The Hindu Business Line : Statement of overhead recovery rates

Business Daily from THE HINDU group of publications Monday, Mar 19, 2007 ePaper

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Mentor - Accountancy
Statement of overhead recovery rates

P. V. Ratnam

Analysis of the December 2006 ICWA (Stage I) paper on cost and management accounting

A company has three production departments, P, Q, R, and two service departments, M and C.

The details shown in Table 1 are in respect of indirect expenses incurred for a typical month. Further data on distribution of overheads is presented in Table 2:

Calculate: a) overhead recovery rates showing the basis of apportionment; and b) total cost of Job No. 234, the job card of which has data as recorded in Table 3.

Answer: The statement of overhead recovery rates is presented in Table 4. Working Note (WN) 1 on power is presented in Table 5.

P = 117600/ 339300 x 6000 = 2080, and so on.

The total cost of Job 234 is shown in Table 6.

Apportionment of joint cost

In a chemical plant, four different products — AB, BC, CD and DD — emerge from the input of crude oil. Product AB can be sold immediately, but the remaining three products require further processing before they can be marketed.

In a month, 40,000 litres of crude oil were procured at Rs 30 per litre and processes at a cost of Rs 3 lakh. The details of output obtained, further processing cost, selling price per unit, etc., are given in Table 7.

Prepare: i) statement showing apportionment of joint cost on suitable basis and product-wise profitability statement; and ii) if the company finds a market for CD at Rs 63/kg without further processing, will it be advisable to accept it?

Answer: WN1:Cost of crude oil (40,000 x 30) = Rs 12,00,000

Add processing cost = Rs 30,0000

Joint cost = Rs 15,00,000

The apportionment of joint cost is worked out in Table 8.

AB: 360000/1940000 x 1500000 = 278350, and so on.

Sale of CD without further processing (12000 x 63) = 756000

Less: Cost at split off point = 556701

Profit = Rs 1,99,299

This is higher than the Rs 1,63,299 profit after further processing. As the profit is higher by Rs 36,000, it is advisable to sell CD at Rs 63 per kg without further processing.

Note: Incremental sales of CD (840000 - 756000) = 84000

Further processing cost = Rs 1,20,000

Loss, if it is further processed = Rs 36,000

Hence, it is advisable to sell CD at Rs 63 per kg without further processing.