Calculation of MHR:
All the machines have to be classified into groups containing similar machines. On the basis of these groups & the service departments, the primary distribution of expenses needs to be done. To these groups, the reapportionment should be done of the service department expenses so that each group gets the total overhead which will be absorbed by the products by which the group of machines is being used.
Factors to be considered before the computation of MHR:
- Machine
setting time & idle time: Firstly,
the actual or potential hours of work of the machine
during a period has to be taken. For the purpose
of ascertainment of the expected effective hours
of work, machine setting time, time which has been
lost for the purpose of normal repairs & maintenance,
normal idle time etc. has to be deducted. Consideration
should not be given to the idle time of abnormal
character for the purpose of ascertainment of the
expected effective hours of work. If there is any
idle time which arises, then such time will get
multiplied by the machine hour rate & will
result in idle time cost which will be charged
to idle time account to be written off to costing
profit & loss
account.
- Machine
Operator: Wages
of operators may be included in the computation
of MHR only if a comprehensive MHR is desired,
otherwise it will be treated as a direct expense
not to be included in the MHR calculation.
- Depreciation: For the purpose of MHR computation, depreciation could be treated either as fixed or as variable, preferably as the later.
Technique of computation of MHR:
The items of expenses which constitute the machine’s or group’s total overhead
are to be arranged under two group heads:- (i) fixed expenses or standing charges & (ii)
variable expenses or machine expenses.
Rent & rates, heating & lighting, salary paid to supervisor, welfare expenses,
insurance paid, sundry supplies, consumable stores etc. comes under first group.
On the other hand, depreciation, power, repairs & maintenance etc. falls under
the second group.
Fixed expenses or standing charges per hour can be computed by dividing the total expenses falls under the head fixed expenses or standing charges by the effective hours of work. This should be shown in the outer column. Similarly, each individual element of expense which falls under the head variable expenses or machine expenses should be divided by the effective hours of work & the result should be shown in the outer column. Now, MHR will be the total of the outer column.
- Advantages of
MHR are: -
(a) Where there is a predominance of machine work, an equitable charge is ensured by MHR.
(b) It becomes the best method of recovery irrespective of whether several machines are being operated by one operator or one machine is operated by many operators.
(c) The amount of under-absorption divided by the MHR will disclose how long the machine will be remained idle, provided in recording, there is no error.
(d) This is a logical method as time factor is completely taken into consideration .
(e) Calculation of predetermined rate & application of the same is not difficult.
Illustration2: A machine worth $ 25000 was installed
in a shop over 1/5th of its floor area at an additional cost of $ 5000.The working
life of the machine was estimated to be 10 years & the scrap was estimated $ 2500.
Compute the historical hourly rate of the machine from the below mentioned details:
Per year rent & rates of the shop 1250
Per month supervisor’s salary 250
Per month general lighting of the shop 125
Quarterly insurance premium of the month 150
Per year machine’s repairs & maintenance 750
Supervisors devote for the machine is estimated at 1/4th of his time. The cost of the
power is $ 5 per 100 units & power @ of 10 units per hour is consumed by the machine.
During the year the machine actually worked for 1000 hours whereas the normal working
hour of the machine is estimated at 1200.
Illustration3: The
following information relates to the activities of
a production department of a factory for a certain
period which produces 2 products A & B:
A B
Direct materials cost $
40 $
60
Direct Labour cost:
Machining $
1.20 per hour 20
hours 40
hours
Assembly $
1.00 per hour 8
hours 8
hours
During the forthcoming year, 160000 units of A & 80000 units of B are being planned
to be produced by the factory & overhead for that
year estimated is $ 960000.
Calculate the overhead absorption rates on the following alternative bases:
(i) rate per hour; (ii) rate per direct labour hour;
(iii) rate per machine hour; (iv) % of direct material;
(v) % of direct wages; (vi) % of prime cost.
Solution (i) Rate per unit = $ 960000/ (160000+80000)
= $ 4 per unit of production.
(ii) Rate per Direct Labour hour = $ 960000/8320000 = $ 0.115
Note- Total direct labour hours:
Machine hours – 160000*20 3200000
80000*40 3200000
6400000
Assembly hours – 160000*8 1280000
80000*8 640000
1920000
8320000
(iii) Rate per Machine hour = $ 960000/6400000 = $ 0.15
(iv) % of direct materials = $ 9600000 * 100 = 8.571%
1120000
Note – Material Cost: A $40*160000 = 6400000
B
$60*80000 = 4800000
1120000
(v) % of Direct wages = $ 960000 * 100 = 10%
9600000
Note- Direct wages: Machine department -$ 1.20*6400000 = 76800000
Assembly
department -$ 1.00*1920000 =1920000
9600000
(vi) % of Prime cost = $ 960000_______ * 100 = 4.615%
1120000+9600000
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