Page 78 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING
P. 78

Unit 5: Overheads




             2.   Convenience: The overhead rate should be simple to calculate and easy to understand.   Notes
                 It should be convenient in application. It should not require unnecessary or additional
                 clerical work.
             3.   Time Factor: Overhead rate should have some relation to the time taken by various
                 jobs for completion. Thus, if a job takes twice as much another job, the first job should

                 be charged twice the amount charged to the second job. It is because of this reason
                 that direct wages percentage rate is preferred over direct material cost percentage
                 rate.
             4.   Manual or Machine Work: The work done by manual labour is to be distinguished
                 from work done by machines and different overhead rates should be applied for
                 manual and machine work.

             5.   Different Overhead Rates:  Different overhead rates should be ascertained for
                 different departments where the nature of work done by one department is different
                 from the work done by other department or departments.

             6.   Information: The selection of most appropriate overhead rate depends on the extent
                 of information available or recorded.


                 Example:  From the budgeted figures of Gwalior Soap Factory:

          1.   Prepare Normal Overhead Application Rates using the:
               (a)    Direct Labour Rate Method
               (b)   Direct Labour Cost Method, and
               (c)    Machine Hours Rate Method.

                    Budgeted figures for the year:

                    Estimated factory overheads   `  58,000
                    Estimated direct labour hours   ` 1,34,600
                    Estimated direct labour cost   `  97,800
                    Estimated Machine-hours    `  50,500
          2.   Prepare a comparative statement of cost showing the result of the application of each of the
               above rates of Batch No. 488 from the data given below:
               Direct materials consumed          ` 42
               Direct labour                      ` 45

               Direct labour hours                  30
               Machine hours                        20
          Solution:
          1.   Computation of Normal Overhead Application Rates from the following Methods:

               (a)   Direct Labour Hour Rate Method:
                    Estimated Factory Overheads      ` 58,000
                    Estimated Direct Labour Hours     1,34,600
                                             58,000
                    Overhead Application Rate =     = ` 0.431
                                            1,34,600




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