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Formula:
The formula used in computing the rate is:
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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.
Disadvantages:
The disadvantages are:
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The machine hour rate may have different concepts such as:
(1) Ordinary Machine Hour Rate:
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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.
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.
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Illustrative Problem 1:
The Genetry Company produces two products, X and Y.
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:
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Variable cost per unit = X, (3, 00, 000/12, 500) = Rs 24, and Y, (1, 50,
000/12, 500) = Rs 12
Illustrative Problem 2:
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Building occupancy costs have been budgeted at Rs. 20,000 per year
and are non-variable with volume.
Illustrative Problem 4:
An engineering company, engaged in the manufacturing of various
heavy engineering products, has installed one Pegard Numerical
Control Horizontal Borer for specialised manufacturing operations.
(viii) Salaries, etc. for operators and supervisory staff Rs 2 lakhs per
year
Notes:
(1) Total working hours per annum are 200 x 12 = 2,400.
(3) Effective working hours are 2,160 hours (2,400 – 10% of 2,400).