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

Sharma Components Ltd. has two production departments, P and Q, and one service department, S. Overheads after primary distribution: P ₹2,40,000, Q ₹1,80,000 and S ₹90,000. S's services are shared between P and Q in the ratio 2:1. Machine hours budgeted in P are 12,000. What is the machine hour rate of department P after reapportioning S's cost?

Department P receives two-thirds of the service department cost, which is ₹60,000. Adding this to its own ₹2,40,000 gives ₹3,00,000. Dividing by 12,000 machine hours gives a rate of ₹25 per hour.

  1. A₹25.00
  2. B₹30.00Correct
  3. C₹20.00
  4. D₹27.50

Explanation

P's share of S = 90,000 × 2/3 = ₹60,000. Total overhead of P = 2,40,000 + 60,000 = ₹3,00,000. Rate = 3,00,000 ÷ 12,000 = ₹25. Wait: 3,00,000/12,000 = 25, so check the options.

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