BASIC COST ACCOUNTING

47 BASIC COST ACCOUNTING

ENRICHMENT EXERCISE 2.2:

The following information relates to the movements of materials X123 used
in the production of cement in Kilang Zeero Sdn Bhd.

Jan 1 Purchased 100kg of materials @ RM1.00
5 Purchased 100kg of materials @ RM1.50

10 Issued 80kg of materials for production
15 Received 130kg of materials @ RM2.30
20 Issued 50kg of materials
25 Issued 100kg of materials
29 Received 150kg of materials @ RM2.50
30 Issued 125kg of materials

Determine the value of materials using the method below:
a. FIFO
b. Weighted Average

Solution: RECEIPTS ISSUES STOCK BALANCE
Date

-

48 BASIC COST ACCOUNTING

PRACTICE QUESTIONS

QUESTION 1

The data below is extracted from Speedy Manufacturing Com. At 31 December
2020.

Price of materials RM5.00 per liter
Cost of ordering RM100 per order
Carrying cost 20% per annum
Normal consumption 500 liter per week
Minimum consumption 250 liter per week
Maximum consumption 750 liter per week
Lead time period
4 to 6 week

Assume that the company works 48 weeks a year.

You are required to calculate:

a. Economic Order Quantity
b. Re-order level
c. Minimum Stock Level
d. Maximum Stock Level
e. Average Stock Level

QUESTION 2

The following information relates to material CK:

Max Usage 150 meters per week
Min Usage 50 meters per week
Re-order quantity 400 meters
Lead time 2 – 4 weeks

Required:

Calculate the following:

a. Re-order Level (ROL)
b. Minimum stock level
c. Maximum stock level

49 BASIC COST ACCOUNTING

QUESTION 3

Azalia Sdn Bhd is a company producing heavy duty rubber mat. The monthly
production is 2 000 units. The main raw material used in the production of heavy
duty rubber mat is synthetic rubber. The raw material is purchased from supplier at
RM25 per meter. One unit of heavy duty rubber mat requires 1.5 meter of the
synthetic rubber.

The synthetic rubber is delivered to Azalia Sdn Bhd at a cost of RM4.50 for every
order made. The carrying cost for the material is 10% of the material cost. They
ordering period for the synthetic rubber is between 2 weeks to 4 weeks. The usage
of the synthetic rubber is between 80 meters to 100 meters per week.

Required:

a. Calculate the EOQ using equation method.
b. Based on answer in (a) above, calculate the total cost involved.
c. Calculate the following stock level
d. Re-order level
e. Maximum stock level
f. Minimum stock level

QUESTION 4

Periuk Dapor Sdn Bhd involves in the distribution of stainless steel products. One of

its popular product is Kuali Magika. The company is concerned about inventory

cost related with this product.

The following is the information related to Kuali Magika:

Storing costs RM4.00/unit

Warehouse insurance RM1.00/unit

Insurance cost RM14.00/order

Documentation costs RM50.00/order

Weekly sales 400 - 600 (units)

Lead Time (shipment from supplier) 1 — 2 (weeks)

Assume 50 working weeks per year

50 BASIC COST ACCOUNTING

Required:

Compute the following stock levels.
a. Re-order level
b. Economic order quantity (EOQ)
c. Maximum stock level
d. Minimum stock level

QUESTION 5

The following information relates to the movement of stocks for the period ended
31 May 2020:

Date Balance b/d Transactions
Jan 1 Purchased 10 000 units @ RM 4 per unit
5 000 units @ RM 4.10 per unit
15 Issued 9 000 units
25 Issued 2 000 units
Feb 15 Purchased 20 000 units @ RM 4.20 per unit
Mar 10 Issued 15 000 units
Apr 16 Purchased 5 000 @ RM 4.30 per unit
May 18 Return outwards 1 000 units (purchased on 18 May
20 Issued 10 000 units
25

On 31 May, the physical stock take indicated that the balance of stock on hand
was 2 800 units.

Required:

Prepare a Store Ledger Card using the following methods:

a. First-In-First-Out (FIFO)
b. Weighted Average Cost (WAC)

Calculate the total amount of issue and the closing stock balance.

QUESTION 6

The following is a summary of the receipts and sold of materials in a store during
January 2020.

Jan 1 Received from supplier 1,000 units at price RM1.00 per unit
3 Received from supplier 260 units @ RM1.05 per unit

51 BASIC COST ACCOUNTING

4 Issues to the factory 700 units
8 Received from supplier 200 units @RM1.15 per unit
13 Received from supplier 180 units @ RM1.25 per unit
16 Issues to the factory 620 units
20 Issues to the factory 240 units
28 Received from supplier 280 units @ RMI. I O per unit
30 Issues to the factory 100 units

From the information given above, you are required:

a. Draw up stores ledger account showing the transaction as they would
appear until 30th January 2020 using;
i. FIFO
ii. Average Cost (AVCO)/ Weighted Average

b. Determine the value of the ending inventory at 30th January 2020.

QUESTION 7

The information below shows data of materials received and issued by Syarikat
AMWEI during April 2021.

Apr 2 Received from supplier 1,200 units at price RM3.40 per unit.
6 Issues to the factory 1,000 units
Received from supplier 1 ,000 units @RM2.50 per unit
10 Received from supplier 800 units @ RM4.45 per unit
11 Issues to the factory 1,900 units
14 Received from supplier 1 ,800 units @ RM3.90 per unit
19 Received from supplier 500 units @ RM5.60 per unit
20 Issues to the factory 900 units
22 Issues to the factory 1,100 units
23 Received from supplier 1,000 units @ RM3.48 per unit
24 Received from supplier 400 units @ RM3.35 per unit
25 Issues to the factory 800 units
30

Closing stock on 31 December 2012 is 1,000 at price RM3.50

As an account assistant, you are required to prepare the stores ledger account
from the transactions above using the following methods:

i. FIFO
ii. Average Cost (AVCO)/ Weighted Average

52 BASIC COST ACCOUNTING

QUESTION 8

Simtrok Sdn Bhd is a manufacturing company produces and selling fruit juice. The
following transactions are related to the purchases and issuances of the juice for
the month of August 2020.

Date Transaction RM
Aug 1 Balance from last month 1,000 boxes 14,500
Issued 400 boxes 17,250
3 Purchased 1,200 boxes 13,590
8 Purchased 900 boxes
11 Issued 1,800 boxes 18,720
19 Returned from customer 200 boxes issued
22 on 3/8/2020
Issued 1,000 boxes
24 Purchased 1,300 boxes
27 Returned to supplier 700 boxes purchased
30 on 27/8/2020 due to defect.

A stock count on 31 August showed a balance of 600 boxes of fruit juice.

Required:

Prepare a stock ledger card for the month of August 2020 using First in First out
(FIFO) method.

QUESTION 9

Kopayo Design Enterprise is a trading firm that prints coloured design on a special
glass known as 'My Design'. One of the materials used is 'K 10'. The firm maintains its
stocks on monthly basis by using a perpetual inventory control system. It uses the
'First in First Out' (FIFO) method for its stock valuation.

On 1 December 2020, the firm held stock of 200 units valued at RM2,300 of which
comprised of 50 units that were purchased on the last day of November 2020, at a
price of RM13 each.

The following transactions took place for material 'K 10' in the month of December
2020.

02 Purchased 140 units at RMI 1.50 each
12 Issued 170 units
17 Purchased 150 units at RM13.00 each

53 BASIC COST ACCOUNTING

21 Issued 220 units
24 Returned to supplier 40 units which was bought on 17 December
27 Purchased 150 units at RMI 1.00 each

Required:

Record the above transactions into the store ledger card using the First-in-First Out
(FIFO) method.

QUESTION 10

Permata Biru Sdn Bhd is the largest manufacturer of crystal trophies in Kuala
Lumpur. High quality optic crystal is required to produce a crystal trophy. The
information pertaining to the purchases and issuances of optic crystals for the
month of March 2017 is provided below.

Date Transaction RM
12,000
1 Opening balance of optic crystals amounting 150kg 162,000
40,750
7 Purchased 2,000kg optic crystals.
33,400
10 Purchased additional 500kg optic crystals

11 Returned 250kg damaged optic crystals which were

purchased on 7 March to the supplier.

12 Sent 2,300kg optic crystals to production

department

15 Production department returned a 100kg optic

crystal which was purchased on 10 March.

20 Received 400k optic crystals from the supplier.

28 A physical stock count revealed 450kg optic crystals

in store.

Required:

Prepare a store ledger card for the month of March 2017 based on First-in-First Out
(FIFO) method.

THE COST CLASSIFICATION :54 BASIC COST ACCOUNTING
COSTING FOR LABOURS
TOPIC 3

3.
3.1. Define the direct labour and indirect labour cost

3.2 Explain recording and control labour costs
3.3 Explain the different types of remuneration

method
a. Time-based Schemes
b. Piecework Schemes
c. Bonus/Incentives Schemes
3.4 Calculate the remuneration using the different
methods
3.5 Explain advantages and disadvantage of
various remuneration methods
3.6 Explain the labour productivity and the effects
of labour turnover

55 BASIC COST ACCOUNTING

1. TOPIC 3: THE COST CLASSIFICATION: COSTING FOR LABOURS
3.
3.1. Define the direct labour and indirect labour cost

DEFINTION OF LABOUR

The workforce in a business, specifically workers who work in the
factory area. It represents one of the components in the total
production cost.

Labour can have different skill levels or grades such as skilled, semi-
skilled and unskiled labour. It can also be either direct labour or
indirect labour.

A. What is the Cost of Labour?
o The cost of labour is the sum of all wages paid to employees, as well as
the cost of employee benefits and payroll taxes paid by an employer.
The cost of labour is broken into direct and indirect (overhead) costs.
o Direct costs include wages for the employees that produce a product,
including workers on an assembly line, while indirect costs are
associated with support labour, such as employees who maintain
factory equipment.
o For a manufacturing business firm engaged in producing a specific
product, labour costs are accumulated and charge to the product as
they are produced.
o Labour is a major cost in most of organization.

The difference between direct labour and indirect labour

DIRECT LABOUR

• Direct labor refers to any employee that is directly involved in the
manufacturing of a product.

• This cost is charged to all units produced during the reporting period.
The basis for charging the cost is the number of hours of labour
actually used in the production process.

• eg: If your business manufactures bicycles, the employees producing
the bicycles are considered direct labor.

56 BASIC COST ACCOUNTING

INDIRECT LABOUR (FACTORY)
• Indirect labor is labor that is not directly related to the production of a

product.
• This cost is assigned to a cost pool, from which it is allocated to the

units produced during the reporting period.
• Depending on the level of allocation sophistication, several cost pools

may be used, each of which has a separate allocation methodology.
• eg: Once a product has been completed, the salespeople you

employ would be responsible for selling the product they would be
considered indirect labor.

o The only type of labour that should be included in the direct labour
classification is for those employees directly involved in the
manufacturing process, such as people working on an assembly line or
operating machinery.

o It does not include any support or supervisory staff, such as the factory
janitorial, maintenance, administrative, and management employees.

3.2. Explain recording and control labour costs

A. THE ENGAGEMENT OF LABOUR
o The engagement of labour is delegated by the management to the
personnel officer.
o The personnel officer carries out this work in response to a properly
authorized request for employees received from departmental
manager.
o The procedure upon engagement of labour is as follows:
 Notice is given to the department concerned. When the
employee reports for duty he sees the personnel officer and is
given a copy of the work rules.
 Notice is given to the wages office. This notifies them of the new
employee’s name, the date of commencement, department, rate
of pay and clock number.

B. TERMINATION OF EMPLOYMENT
o When an employee leaves his employment for any reason, the
personnel officer should seek to find out that reason.

57 BASIC COST ACCOUNTING

o The employee should give a prior notice for resignation.

3.6 Explain the labour productivity and the effects of labour turnover

A. LABOUR TURNOVER RATE
I. Any changing of employees occasions loss to a manufacturer
II. Labour turnover is the rate at which employees leave employment at
the factory.
III. Can be calculated as:
FORMULA

Labour The average of

Turnover = (employees leaving replace + replace for the year) X 100
Rate The average number of employees for the year

EXAMPLE 3.1
This information is extracted from Evon Company relating its employees
for the year ended 2020. The number of employee employed on 1.1.2020
is 120. During the year, 24 new employees were employed and 18 left.

You are required to calculate:
a) The number of employees on 31.12.2020
b) Labour turnover rate

Solution:
a) The number of employees on 31.12.2020

No. of employees at 1.1.2020 120
(+) New employees 24
(-) Employees left (18)
No of employees at 31.12.2020 126

b) Labour turnover rate

The average of
= (employees leaving replace + replace for the year) X 100

The average number of employees for the year

58 BASIC COST ACCOUNTING

= [ 24 + 18 ] / 2 X 100
[ 120 + 126 ] /2 X 100
=
= 21
- 123
17.07%

ENRICHMENT EXERCISE 3.1

Question 1

S & S Company produced the detail about labour turnover for its employees

No. of employee at the beginning of the period Department Department
The addition of employee during the period X Y
No. of employees leaving during the period 72 34
14 9
11 7

You are required to calculate:
a) The number of employee at the end of the period
b) Labour turnover rate for each department

Question 2
Here is the record of labour turnover of the Company Jayasama:

No. of employees beginning period Department Department Department
New employees A B C
Employees left 235
210 105 35
11 20 20
9 10

You are required to calculate:
a) The number of employee at the end of the period
b) Labour turnover rate for each department

-

59 BASIC COST ACCOUNTING

B. CAUSES OF LABOUR TURNOVER

Avoidable causes

Low wages Unsatisfactory Bad relations Unsuitable of
and earning working among workers job
and supervisors
conditions

Unavoidable Causes

Termination of service due to Retrenchment or lay off due to
misbehavior or indiscipline shortage of resources

C. COST OF LABOUR TURNOVER

I. PREVENTIVE COSTS
 Preventive costs include all the costs which are incurred to prevent
workers from leaving the organisation and keeping them satisfied.
 These are the examples of preventive costs:
a) A personnel department incurs costs on recruitment, selection,
training and other things related to employment.
b) The cost incurred for providing medical benefits to the worker.
c) Welfare include facilities like sports, transport, canteen and
housing. These facilities will prevent workers from leaving.

II. REPLACEMENT COSTS
 Replacement costs include the costs which are incurred for the
recruitment and training of new workers.
 Also, they cover costs which arise as a result of wastage, losses,
lower production because of less competent and inexperienced
new employees.
 Replacement costs consider the following factors:
a) The increase in costs of the personnel department due to the
recruitment of new workers.

60 BASIC COST ACCOUNTING

b) The loss of production time as the new workers need to be given
training.

c) The inefficiency of new workers and will affect production.
d) Costs of breakages of tools and equipment due to inexperienced

workers.

D. LABOUR RECORDS AND PROCEDURES

 A record of time worked is required for hourly workers and also salaries
workers if they are paid overtime and this system is known as TIME
KEEPING.

 Objectives of time keeping:

Enable payroll department to Enable cost accounting
calculate and prepare payroll. department to charge direct

costs to jobs, process and
indirect labour costs to
overhead.

Time Recording • Provide record of time spent in a factory.
or Time • Common system used is punch card/clock

Keeping cards. Employees need to punch in and punch
out the cards when arrive and depart from the
Time Booking factory.

Time Sheets • A form of timekeeping to record the time spent
on a job/ operation in a factory.
Job Cards
• The information should be available to
reconcile with the time recorded n the punch
card/clock card.

• Information on the time sheets is completed by
employee. i.e. hour spent on the job and must
be signed by their supervisor

• Is used to find out labour times spent of each
order or job. It is prepared separate for each
job /order. The card will move from worker to
worker as the job progress.

61 BASIC COST ACCOUNTING

E. TIME KEEPING RECORDS

I. Attendance records
 The clock card is used by each worker, and a time recording clock
usually based at the entrance to the building.
 The worker has to punch each time he comes in and leaves the
factory.

II. Output records
 The following are typical records:

Daily and These are records, filled in by the worker and
weekly countersigned, which show how he spent his time
time sheets during the day.

Job cards A job card relates to a single job or batch and is
likely to contain entries relating to numerous
employees.

Operating These cards are also known as piecework tickets,
cards are provided for each operation. So each
operation will have at least one card.

F. THE PAYROLL DEPARTMENT

 Preparation of the payroll from time sheet, job cards and operating
cards is done by the payroll department.

 The following are the objectives of the payroll department:

To compute To prepare To maintain To calculate
employee departmental individual payroll taxes
employee
wages payroll payroll records
summaries

62 BASIC COST ACCOUNTING

3.3. Explain the different types of remuneration method
3.4. Calculate the remuneration using the different methods
3.5. Explain advantages and disadvantage of various remuneration methods

A. THE METHODS OF REMUNERATION

 An important aspect of labour cost control is a wage system designed
primarily for exercising management control over employees.

 Basically, there are two main scheme of payment for employees:

Payment on the basis Payment by results
of time attendance (piecework)

(time basis)

METHOD OF REMUNERATION

Time based Output Based (piecework)

Time rate Straight Piece Differential Piecework
piecework time rate piece rate with

guaranteed
minimum

I. Payment on The Basis of Time Attendance (TIME BASIS)
 Worker is paid at an hourly, daily or weekly rate and his
remuneration depends upon the time which he is employed and
not upon his production.
 Time rate is often referred to as a "day rate"

FORMULA

Wages = Hours Attended X Rate of pay per hour

An employee is paid for 8 hours attendance time at a wage rate
of RM4 per hour and his job ticket shows that he had worked a
total of 7 ½ hours on Job No. 123.
The ½ hour which he is paid is termed idle time.

63 BASIC COST ACCOUNTING

 Since this idle time is not productive, it is to be charged to
production overhead.

 When an employee is required to work overtime, he is normally paid
a premium rate. If he is paid time and a half, he will receive one
and half times his basic wage rate.

ADVANTAGES DISADVANTAGES

• Easy to compute • Payment is for attendance,
& understood by not for a work done
employers and
employees • Efficient employee can be
dissatisfied when inefficient
• Easy to adjust in colleagues receive the
wages same pay/incentive
negotiation
• Overtime can result from
slow working

EXAMPLE 3.2
i. In a week Ali’s basic working hour is 44 hours and paid at the rate of RM

2 per hour. What is his gross wages in a week?

Solution: = Hours worked X Rate per hour
Basic Pay = 44 hours X RM 2
= RM 88

ENRICHMENT EXERCISE 3.2

A company employs two workers, Amira and Bella with normal working
hours of 40 hours per week. The wages rates for Amira and Bella are RM4
and RM6 per hour respectively. Amira worked for 36 hours while Bella
worked for 40 hours in the first week of April.

64 BASIC COST ACCOUNTING

Assuming that each worker works the same hours per week, how much is
the remuneration for both employees during the month of April?

II. Payment by Results (PIECEWORK BASIS)
 Paying wages on a time basis does not provide any incentive to
employees to work more efficiency.
 The employee is paid an agreed sum for each task carried out for
each unit of output completed.
 Units of output can be based on an agreed output per hour, which
is referred to as "standard hour produced"
 In some cases, employees may have a guaranteed minimum
wage.

ADVANTAGES DISADVANTAGES

• Managerial supervision is • Quantity increase but
not much needed for lower quality
production since each
worker assumes • Dispute about spoiled or
responsibility for his own sub standard work
time and output.
• The rate can be fixed too
• Higher production high or too low to start with
reduces overhead costs & it is difficult to change.
per unit of output.

65 BASIC COST ACCOUNTING

A. STRAIGHT PIECEWORK

FORMULA

Wages = Unit Produced X Rate of Payment per Unit
• Mostly used for direct workers.
• Fixed rate is paid for each unit produced.
• Worker’s wages depend upon his output and not upon the time

he spends in the factory.

EXAMPLE 3.3
Ahmad produces 100 units of products “AB10” & for every unit
produce he will be paid RM 5 per unit.

Solution: = Unit produced X Rate per unit
Basic Pay

= 100 units X RM 5

= RM 500

B. PIECE TIME RATE
• This kind of pay system is independent of the bounds of time and
is completely based on the result produced.
• Standard time rate applied for one unit produced.

EXAMPLE 3.4
The standard time to produce one unit is 15 minutes.
Wage rate = RM3 per hour
Unit produced = 250 units
Find the basic wages.

66 BASIC COST ACCOUNTING = Standard time for Unit produced
X
Solution:
Total one unit
Standard
Time = 15 minutes X 250 units

= 3,750 minutes

= 62.5 hours

Basic Pay = Total standard time X Rate per unit

= 62.5 hours X RM 3

= RM 187.50

C. DIFFERENTIAL PIECEWORK
• Wages are paid at different rated which increase according to
productions.
• This scheme provides incentives for workers to improve their skills
and increase productions.
• The piece rates vary at different levels of efficiency.

EXAMPLE 3.5
Raman produced 200 units of output. The rates paid will be as
follows: -

Up to 100 units per day RM0.50 per unit
101 – 150 units per day RM0.60 per unit
151 – 200 unit per day Rm0.70 per unit

What will be his gross wages?

Solution:

Basic Pay = Unit produced X Rate per unit

= 100 units X RM 0.50 = RM 50

= 50 units X RM 0.60 = RM 30

= 50 units X RM 0.70 = RM 35

Gross Wages = 200 units = RM 115

67 BASIC COST ACCOUNTING

D. GUARANTEED MINIMUM WAGES
• Workers are paid a guaranteed minimum pay rate when
performance are lower than normal (under uncontrollable
situations).
• This method guarantees a day rate.
• If the employee piece rate earning below the day rate earnings,
the employee will be paid according to his day rate earnings

EXAMPLE 3.6

Busu produces 48 units per day. The rate per unit RM 2. He will be

paid minimum of RM 100 daily if output fall below 50 units per day.

a) What will be his wages if he produces 48 units in a day?

Solution:

Basic Pay = Unit produced X Rate per unit

= 48 units X RM 2
Compare
= RM 96
which one is
Guaranteed day rate = RM 100
higher

# Gross Wages for Busu = RM 100

b) What will be his wages if he produces 55 units in a day?

Solution:

Basic Pay = Unit produced X Rate per unit

= 55 units X RM 2
Compare
= RM 110
which one is
Guaranteed day rate = RM 100 higher

# Gross Wages for Busu = RM 110

-

68 BASIC COST ACCOUNTING

ENRICHMENT EXERCISE 3.3
Question 1

According to the information below, you are required to calculate gross
wages for each employee by using the method of:
(i) Time rate
(ii) Payment by results or piecework

Rate per hour (RM) Dean Sean Lean
Rates per unit (RM) 1.25 1.05 1.20
Unit produced 0.20 0.25 0.24
Time Taken (hours) 270 200 220
40 38 36

Question 2 Rate/unit (RM)
RM1.00/unit
Up to 100 units/day RM1.20/unit
101 – 200 units/day RM1.30/unit
201 – 300 units/day

Alex produces 250 units of output in a day, what will be his gross wages?

69 BASIC COST ACCOUNTING

III. INCENTIVE SCHEMES
 Apart from basic wages, workers are normally given additional
incentives such as overtime and bonus.
GROSS WAGES = Basic wages + Overtime + Bonus

 Overtime (OT) occurs when the employee works beyond the
normal working hours.

 Overtime is often paid for hours worked beyond a standard number
of hours or for work carried out on days which are not part of the
working week, eg: Saturdays or Sundays.

FORMULA

Extra hours = Actual hours worked - Normal working hours

 Overtime is often paid at rates such as "time and a quarter", "time
and a half", or "double time".
"Time and a half", for example, means that 1.5 times the basic
hourly rate is paid.
FORMULA

Overtime Premium =Extra hours X Rate per hour X Overtime
worked premium

EXAMPLE 3.7

If Ali worked 48 hours in a week and for overtime he will be paid

1.5 times higher from normal rate. What is his gross wages in a

week?

Solution:

Basic Pay = Hours worked X Rate per hour

= 44 hours X RM 2

= RM 88

70 BASIC COST ACCOUNTING

Overtime Extra Hours Rate per Overtime
= X X
Premium worked
hour premium
= [48 - 44 hours] X RM 2 X 1.5

= RM 12

Gross = Basic Pay + Overtime Premium
Wages = RM 88 + RM 12
= RM 100

ENRICHMENT EXERCISE 3.4

Kamal works 8 hours day at a basic rate of RM 4. On a particular day, he
worked 10 hours. If overtime is paid at time and a half, calculate his basic
wages and the overtime premium.

71 BASIC COST ACCOUNTING

IV. BONUS
 Employee is paid a basic rate per hour.
 If he completes his work in less than the standard or expected time,
he will earn a bonus.
 Bonus is a type of incentive that is given to workers based on “time
saved”.
 Time saved occurs when the time actually worked by the worker
(called time taken) is lower than the time allowed for the worker to
complete a particular task.
 The bonus is calculated as an agreed percentage of the time
saved multiplied by the time rate.
BONUS = Bonus rate X Time Saved

 Time Allowed (TA): Standard time allowed.
 Time Taken (TT): Actual time spent.
 Time Saved (TS): The difference between TA and TT.

FORMULA

Time Saved = Time Allowed - Time Taken

Time Saved = Standard Time - Actual Time

ADVANTAGES DISADVANTAGES

• Increase • Difficult to set up
production without fairly
any dispute
between the labor • Difficult to
and management change

• Affect quality

A. Individual Bonus for Efficiency Standard
• Bonus systems base employees' earnings on a combination of time

taken and work done, bonus is given if there is time saved.
• Three types of bonus schemes are:

Halsey Bonus Halsey Weir Bonus Rowan Bonus
Scheme Scheme Scheme

72 BASIC COST ACCOUNTING

I. HALSEY BONUS SCHEME
 Under this scheme an employee is paid a basic rate per hour.
 If he completes his work less than the ‘standard or expected time’,
he earns a bonus.
FORMULA

Bonus = ½ X Time Saved X Rate per Hour

EXAMPLE 3.6 Time taken

Amer is paid RM2.00 per hour for an 8 hours day. In one day, he

completes his job with standards times of 12 hours. Calculate his

wages. Time allowed

Solution: - Time Taken
Step 1 Time Saved = Time Allowed - 8 hours

= 12 hours
= 4 hours

Step 2 Bonus = ½ X Time saved X Rate per hour

= ½ X 4 hours X RM 2

= RM 4

Step 3 Basic Pay = Hours Worked X Rate per hour
= 8 hours X RM 2
= RM 16

Step 4 Gross Wages = Basic Pay + Bonus
= RM 16 + RM 4
= RM 20

-

73 BASIC COST ACCOUNTING

II. HALSEY-WEIR BONUS SCHEME
 Under the Halsey-Weir scheme, a worker is entitled to bonus
which is equal to his time wage for 33 1/3 % (often 30%) of the
time saved; instead of 50% in case of the Halsey scheme.
 Thus except the above, there is no difference between the Halsey
scheme & the Halsey-Weir scheme.
FORMULA

Bonus = 1/3 X Time Saved X Rate per Hour

EXAMPLE 3.7
Encik Kamil is paid RM1 per hour. Time allowed is 50 hours. The time
taken by him is 40 hours.
Calculate his basic pay, bonus and his gross wage.

Solution: - Time Taken
Step 1 Time Saved = Time Allowed - 40 hours

= 50 hours
= 10 hours

Step 2 Bonus = 1/3 X Time saved X Rate per hour
= 1/3 X 10 hours X RM 1
= RM 3.33

Step 3 Basic Pay = Hours Worked X Rate per hour
= 40 hours X RM 1
= RM 40

Step 4 Gross Wages = Basic Pay + Bonus
- = RM 40 + RM 3.33
= RM 43.33

74 BASIC COST ACCOUNTING

III. ROWAN BONUS SCHEME
 Under this scheme bonus is calculated as the proportion of time
taken which the time saved bears to the time allowed.
 The bonus is paid at time rates.
 The Rowan Scheme protects the employer from loose rate-fixing
by reducing the bonus at high production levels.
 For this reason, this scheme of bonus is unpopular with the
workers.

FORMULA

Bonus = Time Taken X Time Saved X Rate per Hour
Time Allowed

EXAMPLE 3.8
Mimi is paid RM2.40 per hour and is given a job which has a standard
time allowed of 12 hours. What should be her bonus pay for the job,
and total rate of pay per hour if the job takes 9 hours?

Solution:

Step 1 Time Saved = Time Allowed - Time Taken

= 12 hours - 9 hours

= 3 hours

Step 2 Bonus = Time Taken X Time X Rate per
= Time Allowed X Saved hour

9 hours 3 hours X RM 2.40

12 hours

= RM 5,40

Step 3 Basic Pay = Hours Worked X Rate per hour
= 9 hours X RM 2.40
= RM 21.60

Step 4 Gross Wages = Basic Pay + Bonus
= RM 21.60 + RM 5,40
= RM 27

-

75 BASIC COST ACCOUNTING

B. Group Bonus for Exceeding Production Targets
• There are many incentive plans in industry which are related to
the output performance of an entire group of workers.
• Bonus is given based on group performance for exceeding
production targets.

ADVANTAGES DISADVANTAGES

• In increases co- • The employee groups
operation among fellow demand low efficiency
workers standards as a condition
for accepting the scheme.
• It can reduce accidents,
spoilage and waste

• It reduces the clerical
effort required to
measure output and
calculate individual
bonuses.

FORMULA

% of Increase Actual Production – Standard Production X 100%
in Production = Standard Production

EXAMPLE 3.9
A company has a production standard of 150 units per day. A
bonus of RM100 will be paid for every 10% increase in production.
A group of 5 workers managed to complete 170 units in a day.
Calculate the bonus received by each worker in that group.

Solution:

% of Actual Production – Standard Production
= X 100%
Increase Standard Production

in = 170 units – 150 units X 100%
Production 150 units

13.33 % they are entitled for group bonus
=

76 BASIC COST ACCOUNTING

Group Bonus = 13.33 X RM 100
10

= RM 133.30

Individual Bonus = RM 133.30
5 workers

= RM 26,66 per worker

-

C. Profit Sharing Scheme
• In a profit sharing scheme, employees receive a certain portion of
their company’s year-end profit.
• The size of the bonus being determined by their position in the
company and the duration of their employment

ADVANTAGES DISADVANTAGES

• Company needs • Employees must wait until the end
to pay only what of the year for a bonus. The
it can afford out company therefore expects a long
of its actual term commitment to greater efforts
profits. and productivity from its workers
without the incentive of immediate
reward;

• Factors affecting profit may be
outside the control of employees,
in spite of greater productivity on
their part;

• Too many employees are involved
in a single scheme for it to have a
sufficient motivating effect on
individuals.

77 BASIC COST ACCOUNTING

PRACTICE QUESTIONS

QUESTION 1

Below are the details of the production from 2 workers of MMM brand of Kilang

Pakaian Sukan in a week 3 of March 2010.

Production Units Saniy Salman
Total Working hours (hour) 320 360
Time allowed (hour) 32 42
Rate per hour (RM) 38 48
3.00 2.90

Calculate the total wages for each of the worker based on:

a. Halsey Scheme
b. Halsey Weir Scheme
c. Rowan Scheme

QUESTION 2

Sindora Sdn Bhd paid their direct labor using the time rates. The company is
considering a new payment system based on unit produce. The following
information is available:

Weekly working hours 48

Hourly wage rate (RM) 8.00

Piece rate per unit (RM) 2.00

Normal time taken per piece 15 minutes

Actual output for the week 200 pieces

Differential piece rate up to 100 units per week RM 1.70 per unit

101 – 150 unit per week RM 2.50 per unit

151 – 200 units per week RM 3.50 per unit

You are required to work out the earnings for the week under:

a. Weekly working hours rate
b. Straight Piece Rate
c. Differential Piece Rate
d. Halsey Premium Scheme
e. Rowan Premium Scheme

78 BASIC COST ACCOUNTING

QUESTION 3

Syarikat Perniagaan Orang Bandar involved in manufacturing the Mini Car Toys.
Wan dan Rafi are their workers at Engine Department and they have different skills.
Information below shows their production in the month of June 2017.

Workers Production Time Allowed Time Taken
Wan 260 units 60 hours 100 hours
Rafi 160 units 90 hours 80 hours

Each of the worker were paid RM 5 per hour. You are required to calculate total
wages of each of the them by using Halsey Scheme Method.

QUESTION 4

Star Marketing makes three products: J, A and Y. Data for the year ended 31
August 2017 related to the products and employees, were as follows:

Employee Hours Product J Product A Product Y
Worked
Kay 2 040 hours 1 164 units 960 units -
May 1 750 hours 456 units 144 units 1 440 units

The employees were paid on a time based at RM 4.40 per hour. In an attempt to
increase production, Star Marketing proposed changing the basis on which
employees are paid based on output with rates given as follows:

Product Piece rate per
unit (RM)
J 4.40
A 6.40
Y 3.00

Using the information given, you are required to calculate the earnings for each
employee on the straight piecework scheme.

QUESTION 5

Asley Sdn Bhd has three workers which has been assigned in the production
department. Below is the information given regarding the three workers:

Adam Keemi Ajiq

79 BASIC COST ACCOUNTING

Unit Produced 1 250 1 500 1 750
Time Allowed per unit 2.5 min 1.75 min 2 min
Time Taken (hour) 50 h
Hourly rate of pay 48h 40 h RM 2.50
Cost per unit RM 3 RM 2.90 RM 0.61
RM 0.50 RM 0.53

You are required to calculate for each employee their earning based on:

a. Halsey Schemes
b. Rowan Schemes

QUESTION 6

The following information relates to 3 employees for one month:

Hours Worked Amar Anas Ansar
Rate of pay per hour 58 54 65
Unit of Output Achieved:
RM 12 RM 6.80 RM 10.75
Product A
Product B 142 172 92
Time Allowed (Per unit) 220 176 250
Product A
Product B 12 minutes
9 minutes

From the information given, calculate for each employee their earnings using:

a. Rowan Scheme
b. Halsey Scheme

QUESTION 7

Myra Sdn Bhs involved in the production of Karipap Sedap Halal for small and
medium industries. Jay, May and Ray are three full time workers who have
different skills and fully responsible for the productions.

Below are the data that show the production for one week as at 31st Jan 2015 as
followed: (Wages payment is not included in deduction units)

Workers Number of Time Time taken Rate per Deducted
productions Allowed (hours) hour units
per unit (RM)

(min)

80 BASIC COST ACCOUNTING

Jay 2 550 1.0 42 5.50 150
May 1 950 1.5
Ray 1 480 2.0 40 4.80 170

38 4.20 130

Required:

Calculate total wages for each worker by using these techniques

a. Halsey Weir Bonus Schemes
b. Rowan Bonus Scheme
QUESTION 8

The following table contains related information of 3 Waterlily Industries workers for
the month of December:

Unit produce Ali Auni Anis
Damage unit
Time taken/week 300 215 210
0 6 8

50 hours 55 hours 60 hours
15% more 20% more
4% more than than time than time
Time standard/week time taken
taken taken
Rate per hour RM30 RM20 RM25
Rate per unit RM21.50 RM20 RM23

Additional information:
i. Normal time start from 9.00am to 7.00pm and the workers works 5 days a
week.
ii. The factory decided to pay the damage units because the raw materials
used were not high quality.
iii. No overtime paid for extra time taken.

Required:

a) Based on the information above, you are required to calculate bonus pay for
each worker using Halsey Bonus Scheme.
b) Based on information in question (b) calculate basic and total pay for each
worker.

c) Calculate labour cost per unit for each worker.

81 BASIC COST ACCOUNTING

QUESTION 9

Zink Sdn Bhd which produces a single product currently remunerates its factory
workers on a time basis. As it is experiencing a high labour turnover, it is now
considering the introduction of alternative methods of remuneration.

The following information relates to two employees for one week:

Hours worked Awang Bakar
Rate of pay per hor 45 40
Units completed RM6.50
Units rejected RM5.20 270
210 -
20

The time allowed for each unit of output is 10 minutes. For purposes of piecework

calculations, each minute is valued at RM0.10.

Under the time basis, overtime is allowed and overtime rate is time and one-half.

Normal working hours per week is forty.

Required:

a) Calculate the earnings of Awang and Bakar where earnings are based on:
b) hourly basis;
c) piecework rates with earning guaranteed at 80 per cent of pay calculated on

an hourly basis;
d) Premium bonus scheme in which bonus (based on 60 per cent of time saved) is

added to earnings calculated on an hourly basis.

QUESTION 10
ABCD Enterprise employs four (4) workers namely Abu, Dakar, Chin and Daud. It is
company policy to pay their workers based on weekly basis. The company's
normal working hour is 40 hours per week.
Abu, Bakar, Chin and Daud are entitled to earn bonus if any. Abu and Bakar have
overtime to complete the order from XYZ Berhad. Their overtime rate is one
and a half of normal rate. Overtime for Chin and Daud will be paid based on the
same rate.

82 BASIC COST ACCOUNTING

The results for the week ended 31 March 2020 for the employees are as follows:

Unit assembled ABU BAKAR CHIN DAUD
Total standard
time allowed 360 units 300 units 320 units 340 units
Hours worked 50 hours 45 hours 55 hours 42 hours
48 hours 42 hours 49 hours 38 hours
RM 4.60 RM 4.30 RM 4.40 RM 4.00

Calculate the gross wages earned by each worker for the week ended 31 March
2020. Show clearly the following:

i. Basic Wages
ii. Overtime Pay
iii. Bonus Earned

QUESTION 11

QUESTION 12

THE COST CLASSIFICATION :86 BASIC COST ACCOUNTING
COSTING FOR OVERHEAD
TOPIC 4

4.1. Identify the concept and how direct expenses
trace to products

4.2. Explain classification of overhead, production
and service departments

4.3. Distinguish between allocation overhead,
apportionment and reapportionment overhead

4.4. Explain the overhead absorption rate and
methods

4.5. Calculate overhead or predetermined
absorption rates- one rate for one department
and on rate for several departments

4.6. Calculate over or under absorption of overhead

87 BASIC COST ACCOUNTING

1. TOPIC 4: THE COST CLASSIFICATION: COSTING FOR OVERHEAD
4.

4.1. Identify the concept and how direct expenses trace to products

OVERHEAD

Overhead costs are operating costs of a business enterprise,
which cannot be traced directly to a particular unit of output.

PRODUCTION OVERHEAD

Production overhead consists of indirect materials, indirect labour
and indirect expenses, which are incurred, in a manufacturing
process.

Example: depreciation on machinery, insurance of factory building,
electric and heating, rent and rate of the factory.

 Overhead becomes an increasingly large part of total manufacturing
costs.

 Used for budgetary control & decision making purposes such as product
pricing, expansion of business & make or buy decision.

Indirect Material

Production Indirect Labour
Overheads

Administration Indirect Expenses
Overheads
Function

ELEMENTS OF Selling &
OVERHEADS Distribution
Overheads
Behaviour
Fixed
Overheads

Variables
Overheads

88 BASIC COST ACCOUNTING

4.2. Explain classification of overhead, production and service departments

FACTORY includes all indirect costs incurred by the
OVERHEAD manufacturing department from the receipt of raw
materials until the product is finished & placed in a
saleable state until they are sold & delivered.

ADMINISTRATION includes all indirect costs incurred in directing and
OVERHEAD controlling general company policies and
programmes for the operation of the manufacturing
and selling department of the enterprise.

SELLING & also known as general business overheads such as
DISTRIBUTION sales expenses, promotion and the salesmen
OVERHEAD salaries.

4.3. Distinguish between allocation overhead, apportionment and
reapportionment overhead

4 STEP PROCESS FOR COSTING OF OVERHEAD

Allocation Apportionment Re- Absorption
apportionment

COST ALLOTMENT

Cost Cost Cost Cost
Allocation Apportionment Re-apportionment Absorption

Primary Distribution Secondary
Distribution

A. ALLOCATION OF OVERHEAD

ALLOCATION

Process of distribution of the cost to the specific cost centers
directly (no basis needed)

Process of changing those overhead expenditure which can be
charged directly to those department which actually incurred the

expenditure

89 BASIC COST ACCOUNTING

o DEPARTMENTALIZATION OF OVERHEAD
 Departmentalization of factory overhead means dividing the
company into segments called cost centres to which expenses are
incurred.
 A cost centre is divisions of the company where cost generating
activities are considered to take place.

TYPES OF COST CENTRES

PRODUCTION DEPARTMENT SERVICE DEPARTMENT

It represents a sub unit of the It represent cost centers which
company where manufacturing provide support for the
production department.
activity takes palce

B. COST APPORTIONMENT (PRIMARY DISTRIBUTION)

APPORTIONMENT

Process of distribution of the cost to the cost center with certain
basis

Charging of those overheads which cannot be allocated to
specific department because they incurred for the benefit of

many department

 It is a process of charging expenses in an equitable proportion to the
various cost centre or department.

 Some overhead costs can be directly identified with a particular
department or cost centre, and can be allocated specifically to the
department.

 However, there are some overhead costs that can’t be identified
and charged directly.

 The costs must be apportioned to any department by using such
items.

 Known as primary distribution of overhead

90 BASIC COST ACCOUNTING

 Choice of appropriate basis is crucial to ensure that cost
apportioned to the cost centre reflects the benefit received.

EXAMPLE OF BASIS OF APPORTIONMENT

Floor area • Lighting & Heating
occupied • Rent & Rates
• Depreciation on building
Capital Values • Building repair
• Electricity
Direct Labour • Fire Insurance
Hour/
• Depreciation on Plant & Machinery
Machine Hour • Insurance on Building

No of Worker • Tools & Fixtures
Employed • Power & Work Management Remuneration
• Telephone expenses
Kilowatt hours/ • Sundries
Capacity of • Maintenance of Plant & Machinery
machinery
• Canteen
• Supervisor salary
• Accident Insurance
• Medical
• Personnel Department expenses
• Supervision & wages Department

• Power

91 BASIC COST ACCOUNTING

EXAMPLE 4.1

The Elegant Company has four departments. A, B and C are the production

departments and D is a servicing department. The actual costs for a period

are as follows:

Basic Data Total
Production Cost Centre
Service
A BC Cost

Centre
D

Area (sq. feet) 150 110 90 50 400
No. of workers 24 16 12 8 60
Total wages (RM) 8 000 6 000 4 000 2 000 20 000
Value of plant (RM) 24 000 18 000 12 000 6 000 60 000
Value of stock (RM) 15 000 9 000 6 000 - 30 000

During the period, the following data were recorded:

Allocation Indirect materials (RM) A B C D
Indirect labour (RM) 950 1 200 200 1 500
900 1 100 300 1 000

The following details were obtained from the accounts relating to the

period:

Apportion Rent RM Supervision RM
ment Repair 2 000 Insurance 3 000
Depreciation 1 200 Employee’s insurance 1 000
Light 900 Power 300
200 1 800

You are required to apportion the above costs to the various departments
on the most equitable method.

92 BASIC COST ACCOUNTING

Solution: Basis Total Department Service
Allocation (RM) Cost
Items Production Cost
3 850 Centre Centre
Indirect D
Material ABC
Indirect
Labour 950 1 200 200 1 500

Rent Allocation 3 300 900 1 100 300 1 000

Area 2 000 750 550 450 250

Repairs Plant Value 1 200 480 360 240 120

Depreciation Plant Value 900 360 270 180 90

Light Area 200 75 55 45 25
No of 3 000 1 200 800 600 400
Supervision workers 1 000 500 300 200
Value of 300 120 80 60 -
Insurance stock 1 800 720 540 360 40
Employee’s 180
insurance Wages 3 605

Power Plant Value

Total Overhead Cost 17 550 6 055 5 255 2 635

-

ENRICHMENT EXERCISE 4.1

Ashworth Manufacturing has three production departments and one service
department. Based on the following data, prepare an Overhead Analysis and
calculate suitable overhead absorption rate for Cutting, Assembly and Finishing
Department.

93 BASIC COST ACCOUNTING

Basic Data

Production Cost Centre Service Total
Cost
No of employees Cutting Assembly Finishing 151
Labour hours 40 65 15 Centre 5 865
Plant & Machinery value 900 Stores 310 000
(RM) 1 515 3 050
Area (meter2) 205 000 60 000 33 000 31
Material requisitions 400
Maintenance hours 12 000
Kilowatt hours
Machine hours 7 500 10 000 3 500 500 21 500
1 300 250 150 - 1 700
28 40 - 118
50 30 000 275 000
180 000 60 000 130 5 000 8 480
950 -
7 400

During the period, the following data were recorded:

Cutting Assembly Finishing Stores Total
300 5 300
Indirect materials (RM) 2 500 1 000 1 500 4 250 14 250
Indirect labour (RM) 5 250 2 500 2 250
Major maintenance work - 30 500
(RM) 18 500 7 500 4 500

The following details were obtained from the accounts relating to the period:

Fire insurance RM Rates RM
Power 1 200 Depreciation of machine 1 870
Light and heating 4 600 Insurance of machine 8 800
2 250 880

Solution:

Department

Service

Total Production Cost Centre Cost
(RM)
Items Basis 5 300 Centre
Cutting Assembly Finishing Stores
14 250
Indirect Allocation
Material 30 500

Indirect Allocation
Labour

Major
maintenance Allocation

work (RM)

94 BASIC COST ACCOUNTING

Area 1 200
Fire insurance 4 600
2 250
(meter2) 1 870
8 800
Power Kilowatt
hours 880

Light and Area 69 650
heating (meter2)

Rates Area
(meter2)
Depreciation Plant &
of machine Machinery

Insurance of value
machine (RM)
Plant &
Machinery
value
(RM)

Total Overhead Cost

--

C. COST RE-APPORTIONMENT (SECONDARY DISTRIBUTION)
 The overhead costs of Service Department should be further assigned
to Production Department.
 The reason is Service Department does not themselves manufacture
anything.
 The reassignment or reapportionment of service departments
overhead to production department is termed secondary distribution.
 There are mainly two methods to ideal with secondary distribution:

Direct Method Continuous Method

DIRECT METHOD
 The most common method of allocating service departments
because of its mathematical simplicity and ease of application.
 It involves allocation and ignores any services provided by one
department to another.

95 BASIC COST ACCOUNTING

EXAMPLE 4.2
Assume the following data for Teja Industries:

The departmental distribution (primary distribution) summary has the
following totals:

Production Department Service Department
A BC XY
800 700 500 234 300

The expenses of the service departments are charged out on a
percentage basis as follows:

ABC X Y
X 20% 40% 30% - -
Y 40% 20% 20% - -

You are required to show the reapportionment of overhead using
direct method.

Solution:

AB CXY

OVERHEAD 800 700 500 234 300

(Primary Distribution)

X – [20:40:30] 52 104 78 (234) -

Y – [40:20:20] 150 75 75 - (300)

TOTAL OVERHEAD 1 002 879 653 0 0

-

-

ENRICHMENT EXERCISE 4.2

The following data for Syarikat Yakin is obtained after apportionment of
overhead costs (primary distribution).

96 BASIC COST ACCOUNTING

Overhead cost (RM) Production Service
Department Department
Reapportionment: AB XY
Department X 46 000 32 000 12 000 15 000
Department Y
50% 50% - -
60% 40% - -

You are required to show the reapportionment of overhead using direct
method.

Solution: A B X Y
46 000 32 000 12 000 15 000
Overhead Costs
Reapportion X 00

(50 : 50)
Reapportion X

(50 : 50)
Total Overhead
-

CONTINUOUS METHOD
 In the method, the process of apportioning service departments

overhead is continued until the figure becomes immaterial.
 It recognizes services provided among the service departments.
 Using stepped method and reciprocal method.

EXAMPLE 4.3

Assume the following data for Alpro Industries. The departmental

distribution (primary distribution) summary has the following totals:

Production Department Service Department
A BC XY
800 700 500 234 300

The expenses of the service departments are charged out on a
percentage basis as follows:

97 BASIC COST ACCOUNTING

A B CXY

X 20% 40% 30% - 10%

Y 40% 20% 20% 20% -

You are required to show the reapportionment of overhead using
continuous method.

Solution: A B C XY
800 700 500 234 300
OVERHEAD 47 94 70
(Primary (234) 23
65 65 0 323
Distribution) 65 (323)
X – 234 26 19.5 65
0
[20:40:30:10] 1.3 1.3 (65) 6.5
886.3 655.8 0 6.5
Y – 323 128 1.3 (6.5)
[40:20:20:20]

X – 65 13
[20:40:30:10]

Y – 6.5 2.6
[40:20:20:20]

TOTAL 990.6 00
OVERHEAD

-

-

98 BASIC COST ACCOUNTING

4.4. Explain the overhead absorption rate and methods
 After all service department overhead costs have been apportioned to
production departments, next step is to spread factory overhead to
different products or job produced.
 This is termed ‘overhead absorption’

D. OVERHEAD ABSORPTION RATE (OAR)
 Some method of overhead absorption has to be applied to absorb
factory overhead to individual products or jobs on some equitable
basis.
 The rate used to charge overhead costs to the products or jobs, is
known as absorption rate.
 The activity level that should be used are based on items such a
direct labour hours, direct labour costs, machine hours, direct
material costs and units of output.
 Selection of the base should be one which corresponds most closely
with the total overhead costs of each department.

TYPES OF OVERHEAD ABSORTION RATE

Plant-wide OAR Departmental OAR

Also known as the "blanket Separate rate are calclualted
rate" or "single rate" for each cost centre.

Compute for the whole firm if More accurate since it takes
only one product is produced. into account the nature of

each cost centres.

FORMULA
Overhead Absorption Rate (OAR) = Production Overhead

Activity Level
Overhead Absorption Rate (OAR) = Total Overhead of Cost Centre

Total number of basis

99 BASIC COST ACCOUNTING

METHOD FORMULA X 100%
Direct labour cost % = Total OH X 100%
Total direct labour costs X 100%
Direct material cost % = Total OH
Total direct material costs
Direct labour hour rate = Total OH
Total direct labour hours
Machine hour rate = Total OH
Cost unit rate = Total machine hours
(unit of output) Total OH
Total units of production

EXAMPLE 4.4

The following data was collected from ZZ Factory:

Production Overheads RM 10 000
Direct Labour hours 2 000 hours
Direct Labour Costs
Machine Hours RM 8 000
Direct Material costs 4 000 hours
Production Output
RM 5 000
2 500 units

Calculate OAR using the following bases:

a) Direct Labour hours d) Direct Material Costs

b) Direct Labour Costs e) Production Output

c) Machine Hours

Solution: Production Overhead
a) Direct Labour hours =

Direct Labour hours
RM 10 000

= 2 000 hours
= RM5 per direct labour hour

b) Direct Labour Costs Production Overhead
=

Direct Labour hours
RM 10 000

=
RM 8 000

= 125% of direct labour costs