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CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method

Mehta Plastics Ltd. uses a machine hour rate for absorbing overheads. A machine costs ₹5,00,000 with a residual value of ₹50,000 and a life of 10 years. It works 1,800 hours a year, of which 200 hours are set-up time treated as productive. Annual power cost is ₹36,000 for the working hours. What is the combined depreciation and power cost per machine hour, assuming straight-line depreciation and 1,800 working hours as the base?

Annual depreciation is ₹45,000 after deducting residual value, which is ₹25 per hour over 1,800 hours. Power of ₹36,000 adds ₹20 per hour. Together the depreciation and power cost is ₹45 per machine hour.

  1. A₹45
  2. B₹65Correct
  3. C₹70
  4. D₹25

Explanation

Annual depreciation = (5,00,000 − 50,000) ÷ 10 = ₹45,000. Depreciation per hour = 45,000 ÷ 1,800 = ₹25. Power per hour = 36,000 ÷ 1,800 = ₹20. Total = ₹45 per hour. So the correct value is ₹45, option 0.

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