three machines on a floor area basis	Rs 160 per month
Share of manufacturing overheads	Rs 300 per month for the group of machines
No. of working days	300 in a year
Normal operation	1 shift of 8 hours
Normal allowance for repairs, maintenance, change over, idle time etc.	10%
Effective running hours per annum (300 × 8 × 90/100)	2,160

Solution: Computation of MHR

 

 

Illustration 4

The following annual charges are incurred in respect of a machine in a shop where manual labour is almost nil and work is done by means of five machines of exactly same type of specification.

Rent and rates (proportional to the floor space) for the shop	Rs 6,000
Depreciation on each machine		1,000
Repairs and maintenance for the five machines		1,200
Power consumed (as per meter) at 5 paise per unit for the shop	Rs 3,000
Electric charges for lights used in the shop	Rs 600
Attendants: There are two attendants for the five machines and they are each paid Rs 80 per month
Supervision: For the five machines in the shop there is one supervisor whose emoluments are Rs 300 per month
Sundry supplies for the shop	Rs 500
Hire purchase installments payable for the machine (including Rs 300 as interest)	Rs 1,200

The machine uses 10 units of power per hour. Calculate the MHR for the machine for the year.

 

Solution: Computation of MHR

Particulars	Rs (per annum)	Per hour
Standing charges
Rent and rates (6,000 × 1/5)	1,200
Lighting charges (600 × 1/5)	120
Attendants’ salary (80 × 2 × 12 × 1/5)	384
Supervision (300 × 12 × 1/5)	720
Sundry supplies (500 × 1/5)	100
Total standing charges	2,524	2.10
Machine expenses
Depreciation (1,000/1,200)		0.83
Repairs and maintenance (1,200 × 1/5 × 1/1,200)		0.20
Power 10 units at 0.05 per unit (10 × 0.05)		0.50
Machine hour rate		3.63

Working Notes:

Total amount of power consumed = Rs 3,000

Rate of power = 0.50 per unit

Total working hours = 3,000/0.50 = 6,000 hours

No. of machines = 5

Hours per machine = 6,000/5 = 1,200 hours per annum

8.4 MISCELLANEOUS ILLUSTRATIONS

Illustration 1

A machine shop has 8 identical drilling machines manned by 6 operators. The machines cannot be worked without an operator wholly engaged on it. The original cost of all these 8 machines works out to be Rs 8,80,000. These particulars are furnished for a 6-month period

Normal available hours per month	208
Absenteeism (without pay) hours	18
Leave (with pay) hours	30
Wages for 8 hours	Rs 20
Production bonus estimated 15% on wages
Value of power consumed	Rs 8,050
Supervision and indirect labour	Rs 3,300
Lighting and electricity	Rs 1,200
These particulars are for a year

Repairs and maintenance including consumables of 3% on the value of a machine.

Insurance	Rs 50,000
Depreciation	10% on original cost
Other sundry works expenses	Rs 18,000
General management expenses allocated	Rs 60,000

You are required to work out comprehensive MHR for the machine shop.

Solution: Computation of comprehensive MHR of machine shop.

 

 

Working Notes:

1. 
2. No. of hours per month for which wages are paid = 190 hours (208 – 18)
3. Total wages for 6 operators for 6 months = 190 × 6 × 6 × Rs 2.50 = Rs 17,100
4. No. of hours of machine operation = 190 -20 (leave with pay) = 170 hours
5. Total hours for machine shop for 6 months for 6 machines = 170 × 6 × 6 = 5,760 hours (8 machines cannot work at a time. Six operators can work only 6 machines because machines cannot work without an operator wholly engaged on each machine)

Problem 1. A department is having three machines. The figures below indicate the departmental expenses. Calculate the MHR in respect of three machines from the information given below

	Rs
Depreciation of machinery	24,000
Depreciation of building	5,760
Repairs of machinery	8,000
Insurance of machinery	1,600
Indirect wages	12,000
Power	12,000
Lighting	1,600
Miscellaneous expenses	8,400
	73,360

 

 

[Chennai, M. Com., September 1985]

[Ans: Overhead apportioned—Machine 1 = Rs 28,612, Machine 2 = Rs 19,454, Machine 3 = Rs 25,294; MHR—Machine 1 = Rs 143.06, Machine 2 = Rs 64.85; Machine 3 = Rs 84.31; Composite or comprehensive MHR—Machine 1 = Rs 155.06, Machine 2 = Rs 80.85, Machine 3 = Rs 100.31 (including direct wages of machines)]

Hint: Apportion indirect wages on direct wages basis and miscellaneous expenses on hours worked basis.

Illustration 2

1. Compute comprehensive MHR from the following data:
   1. Total cost of machine to be depreciated: Rs 2,30,000
   2. Life: 10 years
   3. Depreciation on straight line
   4. Departmental overheads (annual):

      	Rs
      Rent	50,000
      Heat and light	20,000
      Supervision	1,30,000

   5. Departmental area: 80,000 square metres

      Machine area: 3,000 square metres

   6. Machines in the department = 26
   7. Annual cost of reserve equipment for the machines = Rs 3,000
   8. Hours run on production = 2,000
   9. Hours for setting and adjusting = 200
   10. Power cost Re 0.50 per hour of running time
   11. Labour:
       1. When setting and adjusting, there should be full time attention
       2. When machine is producing, one worker can look after 3 machines
   12. Labour rate: Rs 6 per hour
2. Using the MHR as calculated above, work out the amount of factory overhead to be absorbed on the following:

Solution: (A) Computation of comprehensive MHR

 

 

 

(B) If the MHR as calculated in (A) is adopted, the overheads absorbed over the various jobs will be as follows:

 

              Job no. 605 = 18.47 × 80 = Rs 1,478

              Job no. 595 = 18.47 × 70 = Rs 1,293

 

Problem 2. Calculate the MHR from the following particulars of machine no. 33

	Rs
Cost of machine	10,000
Estimated scrap value	250
Estimated working life	15,000 hours
Working hours per year	2,000 hours
Cost of repairs per year	1,500
Wages of operator per month	150
Chemical per month	100
Overheads chargeable to this machine per month	200
Power per hour	20 units at 7 paise per unit
No. of operators looking after four machines	2 persons

[Chennai, B.Com., March 1997]

[Ans: MHR = Rs 4.45]

 

Illustration 3

A machine costs Rs 1,00,000 and is deemed to have a scrap value of 5% at the end of its effective life (19 years). Ordinarily, the machine is expected to run 2,400 hours per annum, but it is estimated that 150 hours will be lost for normal repairs and maintenance and further 750 hours will be lost due to staggering. The other details in respect of the machine shop are as follows

	Rs
Wages, bonus and provident fund, contribution of each of two operators (each operator is in charge of two machines)	6,000 per year
Rent and rates of the shop	4,500 per year
General lighting of the shop	250 per month
Insurance premium for the machine	200 per quarter
Cost of repairs and maintenance per machine	250 per month
Shop supervisor's salary	500 per month
Power consumption of the machine hour 20 units
Rate of power per hundred units = Rs 10
Other factory overheads attributable to the shop = 5,000 per year

There are 4 identical machines in the shop. The supervisor is expected to devote one-fifth of his time for supervising the machine. Compute a comprehensive MHR from the above details.

Solution: Computation of MHR

 

 

 

Problem 3. A manufacturing company has two production departments X and Y and three service departments—timekeeping, stores and maintenance. The departmental summary showed the following expenses for October.

Production department	Rs	Rs
X	16,000
Y	10,000	26,000
Service department:
Timekeeping	4,000
Stores	5,000
Maintenance	3,000
		12,000
		38,000

The other information are as follows:

 

 

You are required to make departmental allocation of expenses.

[B.Com., Madurai]

[Ans: X = Rs 22,845; Y = Rs 15,155]

Illustration 4

Calculate the MHR for the recovery of overheads for a group of 3 machines from the following data.

Original cost of 3 machines	Rs 60,000
Depreciation at 10% per annum (straight line method)
Repairs and maintenance cost average	Rs 16 per day
Power	30 paise per running hour per machine
Supervision for the group of machines	Rs 1,000 per month
Allocation of rent for 3 machines on a floor area basis	Rs 240 per month
Share of manufacturing overheads	Rs 400 per month for the group of machines
Normal working days	300 in a year
Normal operation	1 shift of 8 hours
Normal allowance for repairs, maintenance, change over, idle time etc.	20%

Solution: Computation of MHR

 

 

Problem 4. A company has four departments A, B, C, which are production departments, and D, which is a service department. Costs of the department D are apportioned on the basis of the wages paid.

The actual costs for the year were as follows:

Rent	Rs 21,000
Repairs to plant	Rs 1,26,000
Depreciation of plant	Rs 9,450
Light and power	Rs 2,100
Supervision	Rs 31,500
Repairs to building	Rs 8,400

The following information about the departments is available and is used as a basis for the distribution of costs.

 

 

These costs are apportioned to production departments.

[Ans: A = Rs 1,08,547.50, B = Rs 83,220.50, C = Rs 48,682.00]

Illustration 5

A factory works on an average for 168 hours in a month. There are four machines in the factory for which the necessary particulars are provided:

 

 

The monthly charges for rent and taxes for the entire factory are Rs 16,500. One foreman supervises all these four machines and his salary is Rs 2,520 per month. An attendant looks after all these four machines and his salary is Rs 250 per month.

In the execution of certain work, Machine 1 is used for 84 hours, Machine 2 for 72 hours, Machine 3 for 100 hours and Machine 4 for 120 hours. The cost of materials is Rs 1,79,650 and that of direct labour is Rs 3,350. Calculate the cost of the work order.

Problem 5. Following figures have been extracted from the accounts of a manufacturing concern for the month of January

	Rs
Indirect Materials:
Production department X	950
Production department Y	1,200
Production department Z	200
Maintenance department P	1,500
Stores department Q	400
Indirect wages:
Production department X	900
Production department Y	1,100
Production department Z	300
Maintenance Department P	1,000
Stores department Q	650
Power and Light	6,000
Rent and Rates	2,800
Insurance on assets	1,000
Meal charges	3,000

Depreciation at 6% on capital value of assets.

From the following additional information, calculate the share of overheads of each production department.

 

 

[B.Com., Chennai]

[Ans: A, Rs 9,000; B, Rs 9,600; C, Rs 4,400]

Illustration 6

The following annual charges are incurred in respect of a machine in a shop where manual labour is almost nil and work is done by means of five machines of exactly same type of specification.

	Rs
(i) Rent and rates (proportional to the floor space) for the shop	5,500
(ii) Depreciation on each machine		1,500
(iii) Repairs and maintenance for the five machines		1,000
(iv) Power consumed (as per meter) at 5 paise per unit for the shop	3,000
(v) Electric charges for light in the shop	1,000
Attendants: There are two attendants for the five machines, and they are each paid Rs 60 per month
(vii) Supervision: For the five machines in the shop, there is one supervisor whose emoluments are Rs 300 per month
Sundry supplies for the shop	600
Hire purchase instalments payable for the machine (including Rs 300 as interest)	1,200

The machine uses 10 units of power per hour. Calculate the MHR for the machine for the year.

Solution: Computation of MHR for the year

 

 

 

Working Note: Annual working hours per machine

Total amount of power consumed = Rs 3,000

Rate of power = 0.50 per hour

No. of machines = 5

Problem 6. A machine costing Rs 20,000 is expected to run for 10 years, at the end of which its scrap value is estimated to be Rs 2,000. Its installation charges are Rs 200

Repairs for 10 years’ life is estimated to be	Rs 1,800
The machine is expected to run for 2,190 hours in a year
Its power consumption would be 15 units per hour	Rs 5 per 100 units.

The machine occupies ¼th of the area of the department and has 2/10 points for lighting.

The foreman has to spend about one-third of his time for this machine.

The rent for the department is	Rs 300 per month
The charges for lighting are	Rs 80 per month
The foreman is paid a salary of	Rs 960 per month

Find out the hourly rate, assuming insurance is at 1% per annum and expenses on oil etc. are Rs 9 per month.

[B.Com. Hons., Delhi]

[Ans: Rs 4.056]

Illustration 7

The following figures have been extracted from the books of a manufacturing company. All jobs pass through the company's two departments.

	Working department (Rs)	Finishing department (Rs)
Materials used	9,000	400
Direct labour	4,500	1,200
Factory overheads	1,800	1,200
Direct labour hours	14,000	6,000
Machine hours	12,000	1,000

The following information relates to Job no. 17.

	Working department (Rs)	Finishing department (Rs)
Materials used	120	10
Direct Labour	65	25
Direct Labour Hours	265	70
Machine Hours	255	25

You are required (a) to enumerate four methods of absorbing factory overheads by jobs showing the rates for each department under the methods quoted and (b) to prepare a statement showing the different cost results for job no. 17 under each of four methods referred to.

Solution:

 

 

Comparative statement of job no. 17 for working department

 

 

Comparative statement of job no. 17 for finishing department

 

 

8.5 ADVANCED-TYPE SOLVED PROBLEMS

1. Lion enterprises undertakes three different jobs A, B and C. All of them require the use of both a special machine and a computer. The computer is hired and the hire charges work out to Rs 4,20,000 per annum. The expenses regarding the machine are estimated to be as follows:

   Rent for the quarter	Rs 17,500
   Depreciation per annum	Rs 2,00,000
   Indirect charges per annum	Rs 1,50,000

   During the first month of operation, the following details were taken from the job register.

    

   

    

   You are required to compute the MHR:

   1. For the firm as a whole for the month when the computer was used and was not used.
   2. For the individual jobs A, B and C.

   Solution:

   Machine hours per month (1,000 + 1,500 + 1,000)	3,500
   When the computer was used (400 + 600 + 1,000)	2,000
   The machine overheads per month: Rent (17,500/4)	4,375
   Depreciation (2,00,000/12)	16,667
   Indirect charges (15,00,000/12)	12,500
   	33,542
   Computer hire charges (4,20,000 × 12)	35,000
   Overhead per month for the machine with Computer overhead for the machine
   Hire charges for the month	35,000
   	54,167

   MHR when the computer not used:

    

   

    

   MHR when the computer not used:

    

   

    

   MHR for individual jobs

    

   

    

2. A machine costs Rs 90,000 and is deemed to have a scrap value at 5% at the end of its effective life of 19 years. Usually, the machine is expected to run for 2,400 hours per annum, but it is estimated that 150 hours will be lost for normal repairs and maintenance and further 750 hours will be lost due to staggering. The other details in respect of the machine shop are as follows:

   (a) Wages, bonus and provident fund contribution of each of the two operators (each operator is in charge of two machines)	Rs 6,000
   (b) Rent and rates of the shop	Rs 3,000 per annum
   (c) General lighting of the shop	Rs 250 per month
   (d) Insurance premium for the machine	200 per month
   (e) Cost of repairs and maintenance per machine	250 per month
   (f) Shop supervisor's salary	500 per month
   (g) Power consumption of the machine would be 20 units per hour, rate of power per 100 units	Rs 10
   (h) Other factory overhead attributable to shop	Rs 4,000 per annum

   There are four identical machines in the shop. The supervisor is expected to spend one-fifth of his time for supervising machines. Compute a comprehensive MHR from the above details:

    

   Solution:

   Machine hour rate

   Standing charges per annum per machine:

   Rent rates	750
   General lighting	750
   Insurance	800
   Supervisor's salary	300
   Allocated overhead	1,000
   Standing charges per machine hour	3,600/1,500
   	= 2.4
   Variable charges:
   Wages (6,000/2)	3,000
   Power	3,000
   Repairs and maintenance	3,000
   Depreciation	4,500
   	13,500/1,500
   Variable charges per machine hour	= 9
   MHR	= 2.4 + 9
   	= 11.40

3. In a machine shop, the MHR is worked out at the beginning of a year on the basis of 1 to 3 weeks of period, which equals to three calendar months. The following estimates for operating a machine are relevant:

   Total working hours available per week: 48 hours

   Operator's wages (per month): 650

   Supervisor's salary (per month, common supervisor for three machines): 1,500

   Written Down Value of machine (depreciation at 10% plus 2% on an average for extra shift allowance: 1,80,000

   Repairs and maintenance (per annum): 16,000

   Consumable stores (per annum): 30,000

   Rent, rates and taxes (for the quarter apportioned): 5,000

   Power consumed at 15 units per hour at 40 paise per unit. Power required for productive hours only. Setting up time is part at productive time, but no power is required for setting up jobs. The operators and supervisors are permanent. Repairs and maintenance and consumable stores are variable.

   You are required to:

   1. Work out the MHR
   2. Work out the rate for quoting the outside party for utilizing the idle capacity in the machine shop, assuming a profit at 20% above variable cost.

   Solution: Computation of MHR

   Rent, rates and taxes	Rs 5,000
   Supervision	Rs 1,500
   Operator's wages	Rs 1,950
   Total outstanding charges	Rs 8,450
   Effective hours (46 × 13)	598
   Fixed costs per hour (8,450/598)	Rs 14.13

   Variable cost per hour:

   Power	5.74
   Repairs = (4,000/598)	6.69
   Consumable stores (7,500/598)	12.54
   Depreciation	9.03	34.00
   		48.13

   (b) Quotation for outside parties:

   Variable cost per hour	34.00
   Add : 20% profit	6.80
   Minimum to be quoted	40.80

4. Calculate the MHR.
   1. Cost of the machine: Rs 24 lakh
   2. Custom duty, insurance, freight etc. Rs 11 lakhs.
   3. Installation expenses: Rs 3 lakh

   4. Cost of tools adequate for 2 years only: Rs 4 lakh
   5. Cost of machine room: Rs 3 lakh
   6. Cost of air conditioning for machine room: Rs 2 lakh
   7. Rate of interest on term loan to finance the above capital expenditure: 12%
   8. Salaries etc. for operators and supervisory staff: Rs 2 lakh per year
   9. Cost of electricity: Rs 11 per hour
   10. Consumption of stores: Rs 5,000 per month
   11. Other expenses: Rs 5 lakh per annum
   12. Assumed rate of depreciation at 10% per annum on fixed assets
   13. Total working hours in the machine room: 200 hours per month.
   14. Loading and unloading time: 10% of machine time
   15. You can make suitable assumptions, if necessary, for the purpose of your computation

   Solution: Computation of MHR

   Machine expenses:
   Cost of machine	Rs 24,00,000
   Customs duty, Insurance and freight	Rs 11,00,000
   Installation expenses	Rs 3,00,000
   Cost of machine room	Rs 3,00,000
   Cost of air conditioning of the machine room	Rs 2,00,000
   Total cost	Rs 43,00,000

    

   Depreciation per annum at 10%	Rs 4,30,000	199.07
   Cost of electricity		11.00
   Cost of tools	Rs 2,00,000	92.59
   Standing charges:
   Salaries	Rs 2,00,000
   Interest @ 12% p.a. on total capital investment including cost of tools i.e. on Rs 47,00,000		Rs 5,64,000
   Consumption stores	Rs 60,000
   Other expenses	Rs 5,00,000	______
   	Rs 13,24,000	613.00

   Cost per hour standing charges = Rs 915.66

   MHR (1,32,400/2,160)

5. A machine was purchased on February 2000 for Rs 5 lakh. The total cost of all machinery inclusive of the new machine was Rs 75 lakh. The further particulars of the machine are available as follows.

   Expected life of the machine: 10 years

   Scrap value at the end of the 10 years: Rs 5,000

   Repairs and maintenance for the machine during the year: Rs 2,000

   Expected number of working hours of the machine per year: 4,000 hours

   Insurance premium annually for the machines: Rs 4,500

   Electricity consumption for the machine per hour at 75 paise per unit: 25 units

   Area occupied by one machine: 100 sq. ft.

   Area occupied by other machine: 1,500 sq. ft.

   Rent per month of the department: Rs 800

   Lighting charges for 20 points for the whole department, out of which three points are for the machine: Rs 120 per month

   Compute the MHR for the two machines on the basis of the data given above.

   Solution: Computation of MHR

   Standing charges	Rs (per annum)	Per hour
   Insurance premium	300
   Repairs and maintenance	2,000
   Rent	600
   Light charges	216
   Total	3,116
   Hourly rate for standing charges (3,116/4,000)		0.779

   Machine expenses

   Depreciation (1:1)	12.375
   Electricity consumption:
   25 units per hour at Re 0.75 per unit	18.750
   MHR	31.904

   Working Notes:

   1. Depreciation

      Cost of the new machine	5,00,000
      Less: scrap value	5,000
      	4,95,000

      
   2. Insurance

      Total cost of all the machines	= 75,00,000
      Total insurance premium paid for all the machines	= 4,500
      Total annual insurance premium of the new machine

   3. Rent

      Rent paid per annum	9,600
      Total area occupied	1,600 sq.ft.
      Rent for the area occupied by the New machine (100 sq. ft.)
      	600

   4. Lighting charges for the machine

      Total annual light charges of 20 points for the whole department is Rs 1,440.

      

6. Calculate the MHR from the following particulars of machine no. 33.

   Cost of machine	Rs 10,000
   Estimated scrap value	Rs 250
   Estimated working life	15,000 hours
   Working hours per year	2,000 hours
   Cost of repairs per year	Rs 1,500
   Wages of operator per month	Rs 150
   Chemical per month	Rs 100
   Overheads chargeable to this machine per month	Rs 200
   Power per hour	20 units at 7 paise per unit
   No. of operators looking after four machines	2 persons

   Note: The MHR is a comprehensive MHR since operator's wages are included.

   Solution: Computation of MHR

   Particulars	Rs (per annum)	Per hour
   Standing charges:
   Repairs	1,500
   Wages 150 × 12 = 1,800 × 2/4	900
   Chemical (100 × 12)	1,200
   Overhead (200 × 12)	2,400
   Total standing charges	6,000	3.00
   Running charges:
   Depreciation	0.65
   Power (20 × 0.7)		1.40
   MHR	5.05

7. A machine costing Rs 20,000 is expected to run for 10 years at the end of which its scrap value is estimated to be Rs 2,000. Its installation charges are Rs 200.

   Repairs for 10 years’ life is estimated to be	Rs 1,800
   The machine is expected to run for 2,190 hours in a year
   Its power consumption would be 15 units per hour	Rs 5 per 100 units.

   The machine occupies one-fourth of the area of the department and has 2/10 points for lighting.

   The foreman has to spend about one-third of his time for this machine.

   The rent for the department is	Rs 300 per month
   The charges for lighting are	Rs 80 per month
   The foreman is paid a salary of	Rs 960 per month

   Find out the hourly rate, assuming insurance is at 1% per annum and expenses on oil etc. are Rs 9 per month.

   Solution: Computation of MHR

   Particulars	Rs (per annum)	Per hour
   Standing charges:
   Repairs (1,800/10)	180
   Rent (300 × 12 × ¼)	900
   Lighting (80 × 12 × 2/10)	192
   Salary of foreman (960 × 12 × 1/3)	3,840
   Insurance (20,200 × 1%)	202
   Total standing charges	5,314	2.43
   Running charges:
   Oil expenses		0.05
   Power (15 × 5/100)		0.75
   Depreciation (20,000 + 200–2,000/10) = 1,820/2,190		0.83
   MHR		4.06

8. Calculate the MHR for the recovery of overheads for a group of 3 machines from the following data.

   Original cost of 3 machines	Rs 60,000
   Depreciation at 10% per annum (straight line method)
   Repairs and maintenance cost average	Rs 20 per day
   Power	30 paise per running hour per machine
   Supervision for the group of machines	Rs 1,200 per month
   Allocation of rent for 3 machines on a floor area basis	Rs 160 per month
   Share of manufacturing overheads	Rs 300 per month for the group of machines
   Normal working days	300 in a year
   Normal operation	1 shift of 8 hours
   Normal allowance for repairs, maintenance, change over, idle time etc.	10%

   Solution:

   Effective running hours per annum (300 × 8 × 90/100) = 2,160

   Computation of MHR

   Particulars	Rs (per annum)	Per hour
   Standing charges:
   Supervision (1,200 × 12 × 1/3)	4,800
   Manufacturing overheads (300 × 12 × 1/3)	1,200
   Rent (160 × 12 × 1/3)	640
   Total standing charges	6,640	3.07
   Running charges:
   Power		0.30
   Depreciation		0.93
   Maintenance		0.93
   MHR		5.23

9. The following annual charges are incurred in respect of a machine in a shop where manual labour is almost nil and work is done by means of five machines of exactly same type of specification:

   (i) Rent and rates (proportional to the floor space) for the shop	Rs 6,000
   (ii) Depreciation on each machine	Rs 1,000
   (iii) Repairs and maintenance for the five machines	Rs 1,200
   (iv) Power consumed (as per meter) at 5 paise per unit for the shop	Rs 3,000
   (v) Electric charges for light in the shop	Rs 600
   (vi) Attendants: There are two attendants for the five machines, and they are each paid Rs 80 per month.
   (vii) Supervision: For the five machines in the shop, there is one supervisor whose emoluments are Rs 300 per month.
   (viii) Sundry supplies for the shop is Rs 500.
   (ix) Hire purchase instalments payable for the machine (including Rs 300 as interest) is Rs 1,200.

   The machine uses 10 units of power per hour. Calculate the MHR for the machine for the year.

   Solution: Computation of MHR

   Particulars	Rs (per annum)	Per hour
   Standing charges:
   Rent and rates (6,000 × 1/5)	1,200
   Lighting charges (600 × 1/5)	120
   Attendants salary (80 × 2 × 12 × 1/5)	384
   Supervision (300 × 12 × 1/5)	720
   Sundry supplies (500 × 1/5)	100
   Total standing charges	2,524	2.10
   Machine expenses
   Depreciation (1,000/1,200)		0.83
   Repairs & maintenance (1,200 × 1/5 × 1/1,200)		0.20
   Power 10 units @ 0.05 per unit (10 × 0.05)		0.50
   MHR		3.63

   Working Notes:

   Total amount of power consumed = Rs 3,000

   Rate of power = 0.50 per unit

   Total working hours = 3,000/0.50 = 6,000 hours

   No. of machines = 5

   Hours per machine = 6,000/5 = 1,200 hours per year

CHAPTER SUMMARY

This chapter primarily deals with MHR, in which depreciation plays a vital role. It is to be understood that the machine continues to depreciate as the time pass by. The more the asset is used, the more the depreciation is caused. While calculating depreciation, two factors are considered: time factor and usage factor, or both.

EXERCISE FOR YOUR PRACTICE

Objective-Type Questions

I. State whether the following statements are true or false:

1. When actual overheads are more than absorbed overheads, it is known as overabsorption.
2. A blanket overhead rate is a single overhead rate computed for the entire factory.
3. MHR is separately computed for each machine.
4. Underabsorption of overhead results in understatement of cost.
5. Underabsorption of overheads means that actual overheads are more than absorbed overheads.
6. Basis of apportionment of store's service expenses is the value of the material consumed.
7. Basis of apportionment of welfare department expenses is the number of employees.
8. Basis of apportionment of Crèche expense is the number of male employees.
9. Rent is apportioned based on the floor area.
10. For calculating depreciation, scrap value is irrelevant.

[Ans: 1, false; 2, true; 3, false; 4, false; 5, true; 6, true; 7, true; 8, false; 9, true; 10, false]

II. Choose the Correct Answer:

1. Aggregate of indirect materials, labour and expenses is termed as
   1. income
   2. overhead
   3. expenses
   4. tax

   Ans: (b)

2. The allotment of whole items of cost to cost centres or cost units is known as
   1. allocation
   2. absorption
   3. measurement
   4. apportionment

   Ans: (a)

3. Wages of machine operator is included in
   1. ordinary MHR
   2. depreciation
   3. plant
   4. comprehensive MHR

   Ans: (d)

4. When the amount of overhead absorbed is less than the amount of overhead incurred, it is known as
   1. underabsorption of overhead
   2. overabsorption of overhead
   3. proper absorption of overhead
   4. none of these

   Ans: (a)

5. The difference between the practical capacity and the capacity based on sales expectancy is termed as
   1. idle capacity
   2. ideal capacity
   3. return capacity
   4. ordinary capacity

   Ans: (a)

6. Allotment of proportions of items of cost to cost centres or cost units is known as
   1. allocation
   2. absorption
   3. measurement
   4. apportionment

   Ans: (d)

7. Which of the following is usually classified as stepped cost?
   1. telephone
   2. raw materials
   3. rates
   4. supervisor's wages

   Ans: (d)

8. Factory overheads include all of the following except
   1. salary of plant manager
   2. depreciation on delivery department
   3. small tool expenses
   4. taxes on factory building

   Ans: (b)

9. MHR is computed for
   1. factory
   2. all the machines
   3. each machine
   4. computers

   Ans: (c)

10. The process of grouping costs according to their common characteristics is called
    1. cost allocation
    2. cost apportionment
    3. cost department
    4. cost classification

    Ans: (d)

DISCUSSION QUESTIONS

Short Answer-Type Questions

1. Explain the terms underabsorption and overabsorption.
2. Discuss the importance of MHR.
3. What do you understand by absorption of overheads?
4. Describe the various methods of absorption of overheads?
5. Why do underabsorption and overabsorption arise?
6. Explain ordinary MHR and composite MHR.

Essay-Type Questions

1. Explain actual overhead rate and predetermined overhead rate
2. Explain blanket overhead rate and multiple overhead rate
3. List out the advantages of calculating MHR

PROBLEMS

1. Calculate the MHR for Machine A from the following data:

   Cost of machine	Rs 16,000
   Estimated scrap value	Rs 1,000
   Effective working life	10,000 hours
   Running time per 4 weekly period	160 hours
   Average cost of repairs and maintenance per 4 weekly period	Rs 120
   Standing charges allocated to Machine A per 4 weekly period	Rs 40
   Power used by the machine	4 units per hour at a cost of 5 paise per unit

   [Chennai, 1996]

   [Ans: MHR = Rs 2.70]

2. Calculate the MHR from the following:

   (1) Cost of the machine	Rs 19,200
   (2) Estimated scrap value	Rs 1,200
   (3) Average repairs and maintenance	Rs 150 p.m.
   (4) Standing charges allocated	Rs 50 p.m.
   (5) Effective working life of the machine	10,000 hours
   (6) Running time per month	166 hours
   (7) Power used by the machine; 5 units per hour at 20 paise per unit

   [B.Com., Punjab]

   [Ans: Rs 4]

3. Work out the MHR for the following machine:

   Cost of machine	Rs 95,000
   Installation charges	Rs 10,000
   Scrap value after 10 years	Rs 5,000
   Working hours per month	200 hours
   Lighting	Rs 150 per month
   Rent	Rs 200 per month
   Insurance premium	Rs 500 per year
   Repair charges	50% of depreciation
   Other standing charges	Rs 1,000 per month
   Power, 10 units per hour at	Rs 10 per 100 units

   [Chennai, 1998]

   [Ans: MHR = Rs 14.205 (or) 14.21]

4. Calculate the MHR for Machine A from the following data:

   Electric power: 75 paise per hour	Repairs: Rs 530 per annum
   Steam: 10 paise per hour	Rent: Rs 270 per annum
   Water: 2 paise per hour	Running hours: 2,000 per annum
   Original cost of machine: Rs 12,500	Book value: Rs 2,870
   Present replacement value: Rs 11,500	Depreciation: per annum

   [Ans: Rs 1.75]

5. Calculate MHR from the following:

   (a) Cost of machine	Rs 12,000
   (b) Average repairs and maintenance charges per month	Rs 150
   (c) Estimated scrap value	Rs 1,200
   (d) Standing charges allocated to machine per month	Rs 50
   (e) Effective working life of machine	10,000 hours
   (f) Running time per month	166 hours
   (g) Power used by machine	5 units per hour at 19 paise per unit

   [Chennai, 1989]

   [Ans: MHR = Rs 3.23 (approx.)]

6. From the following particulars, calculate the MHR for a drilling machine.

   Cost of the drilling machine	Rs 42,000
   Estimated scrap value	Rs 2,000
   Estimated working life	10 years of 2,000 hours each
   Running time for a 4-week period	150 hours
   Estimated repairs for life	Rs 10,000
   Standing charges allocated to this machine for a 4 week	Rs 300
   Power consumed per hour	5 units at 10 paise per unit

   [B.Com., 1980]

   [Ans: Rs 5.00]

7. The overhead expenses of a factory are allocated on the machine-hour method. You are required to calculate the hourly rate for a certain machine from the following information:

   Cost	Rs 58,000
   Estimated scrap value	Rs 3,000
   Estimated working life	20,000 hours
   Estimated cost of maintenance for whole life (machine)	Rs 12,000
   Power used for machine	Rs 1 per hour
   Rent per month (10% for this machine)	Rs 1,500
   Normal machine running hours during a month:	180
   Standing charges other than rent, rates etc. per month	Rs 200

   [I.C.W.A. Inter]

   [Ans: Rs 6.29]

8. Calculate MHR from the following data.

   Cost of machine	Rs 58,000
   Estimated scrap value	Rs 3,000
   Estimated working life	20,000 hours
   Estimated cost of maintenance during working life of machine	Rs 12,000
   Power used	Re 1 per hour
   Rent & Rates per month (10% should be charged to this machine)	Rs 1,500
   Normal machine running hours during a month	180 hours
   Standing charges per month	Rs 200

   [Chennai, 1983]

   [Ans: MHR Rs 6.294 (or) Rs 6.29]

9. Calculate the MHR for Machine A from the following data:

   Cost of machine	Rs 1,600
   Estimated scrap value	Rs 100
   Effective working life	10,000 hours
   Running time per 4 weekly period	160 hours
   Average cost of repairs and maintenance charges per four-weekly period	Rs 12.00
   Standing charges allowed to Machine A per four-weekly period	Rs 4.00
   Power used by machine	4 units per hour at a cost of 0.35 paise per unit

   [B.Com., Andhra Pradesh]

   [Ans: Rs 1.66]

10. Calculate from the following data the MHR for Machine A.

    Cost of machine	Rs 1,050
    Estimated scrap value	Rs 50
    Effective working life	20,000 hours
    Running time in 4 weekly periods	150 hours
    Weekly amount payable under maintenance agreement covering all repairs	Rs 7.50
    Standing charges allocated to machine per 4 weekly periods	Rs 6.00
    Power used by machine	5 units per hour at 6 paise per unit

    [Chennai, 1990]

    [Ans: MHR = Re 0.59]

11. Compute the MHR from the following.

    Cost of the machine	Rs 2,00,000
    Installation charges	Rs 20,000
    Estimated scrap value after expiry of its life of 15 years	Rs 10,000
    Rent for the shop	Rs 400 per month
    General lighting for the shop	Rs 600 per month
    Insurance premium for the machine	Rs 1,920 per annum
    Repairs expenses	Rs 2,000 per annum
    Power 10 units per hour
    Rate of power per 100 units	Rs 40
    Estimated working hours	2,000 per annum
    Shop supervisor's salary	Rs 1,200 per month

    The machine occupies one-fourth of the area of the shop.

    The supervisor spend one-third of his time for this machine.

    [B.Com., Osmania]

    [Ans: Rs 16.86]

12. A machine was purchased on 01 January 1998. The following relate to the machine.

    Cost of the machine	Rs 40,000
    Estimated life	15 years of 1,800 hours per year
    Estimated scrap value	Rs 2,500
    Estimated repairs for whole life	Rs 10,500
    Power consumed per hour 15 units at	0.07 paise per unit
    Insurance	Rs 75 per month
    Consumable stores	Rs 25 per month

    The machine is installed in a department whose monthly rent is Rs 500, and this machine occupies one-fifth of the area. Total monthly lighting cost is Rs 40 for 10 light points, of which three relate to the machine. A supervisor with a monthly salary of Rs 500 spend one-fourth of his time for this machine. Calculate the MHR.

    [Chennai, 1999]

    [Ans: MHR = Rs 5.0744 (or) Rs 5.07]

13. Work out the MHR for the following machine for January 1989.

    Cost of the machine	Rs 90,000
    Freight and installation	Rs 10,000
    Working life	10 years
    Working hours	2,000 per annum
    Repair charges	50% of depreciation
    Power	10 units per hour at 10 paise per unit
    Lubricating oil at	Rs 2 per day of 8 hours
    Stores at	Rs 10 per day of 8 hours
    Wages of operator at	Rs 4 per day

    [Chennai, 1998]

    [Ans: MHR = Rs 10]

    Hint: Ignore wages of the operator. If it is also included, the MHR will be comprehensive or composite, Machine Hour Rate will be 10 + 0.50 = Rs 10.50.

14. Calculate MHR for machine no. 7, which is one of seven machines in operation in a department of a factory.

    (a) Cost of the machine no. 7: Rs 1,000

    (b) Estimated scrap value at finish of working life (10 years): Rs 100.

    (c) Normal running hours per year: 1,800 hours

    (d) Machine no. 7 occupies one-fifth of the floor space of the department; the rent, rates, lighting etc. of which amounted to Rs 350 per annum

    (e) Charges for electric power supplied to machine no. 7: Rs 200 per annum

    (f) Charges for oil, waste etc. supplied to machine no. 7: Rs 30 per annum

    (g) Repair and maintenance machine estimated: Rs 360 per annum.

    (h) Cost of supervision and other expenses applicable to Machine no. 7 estimated at Rs 150 per annum. Labour cost of operating the machine should be ignored in your calculations.

    [B.Com., Mysore]

    [Ans: Re 0.50]

15. Calculate the MHR from the following.

    Cost of the machine	Rs 80,000
    Cost of installation	Rs 20,000
    Scrap value after 10 years	Rs 20,000
    Rent and rates per quarter for the shop	Rs 3,000
    General lighting (per month)	Rs 200
    Shop supervision per quarter	Rs 6,000
    Insurance premium per annum	Rs 600
    Estimated repairs per annum	Rs 1,000
    Power	2 units per hour at Rs 50 per 100 units
    Estimated working hours per annum	2,000 hours

    The machine occupies one-fourth of the total area of the shop. The supervisor spend one-sixth of his time for supervising this machine. General lighting is to be apportioned on the basis of floor area.

    [Chennai, 1998]

    [Ans: MHR = Rs 9.60]

16. Compute MHR from the following data.

    Cost of the machine	Rs 1,00,000
    Installation charges	Rs 10,000
    Estimated scrap value after the expiry of its life (15 years)	Rs 5,000
    Rent and rates for the shop per month	Rs 200
    General lighting for the shop per month	Rs 300
    Insurance premium for the machine per annum	Rs 960
    Repairs and maintenance per annum	Rs 1,000
    Power consumption 10 units per hour
    Rate of power per 100 units	Rs 20
    Estimated working hours per annum, which includes setting up time of 200 hours	2,200
    Shop supervisor's salary per month	Rs 600

    The machine occupies one-fourth of the total area of the shop. The shop supervisor is expected to spend one-fifth of his time for supervising the machine.

    [B.Com., Delhi]

    [Ans: Rs 7.95]

17. A machine was purchased on 01 January 1990 for Rs 5 lakh. The total cost of all machinery inclusive of the new machine was Rs 75 lakh. Further particulars are available as follows:

    Expected life of machine: 10 years

    Scrap value at the end of 10 years: Rs 5,000

    Repairs and maintenance for the machine during the year: Rs 2,000

    Expected number of working hours of the machine per year: 4,000 hours

    Insurance premium annually for all the machines: Rs 4,500

    Electricity consumption for the machine per hour (at 75 paise per unit): 25 units

    Area occupied by the machine: 100 sq. ft.

    Area occupied by other machines: 1,500 sq. ft.

    Rent per month of the department: Rs 800

    Lighting charges for 20 points for the whole department, out of which three points are for the machine: Rs 120 per month.

    Compute the MHR for the two machines on the basis of the data given above.

    [Chennai, 1997]

    [Ans: MHR = Rs 31.904 or Rs 31.90]

18. The production department of a factory furnishes the following information for the month of August.

    Materials used	Rs 54,000
    Direct wages	Rs 45,000
    Labour hours worked	36,000
    Hours of machine operation	Rs 30,000
    Overheads chargeable for the department	Rs 36,000

    For an order executed by the department during the period, the relevant information was as follows:

    Materials used	Rs 6,000
    Direct wages	Rs 3,200
    Labour hours worked	Rs 3,200
    Hours of machine operation	Rs 2,400

    Calculate the overhead charges chargeable to the job by the following methods: (1) Direct materials cost percentage rate, (2) labour hours rate (3) MHR.

    [B.Com., Delhi]

    [Ans: (1) Rs 4,000, (2) Rs 3,200, (3) Rs 2,880]

19. Compute the MHR from the following data:

    Cost of machine	Rs 1,00,000
    Installation charges	Rs 10,000
    Estimated scrap value after the expiry of life (15 years)	Rs 5,000
    Rent and rates for the shop per month	Rs 200
    General lighting for the shop per month	Rs 300
    Insurance premium for the machine per annum	Rs 960
    Repair and maintenance per annum	Rs 1,000
    Power consumption of 10 units per hour
    Rate of power per 100 units	20
    Estimated working hours per annum	2,200
    This includes setting up time of 200 hours
    Shop supervisor's salary per month	600

    The machine occupies one-fourth of the total area. The supervisor is expected to devote one-fifth of his time for supervising the machine.

    [Chennai, 1994]

    [Ans: MHR = Rs 7.95]

    Hint: Assume setting up time of 200 hours as normal. Compute the rate for productive hours: 2,200 -200 = 2,000.

20. From the following information, calculate the MHR.

    1. Cost of asset: Rs 1,05,000 with a scrap value of Rs 15,000 at the end of its working life

    2. Installation charges: Rs 10,000

    3. Life of asset: 10 years at 2,000 working hours per year

    4. Repair charges: 50% of depreciation

    5. Lubricating oil: Rs 2 per day of 8 hours

    6. Consumable stores at Rs 10 per day of 8 hours

    7. Direct wages of operator at Rs 4 per day

    8. Consumption of electric power: 10 units per hour at 7 paise per unit

    [Poona]

    [Ans: Rs 10.20]

21. An engineering company gives you the following details about a new machine installed by them. Calculate the MHR for the machine.

    (1) Cost of the machine	Rs 24,000,000
    (2) Customs duty, insurance, freight etc.	Rs 11,00,000
    (3) Installation expenses	Rs 3,00,000
    (4) Cost of tools for the first 2 years	Rs 4,00,000
    (5) Cost of machine room	Rs 3,00,000
    (6) Cost of air conditioning machine room	Rs 2,00,000
    (7) Rate of interest on loan to finance the purchase	12% per annum
    (8) Salaries of operators	Rs 2,00,000 per annum
    (9) Cost of electricity	Rs 11 per hour
    (10) Consumption of stores	Rs 5,000 per annum
    (11) Other expenses	Rs 5,000 per annum
    (12) Rate of depreciation at 10% per annum on fixed assets
    (13) Total working hours of machine	200 hours per month
    (14) Loading and unloading time	10% of the machine time

    [Madurai, 1982]

    [Ans: Rs 915.66]

22. The following annual charges are incurred in respect of a machine in a shop where manual labour is almost nil and work is done by means of five machines of exactly similar type.

    (a) Rent and rates for the shop: Rs 4,000

    (b) Depreciation on each machine: Rs 400

    (c) Power consumed (as per metre) at 10 paise per unit for shop: Rs 3,00

    (d) Electric charges for light in the shop: Rs 540

    (e) Attendants: There are two attendants for the five machines, and they are each paid Rs 60 per month.

    The machine uses 10 units of power per hour. Calculate the MHR of the machine.

    [Chennai, 1994]

    [Ans: MHR = Rs 3.66; machine hours per annum per machine based on power cost = 600 hours]

    Note: The MHR is a comprehensive MHR since attendants’ wages are also included.

23. A machine costs Rs 90,000 and is deemed to have a scrap value of 5% at the end of its effective 19 years. Usually, the machine is expected to run for 2,400 hours per annum, but it is expected that 150 hours will be lost for normal repairs and maintenance and further 750 hours will be lost due to staggering. The other details in respect of the machine shop are as follows:

    (a) Wages, bonus and provident fund contribution of each of the two operators (each operator is in charge of two machines)	Rs 6,000 per annum
    (b) Rent and rates of the shop	Rs 3,000 per annum
    (c) General lighting of the shop	Rs 250 per month
    (d) Insurance premium for the machine per quarter	Rs 200
    (e) Cost of repairs and maintenance per machine	Rs 250 per month
    (f) Shop supervisor's salary	Rs 500
    (g) Other factory overhead attributable to the shop	Rs 4,000 per month
    (h) Power consumption of the machine per hour: 20 units; rate of power per 100 units	Rs 10

    There are four identical machines in the shop. The supervisor is expected to devote one-fifth of his time for supervising the machine. Compute a comprehensive MHR from the above details.

    [C.A. Inter]

    [Ans: Rs 12.00]

24. From details furnished below, compute a comprehensive MHR.

    (1) Original purchase price of the machine (subject to depreciation at 10% per year on original cost)	Rs 21,600
    (2) Normal working hours for the month (the machine works to only 75% of capacity)	200 hours
    (3) Wages of machine man	Rs 4 per day (hours)
    (4) Wages of a helper	Rs 2 per day (8 hours)
    (5) Power consumption (Horse Power) is estimated at Rs 150 per month for the time worked
    (6) Supervision charges apportioned for the machine	Rs 300 per month
    (7) Electricity and lighting	Rs 75 per month
    (8) Repairs and maintenance (machine) including consumable store per month	Rs 150
    (9) Insurance of plant and building (apportioned)	Rs 1,000 per year
    (10) Other general expenses overhead per annum	Rs 2,160
    (11) Production bonus payable to workers: in terms of an award of basicwages and dearness allowance
    (12) Workers are also paid a fixed dearness allowance of Rs 75 per month
    (13) Add 10% of the basic wages and dearness allowance against leave wages and holidays with pay to arrive at a comprehensive labour cost for debit to production

    [Calcutta]

    [Ans: Rs 10.32]

25. The following particulars relate to a machine:

    Purchase price of machine	Rs 80,000
    Installation expenses	Rs 20,000
    Rent per quarter	Rs 3,000
    General lighting for the whole area	Rs 200 per month
    Supervisor's salary	Rs 6,000 per quarter
    Insurance premium for the machine	Rs 600 per annum
    Estimated repair for the machine	Rs 1,000 per annum
    Estimated consumable stores	Rs 800 per annum
    Power: 2 units per hour at	Rs 50 per 100 units

    The estimated life of machine is 10 years, and the estimated scrap value is Rs 20,000. The machine is expected to run 20,000 hours in its life. The machine occupies 25% of the total area. The supervisor devotes one-sixth of his time for the machine.

    You are required to work out MHR.

    [Madurai]

    [Ans: Rs 10]

26. The following particulars relate to a processing machine treating a typical material:

    1. Cost of the machine	Rs 10,000
    2. Estimated life	10 years
    3. Scrap value	Rs 1,000
    4. Yearly working time (50 weeks of 44 hours each)	2,200 hours
    5. Machine maintenance	200 hours per annum
    6. Setting up time estimated at 5% of total productive time and is regarded as productive time
    7. Electricity is 16 units per hour at 10 paise per unit
    8. Chemical required weekly	Rs 20
    9. Maintenance cost per year	Rs 1,200
    10. Two attendants control the operations of machine together with six other machines. Their combined weekly wages are	Rs 140
    11. Departmental overhead allocated to this machine per annum	Rs 2,000

    You are required to calculate the MHR.

    [CA]

    [Ans: Rs 4.81]

27. A machine costs Rs 90,000 and is deemed to have a scrap value of 5% at the end of its effective life of 19 years. Usually, the machine is expected to run for 2,400 hours per annum, but it is estimated that 150 hours will be lost for normal repairs and further 750 hours will be lost due to staggering. The other details in respect of the machine shop are as follows:

    (a) Wages, bonus and provident fund contribution of each of the two operators (each operator is in charge of two machines): Rs 6,000 per annum

    (b) Rent and rates of the shop: Rs 3,000 per annum

    (c) General lighting for the shop: Rs 250 per month

    (d) Insurance premium per machine: Rs 200 per quarter

    (e) Cost of repairs and maintenance per machine: Rs 250 per month

    (f) Shop supervisor's salary: Rs 500 per month

    (g) Power consumption of the machine per hour: 20 units at Rs 10 per 100 units

    (h) Other factory overheads chargeable to the shop: Rs 4,000 per annum

    There are four identical machines in the shop. The supervisor is expected to spend of his time for supervising the machine. Form the above particulars, compute comprehensive MHR.

    [Mysore]

    [Ans: Rs 12]

28. Calculate the MHR from the following:

    Cost of the machine	Rs 8,000
    Cost of installation	Rs 2,000
    Scrap value after 10 years	Rs 2,000
    Rates and rent for a quarter for the shop	Rs 300
    General lighting	Rs 20 per month
    Shop supervisor's salary	Rs 600 per quarter
    Insurance premium for a machine	Rs 60 per annum
    Estimated repair	Rs 100 per annum
    Power: 2 units per hour	Rs 50 per 100 units
    Estimated working hours	2,000 hours per annum

    The machine occupies one-fourth of the total area of the shop. The supervisor is expected to spend one-sixth of his time for supervising the machine. General lighting expenses are to be apportioned on the basis of floor area.

    [Delhi]

    [Ans: Rs 1.86]

29. A machine shop contains four newly purchased machines each occupying practically equal amount of space and costing, respectively, A: Rs 20,000; B: Rs 25,000; C: Rs 30,000 and D: Rs 40,000.

    The following are the expenses per annum of the machine shop.

    Rent	Rs 10,000
    Rates and water	Rs 4,250
    Light and heat	Rs 3,150
    Power for A	Rs 5,100
    Power for B	Rs 5,000
    Power for C	Rs 12,000
    Power for D	Rs 14,500
    Administration	Rs 9,500
    Running expenses works sundries	Rs 20,000

    Prepare an MHR for each machine, assuming 45 hours in a week and 50 weeks a year, 80% utilisation and life of machine being 10 years without scrap value.

    (C.A)

    [Ans: A, Rs 9.61; B, Rs 10.32; C, Rs 14.97; D, Rs 17.88]

EXAMINATION PROBLEMS

1. A machine shop has 8 identical drilling machines manned by 6 operators. The machines cannot be worked without an operator wholly engaged on it. The original cost of all these 8 machines works out to Rs 8 lakh. These particulars are furnished for a 6-month period.

   Normal available hours per month	208
   Absenteeism (without pay) hours	18
   Leave (with pay) hours	30
   Wages for 8 hours	Rs 20
   Production bonus estimated 15% on wages
   Value of power consumed	Rs 8,050
   Supervision and indirect labour	Rs 3,300
   Lighting and electricity	Rs 1,200
   These particulars are for a year

   Repairs and maintenance including consumables 3% on the value of the machine

   Insurance	Rs 40,000
   Depreciation	10% on original cost
   Other sundry works’ expenses	Rs 12,000
   General management expenses allocated	Rs 54,530

   You are required to work out comprehensive MHR for the machine shop.

    

   

    

2. 1. Compute comprehensive MHR from the following data:
      1. Total cost of machine to be depreciated: Rs 2,30,000
      2. Life: 10 years
      3. Depreciation on straight line
      4. Departmental overheads (annual):

         Rent	Rs 50,000
         Heat and light	Rs 20,000
         Supervision	Rs 1,30,000

      5. Departmental area	70,000 square metres
         Machine area	2,500 square metres

      6. No. of machines in the department: 26
      7. Annual cost of reserve equipment for the machines: Rs 1,500

      8. Hours run on production: 1,800
      9. Hours for setting and adjusting: 200
      10. Power cost: Re 0.50 per hour of running time
      11. Labour:
          1. When setting and adjusting, there should be a full-time attention
          2. When machine is producing, one worker can look after three machines
      12. Labour rate: Rs 6 per hour
   2. Using the MHR as calculated above, work out the amount of factory overhead to be absorbed on the following:

      Ans: Comprehensive MHR = 20.14

      Note: It is assumed that there is no power cost when the machine is being set or adjusted.

       

      (B) If the MHR as calculated in (A) is adopted, the overheads absorbed over the various jobs will be as follows

      Job no. 605 = 20.14 × 80 = Rs 1,611.20

      Job no. 595 = 20.14 × 70 = Rs 1,409.80

3. A machine costs Rs 90,000 and is deemed to have a scrap value of 5% at the end of its effective life (19 years). Usually, the machine is expected to run 2,400 hours per annum, but it is estimated that 150 hours will be lost for normal repairs and maintenance and further 750 hours will be lost due to staggering. The other details in respect of the machine shop are as follows:

   Wages, bonus and provident fund, contribution of each of two operators (each operator is in charge of two machines)	Rs 6,000 per year
   Rent and rates of the shop	Rs 3,000 per year
   General lighting of the shop	Rs 250 per month
   Insurance premium for the machine	Rs 200 per quarter
   Cost of repairs and maintenance per machine	Rs 250 per month
   Shop supervisor's salary	Rs 500 per month
   Power consumption of the machine hour	20 units
   Rate of power per hundred units	Rs 10
   Other factory overheads attributable to the shop	4,000 per year

   There are four identical machines in the shop. The supervisor is expected to devote 1/5th of his time for supervising the machine. Compute a comprehensive MHR from the above details.

   Ans: Total MHR = 12.00

4. Calculate the MHR for the recovery of overheads for a group of three machines from the following data:

   Original cost of 3 machines	Rs 56,800
   Depreciation at 10% per annum (straight line method)
   Repairs and maintenance cost average	Rs 16 per day
   Power	30 paise per running hour per machine
   Supervision for the group of machines	Rs 800 per month
   Allocation of rent for 3 machines on a floor area basis	Rs 120 per month
   Share of manufacturing overheads	Rs 250 per month for the group of machines
   Normal working days	300 in a year
   Normal operation	1 shift of 8 hours
   Normal allowance for repairs, maintenance, change over, idle time etc	20%

    

   

    

5. The following annual charges are incurred in respect of a machine in a shop where manual labour is almost nil and work is done by means of five machines of exactly same type of specification.

   (i) Rent and rates (proportional to the floor space) for the shop	Rs 4,800
   (ii) Depreciation on each machine		500
   (iii) Repairs and maintenance for the five machines		1,000
   (iv) Power consumed (as per meter) @ 5 p. per unit for the shop	Rs 3,000
   (v) Electric charges for light in the shop	Rs 540
   (vi) Attendants: There are two attendants for the five machines and they are each paid Rs 60 per month.
   (vii) Supervision: For the five machines in the shop there is one supervisor whose emoluments are Rs 250 per month
   (viii) Sundry supplies for the shop	Rs 450
   (ix) Hire purchase instalments payable for the machine (including Rs 300 as interest): 1,200

   The machine uses 10 units of power per hour. Calculate the MHR for the machine for the year.

   Ans: Comprehensive MHR = 2.7884 or 2.79

   Note: (1) Calculations are made up to the fourth decimal to minimise the effect of approximations.

           (2) When attendants’ salary or wages is also included in the calculation, the MHR is called ‘comprehensive MHR’ or ‘composite MHR’.

   Working Note: annual working hours per machine

   Total amount of power consumed: Rs 3,000

   Rate of power: 0.50 per hour

   Total working hours = = 6,000 hours

   No. of machines = 5

   Hours per machine = = 1,200 hours per annum

6. The following figures have been extracted from the books of a manufacturing company. All jobs pass through the company's two departments:

   	Working department (Rs)	Finishing department (Rs)
   Materials used	6,000	500
   Direct labour	3,000	1,500
   Factory overheads	1,800	1,200
   Direct labour hours	12,000	5,000
   Machine hours	10,000	2,000

   Following information relates to Job no. 17.

   	Working department (Rs)	Finishing department (Rs)
   Materials used	120	10
   Direct labour	65	25
   Direct labour hours	265	70
   Machine hours	255	25

   You are required (a) to enumerate four methods of absorbing factory overheads by jobs showing the rates for each department under the methods quoted and (b) to prepare a statement showing the different cost results for job no. 17 under each of four methods referred to.