Question

if someone could provide flow chart and costing based on machine hour rate process for a mattress manufacturing company

need a machine hour rate based costing process flow chart indicating apportionment and allocation

costing flow chart for a manufacturing process

detailed example of computation of machine hour rate method

Answer 1

Factory overhead/Machine hours

If factory overhead is Rs 3, 00,000 and total machine hours are 1,500, the machine hour rate is Rs 200 per machine hour (Rs 3, 00,000 ÷ 1500 hours).

Advantages:

This method can be used advantageously where the machine is the major factor in production. In capital intensive industries plants and machines are used in large quantities and one operator may attend to several machines or several operators may attend to single machine. By making the machine the basis, therefore, overhead costs can be equitably absorbed among different products.

Disdvantages:

1) Machine hour data have to be collected; therefore it requires additional clerical work. The cost of collection and accounting activities goes up and therefore, is not workable for small business firms.

(2) The method cannot be used universally by all business concerns. It can be used where production is mainly through machine. Comparatively, direct labour hours can be used widely by the organizations.

Calculation of Machine Hour Rate:

For the purpose of computing the machine hour rate, each machine (or a group of similar machines) becomes a cost centre and all overheads are charged to a machine cost centre or to differ­ent machine cost centres if many such centres have been created within the department. A machine hour rate for a specific machine cost centre is computed by dividing the total overhead estimated or incurred for that machine divided by actual or estimated machine hours.

The machine hour rate may have different concepts such as:

(1) Ordinary Machine Hour Rate:

This rate takes into account only those overhead expenses which are variable and directly attributed to the running of a machine. Such expenses are power, fuel, repair, maintenance and depreciation. The total of all these expenses is divided by the total machine hours.

(2) Composite Machine Hour Rate:

This method takes into account not only expenses directly connected with the machine as mentioned above, but also other expenses which are known as stand­ing or fixed charges. Such expenses are rent and rates, supervisory, labour, lighting and heating, etc. These expenses being fixed in nature are determined for a particular period and then apportioned among different departments on some equitable bases. The overhead expenses thus apportioned to each department are further apportioned among the machines (machine cost centres) in that depart­ment on an equitable basis.

The following are bases used for the apportionment of expenses for computing machine hour rate:

Selecting an Absorption Rate:

The above absorption rates have their own merits and demerits. The method to be used depends on the factors and circumstances prevailing in a manufacturing firm.

Whatever method is selected by a firm, it must achieve the following objectives:

(1) The basic objective is to select an absorption base which helps in determining the accurate amount of factory overhead to be charged to individual products, jobs, processes, etc. The base should have cause and effect relationship with the incurrence of the overhead costs and should be physically related to the production of the products. If overhead items mainly relate to the use of machinery, a machine hour rate will be suitable. If overhead items originate due to purchasing and handling materials, then the materials cost may be selected as the base.

(2) A secondary objective in selecting a method of absorption is to minimise clerical effort and cost. When two or more absorption rates tend to charge the same amount of overhead, the simplest base could be used. Generally speaking, the direct labour cost or materials cost base do involve least clerical effort and cost, whereas direct labour hour and machine hour involve more clerical work and are expensive. In a standard costing system the usual bases are standard direct labour cost, standard labour hours, and standard machine hours.

(3) The selection of an absorption base is also influenced by other factors, such as type of industry, legal requirements, if any, policy of management, etc. in addition to the suitability of a method under specific circumstances.

Illustrative Problem 1:

The Genetry Company produces two products, X and Y.

Estimated costs are presented below for a year in which 12,500 units of each product are expected to be sold:

An annual profit of Rs 1, 50,000 for the whole company is considered satisfactory. The com­pany uses the same gross margin percentage (i.e., mark-on) to arrive at the price for both products.

Required:

(a) Calculate selling prices for both products X and Y.

(b) Using the prices calculated above, how much profit would result if sales were 15,000 units of X and 10,000 units of Y instead of 12,500 units of each?

(c) Comment on the effect of changes in the product mix on total profit when the same margin percentage is used (M Com., Delhi 1993)

Solution:

Determination of selling price:

(c) The total company profit is Rs 180,000 in situation (B) as compared to Rs 1, 50,000 in (A)

Note:

Gross profit will be Rs 2, 70,000 as total profit is Rs 1, 50,000 after paying selling and administrative cost of Rs 1, 20,000. Thus,

Gross profit = Selling and Admn. + Company profit

= 1, 20,000 + 1, 50,000 = Rs 2, 70,000.

Variable cost per unit = X, (3, 00, 000/12, 500) = Rs 24, and Y, (1, 50, 000/12, 500) = Rs 12