Manufacturing Overhead Allocation and Costing

This assignment focuses on calculating manufacturing overhead costs for two departments (A and B) using different allocation bases: machine hours for department A and direct labor cost for department B. It also requires determining the over or under-absorption of manufacturing overhead for both departments. Finally, students are tasked with calculating the total cost for Job 110, incorporating direct materials, direct labor, and allocated manufacturing overhead costs.

Name: I.L.Edirisingha
Student No: HDIB/2019/014
Assignment: Cost and Management Accounting
University Of Kelaniya

Question 01-By using examples, explain the difference between process costing and specific order costing?
Process costing
Process costing is a term used in cost accounting to describe one method for collecting an assigning manufacturing
costs to the units produced. A processing cost system is used when nearly identical units are mass produced. (Job
costing or job order costing is a system used to collect and assign manufacturing costs to units that vary from one
another.) Process costing is an accounting methodology that traces and accumulates direct costs, and allocates indirect
costs of a manufacturing process. Costs are assigned to products, usually in a large batch, which might include an
entire month's production. Eventually, costs have to be allocated to individual units of product. It assigns average
costs to each unit, and is the opposite extreme of Job costing which attempts to measure individual costs of
production of each unit. Process costing is usually a significant chapter. It is a method of assigning costs to units of
production in companies producing large quantities of homogeneous products.
Examples of this include the chemicals and processes food, Coca-cola company produce drink.
Specific Order Costing
The basic costing method applicable where the work consists of separate contracts, jobs or batches, each of
which is authorized by a special order or contract. The specific order costing is further classified into the following.
1) Job Order costing: Under this method, costs are ascertained for each work order separately as each has its
own specification and scope. Tailor made products also get covered by this type of costing.
Example: Repair of buildings, Painting, Cake Ordering, Advertising Company etc
2) Contract costing:
In this method costing is done for jobs that involve heavy expenditure and stretches over long period and
across different sites. It is also called as terminal costing.
Example: Construction of roads and bridges, buildings etc
3) Batch costing:
Through this method the costing is done for units that are produced in batches that are uniform in nature
and design.
Example: Pharmaceuticals, Produce Soldiers shoes

Question 02-Gamini manufactures sets up as a manufacturing business in Sri-Lanka. The budgeted selling
price and costs of its single product are as follows. Product as follows.
Budgeted for one unit Rs.
Selling price 50
Direct Material 20
Direct Labor 7.50
Variable product overhead 5
Total variable cost 32.50
The fixed production overhead cost for one month is budgeted as Rs.75000.The budgeted production volume is
10000 per month.
For the months of January to June the production and sales were 10000 per month as budgeted. In the month of
July the production was 9000 but the sale were only 8600 units.
1. Prepare profit statements for month of July, in a columnar format, using.
(a) Marginal costing
(b) Absorption costing

Gamini Manufactures Ltd
Marginal Costing Statement
Sales 50*8600 430,000.00
(-)var.cost of goods sold
Opening Stock
Var.Product Cost
Direct Material 20*9000 180,000.00
Direct Labor 7.50*9000 67,500.00
Var.Manufacturing OH 5*9000 45,000.00
292,500.00
(-)Closing Stock 32.50*400 -13,000.00
Var.COGS 279,500.00
Production Contribution 150,500.00
(-)Var.Expences
Var.selling Expenses -
Var.Admin Expenses -
Contribution 150,500.00
Fixed Expenses
Fixed Selling Expenses
Fixed Admin Expenses
Fixed Manufacturing OH 75,000.00 75,000.00
Net Profit 75,000.00
Closing Stock Cost- 20 DM
7.5 DL
5 Var.Man,OH
32.5

Gamini manufactures Ltd
Absorption Costing Statement
Sales 50*8600 430,000.00
(-)Cost of goods sold
Opening Stock
Var.Product Cost
Direct Material 20*9,000 180,000.00
Direct Labor 7.50*9,000 67,500.00
Var.Manufacturing OH 5*9000 45,000.00
Fixed Manufacturing OH 75,000.00
367,500.00
(-)Closing Stock 40*400 16,000.00
COGS 351,500.00
Gross Profit 78,500.00
Expenses
Var.selling Expenses -
Var.Admin Expenses -
Fixed Selling Expenses -
Fixed Admin Expenses -
Net Profit 78,500.00
Closing stock Cost 20 DM
7.5 DL
5 Var.Man.OH
7.5 Fixed.Man.OH (75,000/10,000)
40
Closing stock units 400 (9000-8600)
2 .Explain the difference between net profit under absorption costing and the same under marginal costing.

The difference between the profit of absorption costing and the profit of marginal costing is affected
by the difference in the final stock. Applies only those costs to inventory that were incurred when
each individual unit was produced, while absorption costing applies all production costs to all
units produced. This results in the following differences between the two methods:
 Cost application. Only the variable cost is applied to inventory under marginal costing,
while fixed overhead costs are also applied under absorption costing.
 Profitability. The profitability of each individual sale will appear to be higher under
marginal costing, while profitability will appear to be lower under absorption costing.
 Measurement. The measurement of profits under marginal costing uses the contribution
margin (which excludes applied overhead), while the gross margin (which includes applied
overhead) is used under absorption costing.
Overhead costs are charged to expense in the period under marginal costing, whereas they are
applied to products under the absorption costing method (which may defer expense
recognition to a later period).
An additional difference is that absorption costing is required by the applicable accounting
frameworks for financial reporting purposes, so that factory overhead will be included in the
inventory asset. Marginal costing is not allowed for financial reporting purposes, so its use is
restricted to internal management reports.
Question 03 Madura Ltd absorbs overheads on the basis of labor hours and has the following information
available.
Difference
Absorption Costing 16000
Marginal Costing 13000
3000

ITEM BUDGETED ACTUAL
Fixed Production OH Rs.450,000 Rs.475,000
Output 50,000 60,000
Labor Hours 900,000 930,000
Calculate the under or over absorption of overheads in the year.
Fixed production Overhead per Labor Hour = Budgeted fixed production Overheads
Budgeted Activity Level
= 450,000
900,000
= 0.5 Per Labor Hours
Production Overhead = Fixed production Overhead* Actual Level of Activity base
= 0.5*930,000
= 465,000
Under Absorption = Actual Overhead Absorption - Absorbed Overhead Absorption
Under Absorption =475,000-465,000
Under Absorption =10000
Question 04 Amesh Company has two departments, A and B.Overhead is absorbed based on machine hours in
department. A and labor cost in department B.The following additional information available.

Budgeted Amount Department A (Annual) Department B (Annual)
Direct Labor Cost Rs.252, 000 Rs.168, 000
Manufacturing Overhead Rs.180, 000 Rs.252, 000
Machine Hours 70,000mh 56000mh
The following information is the actual data for one of the jobs completed during the month.
Actual Data for Job 110 Department A Department B
Direct Material Used Rs.14, 000 Rs.22 400
Direct Labor Hours Used 2800 400
Machine Hours 9800MH 3080MH
Direct Labor cost per hour is Rs.20 for department A and Rs.18 for department B.
1) Compute budgeted manufacturing overheads rates for department A and B.
Department A (Machine Hours)
Overhead cost per Machine hour = Budgeted Manufacturing Overhead
Budgeted Machine Hour
= 180,000
70,000
= 2.57
Department B (Labor Cost)
Overhead cost per 1 Rupee Labor Cost = Budgeted Manufacturing Overhead
Direct Labor Hours
= 252,000
168,000
= 1.5
2) Calculate over or under absorbed manufacturing overhead for department A and B .
Department A

Manufacturing Production OH = 180,000 = 2.57
Machine Hours 70,000
Actual Machine Hours * 2.57 = 9,800*2.57
9,800*2.57 = 25,168
Over/Under Absorption = 25,186-180,000=154,518
Under Absorption for Department A
Department B Working
Budgeted Manufacturing Overhead = 252,00 =1.5 Actual Labor Cost = 400*18
Direct Labor Hours 168,000 = 7200
Actual Labor Hours*1.5 = 7200*1.5
7200*1.5 = 10,800
Over/Under Absorption =10,000-252,000=241,200
Under Absorption for Department B
3) What is the total cost for Job 110?
Direct Material Cost = Department A - 14,000

Department B - 22,400
36,400
Direct Labor = Department A - 56,000
Department B - 7,200
63,200
Fixed Production Over Head = Department A- 25,186
Allocation rate*Actual usage of allocation
2.57*9800
25186
Department B -10,800
Allocation rate*Actual usage of allocation
1.5*7200
10800
36,000
135,586