CMA Intermediate · Cost Accounting · Direct Expenses
Ganga Tools Ltd hired a special machine for a single job, JOB-17, at Rs 6,000 per week for 4 weeks. The hire is traceable only to this job. A further Rs 3,000 was paid as transport of the machine to and from the site. How should the total Rs 27,000 be treated in cost records?
The whole Rs 27,000 is a direct expense of JOB-17. Hire of Rs 24,000 (6,000 x 4 weeks) is specific to the job, and the Rs 3,000 transport was incurred only to bring that machine, so it is also traceable to the job.
- ARs 24,000 as direct expense of JOB-17 and Rs 3,000 as factory overhead
- BRs 27,000 as administration overhead
- CRs 27,000 as direct expense of JOB-17Correct
- DRs 24,000 as direct expense and Rs 3,000 as selling overhead
Explanation
Hire is 6,000 x 4 = 24,000. Transport of the machine is incurred solely for this job, so it is also directly traceable. Total direct expense = 24,000 + 3,000 = 27,000. Splitting the transport into overheads is wrong as it is specific to the job.
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