Consider an industry with the following features : • Budgeted monthly fixed cost = ₹ 2,20,000 • Normal monthly output = 12000 per standard labour hour • Standard variable overhead rate = ₹ 25 per labour hour What would be the total factory overhead rate ?
- (a)₹ 40·33 per labour hour
- (b)₹ 41·67 per labour hour
- (c)₹ 42·67 per labour hour
- (d)₹ 43·33 per labour hour
Answer
Why
Correct — D, (d) ₹ 43·33 per labour hour.
A TOTAL FACTORY OVERHEAD RATE is the sum of two rates — the fixed overhead absorbed per hour and the variable overhead incurred per hour — and only the first of them has to be worked out. The second is handed to you.
fixed overhead rate = budgeted fixed cost ÷ normal output = ₹ 2,20,000 ÷ 12000 labour hours = ₹ 18·33 per labour hour variable overhead rate = ₹ 25 per labour hour (given) total factory overhead rate = 18·33 + 25 = ₹ 43·33 per labour hour
That is option (d).
WHY THE FIXED COST HAS TO BE DIVIDED AND THE VARIABLE COST DOES NOT. A fixed cost is a lump sum for the period; it does not move with output, so it has no natural per-hour figure until you choose a level of activity to spread it over. That chosen level is NORMAL CAPACITY — here the normal monthly output of 12000 standard labour hours — and dividing by it is what turns a monthly lump into an absorption rate. A variable cost is already expressed per hour by its nature, so it is simply carried across.
THE UNITS DO THE PROOF, and they also settle the stem's awkward second bullet. 'Normal monthly output = 12000 per standard labour hour' reads oddly, but rupees divided by hours can only give rupees per hour, and the answer is asked in rupees per labour hour, so 12000 must be the month's standard labour hours. Any other reading leaves the arithmetic without a denominator.
The item prints ₹ 2,20,000 with Indian digit grouping and 12000 with no separator at all, in the same three bullets; the decimals in the options are raised middle dots. Both are the paper's own rendering.
Why the others are wrong
- (a)₹ 40·33 per labour hour — Three rupees below the correct rate, and nothing in the question produces it. Strip out the ₹ 25 variable component that the stem states outright and this option implies a fixed overhead rate of ₹ 15·33 per hour. To get ₹ 15·33 out of a fixed pool of ₹ 2,20,000 you would need a normal output of about 14,350 labour hours, not the 12,000 the item gives. The option's function on the page is to sit at the bottom of a tightly spaced set: all four values lie within ₹ 3 of one another, so a candidate who has the method but abandons the division part-way has four similar-looking numbers to choose between and no way to discriminate.
- (b)₹ 41·67 per labour hour — The most instructive of the three, because it IS reproducible — from a misread figure. Take the fixed cost as ₹ 2,00,000 instead of the ₹ 2,20,000 printed, and 2,00,000 ÷ 12000 = ₹ 16·67 per hour, which with the ₹ 25 variable rate gives exactly ₹ 41·67. That is what this option is for: the stem writes the fixed cost with Indian digit grouping as 2,20,000 while writing the output in the very next bullet as 12000 with no separator, and a candidate reading quickly across two differently formatted numbers drops the middle digits. The defence is to write both figures out before dividing.
- (c)₹ 42·67 per labour hour — The closest of the three, and the one aimed at a rounded division. It implies a fixed overhead rate of ₹ 17·67 per hour once the ₹ 25 variable rate is removed, which would require a normal output of roughly 12,450 labour hours rather than 12,000. The true fixed rate, 2,20,000 ÷ 12000, is ₹ 18·33 recurring, and a candidate who rounds it in the wrong direction or truncates it mid-division lands within a rupee of the answer without reaching it. With the four values spaced under ₹ 3 apart, an approximate quotient cannot identify the right one — carry the recurring decimal, or better, add before dividing: (2,20,000 + 25 × 12000) ÷ 12000 = 5,20,000 ÷ 12000 = ₹ 43·33.
Concept
OVERHEAD ABSORPTION is the costing step that attaches indirect factory costs to production. Direct materials and direct labour can be traced to a unit of output; factory rent, supervision, power and depreciation cannot, so they are pooled and then charged out through a PREDETERMINED RATE fixed at the start of the period.
overhead absorption rate = budgeted overhead ÷ budgeted level of the chosen base
The base is whatever best tracks the way the overhead is consumed — direct labour hours (used here), machine hours, direct wages, direct material cost, or units of output. Labour hours are the natural base in a labour-paced factory, machine hours in a machine-paced one.
FIXED AND VARIABLE OVERHEAD BEHAVE DIFFERENTLY, which is why the rate has two components. Variable factory overhead — power consumed while machines run, consumables — rises with activity and is naturally quoted per hour already. Fixed factory overhead — rent, salaried supervision, straight-line depreciation — is a lump for the period, so it acquires a per-hour figure only when it is divided by a stated level of activity. Adding the two gives the TOTAL or COMPOSITE factory overhead rate, which is what this item asks for.
WHY THE DENOMINATOR IS 'NORMAL' CAPACITY. Using actual output would make the fixed rate swing about from month to month purely because activity swung, so a slow month would appear to make each hour of work more expensive. Costing therefore fixes the denominator at a NORMAL or budgeted level of activity, averaged over the business cycle, and lets the difference show up separately.
That difference is UNDER- OR OVER-ABSORPTION. Fixed overhead absorbed equals the rate times the ACTUAL hours worked, so if actual activity falls short of normal, less is absorbed than was incurred — under-absorption, an unfavourable volume variance — and if activity exceeds normal, more is absorbed than incurred, which is over-absorption. The balance is written off or apportioned at the period end. This is the fixed-overhead VOLUME variance, and it exists only because the fixed rate has a chosen denominator in it.
This APFC paper carries a real costing and accountancy strand alongside its economics questions, and it is asked at the level of someone who has to read a management account rather than prepare one. The recurring demand is that you know which figure is divided by what, and by what denominator.
The item is deliberately built so that the arithmetic is trivial and the reading is not. It sets its three inputs as bullets rather than as a sentence, states the variable rate in the very form the answer is wanted in, and prints the two large numbers in two different styles — ₹ 2,20,000 with Indian digit grouping, 12000 with none — inside the same list. One option is exactly what you get if you read the first of those as ₹ 2,00,000.
The second reading problem is the phrase 'Normal monthly output = 12000 per standard labour hour', which does not parse as written. The way through is the units. The answer is asked in rupees per labour hour, the fixed cost is in rupees, so 12000 can only be the hours. Letting the units settle an ambiguous stem is a general technique on this paper's quantitative items and is worth practising deliberately.
The third habit the item rewards is adding before dividing. Because 2,20,000 ÷ 12000 recurs, computing it first invites a rounding error into a set of options spaced under ₹ 3 apart. Pooling the whole month's overhead first — 2,20,000 + 25 × 12000 = 5,20,000 — and dividing once gives ₹ 43·33 with no recurring intermediate to mishandle.
Key facts
- Total factory overhead rate = fixed overhead absorption rate + variable overhead rate; only the fixed component has to be divided out, because the variable one is already expressed per hour.
- Fixed overhead absorption rate = budgeted fixed overhead ÷ NORMAL (budgeted) activity, not actual activity — here ₹ 2,20,000 ÷ 12000 hours = ₹ 18·33 per labour hour.
- Adding ₹ 18·33 to the given variable rate of ₹ 25 gives the total factory overhead rate of ₹ 43·33 per labour hour.
- The single-division route avoids a recurring intermediate: (2,20,000 + 25 × 12000) ÷ 12000 = 5,20,000 ÷ 12000 = ₹ 43·33.
- A predetermined overhead rate is set before the period begins, from budgeted figures, so that product costs can be struck as work is done rather than waiting for actual costs.
- Overhead is absorbed at the rate times the ACTUAL hours worked, so activity below normal leaves fixed overhead under-absorbed and activity above normal leaves it over-absorbed.
- Common absorption bases are direct labour hours, machine hours, direct wages, direct material cost and units of output; the base should be the one the overhead's consumption actually tracks.
Study next
Common traps
- Dividing the variable rate as well. It is already stated per labour hour and must simply be added to the fixed rate.
- Misreading ₹ 2,20,000 as ₹ 2,00,000 — the item prints one number with Indian digit grouping and the next with none, and the misreading lands exactly on an option.
- Rounding 2,20,000 ÷ 12000 = ₹ 18·33 recurring in mid-division, when the options are spaced under ₹ 3 apart.
- Using actual output where the question gives normal output. The absorption rate's denominator is the budgeted or normal level by definition.
- Being defeated by the odd wording of the output bullet instead of letting the units settle it: rupees divided by hours can only give rupees per hour.
The costing questions on EPFO papers are computational but small, and they test whether a definition has been understood rather than whether long arithmetic can be sustained. Expect an absorption rate to be asked from a budgeted overhead and a stated level of activity; expect inventory to be valued on FIFO, LIFO or weighted average from a short receipts-and-issues history; and expect single-line classification items — capital or revenue, direct or indirect, fixed or variable, product or period. The option sets are typically clustered close together, with at least one value reproducible from a specific misreading of the data rather than from a wrong method, so the reliable defence is to write the given figures out, name the formula, and check that the units of the answer match the units asked for.
Related PYQs
EPFO_APFC_2016_Q69Data regarding inventory of a particular item of usage in the production activities of an organization are : the quantity in stock is 1500 units and the value of this stock is ₹ 1,27,500. (This works out to an average unit cost of ₹ 85.) During the ensuing year X, an additional 300 units are purchased at a unit cost of ₹ 95. Consumption in production processes during the year X has been 600 units. Working by the First-In-First-Out basis, the value of the residual inventory of the item at the end of the year X will be
- (a) ₹ 1,00,000
- (b) ₹ 1,02,500
- (c) ₹ 1,05,000
- (d) ₹ 1,07,500
Answer(c) ₹ 1,05,000
The other costing computation on this paper — valuing a closing inventory on the First-In-First-Out basis, and likewise a question about which figures pair with which rather than about hard arithmetic.
EPFO_EOAO_2023_Q76Which of the following is included in the ‘Cost of Inventory’ according to Accounting Standard-2 (Inventory Valuation) :
- (a) Administrative overheads that do not contribute to bringing the inventories to their present location and condition
- (b) Storage costs which are necessary in the production process prior to a further production stage
- (c) Selling and distribution costs
- (d) Duties and taxes paid on purchases, subsequently recoverable by the enterprise from the Tax Authorities
Answer(b) Storage costs which are necessary in the production process prior to a further production stage
Which costs enter the 'cost of inventory' under Accounting Standard 2 — the same fixed-and-variable, product-and-period distinctions applied to stock valuation instead of to an absorption rate.
EPFO_APFC_2023_Q81Which of the following is not a capital expenditure?
- (a) ₹ 5,000 spent to remove a worn-out part. This part needs to be replaced with a new engine
- (b) Expenses on foreign tour for purchasing a new machine
- (c) Freight and insurance of the machinery purchased
- (d) Amount spent on repairing a secondhand machine before put to use
Answer(a) ₹ 5,000 spent to remove a worn-out part. This part needs to be replaced with a new engine
A capital-or-revenue classification item: the same accountancy strand asked as a one-line judgment about which pool a given outlay belongs in.
Practice
- practice — not a real PYQ
A factory budgets fixed factory overhead of ₹ 1,80,000 for a month against a normal output of 9,000 standard labour hours, and its standard variable overhead rate is ₹ 20 per labour hour. What is the total factory overhead rate ?
- (a)₹ 36 per labour hour
- (b)₹ 38 per labour hour
- (c)₹ 40 per labour hour
- (d)₹ 42 per labour hour
Answer(c) ₹ 40 per labour hour — the fixed component is 1,80,000 ÷ 9,000 = ₹ 20 per hour, and adding the given variable rate of ₹ 20 gives ₹ 40. The same figure comes out of a single division: (1,80,000 + 20 × 9,000) ÷ 9,000 = 3,60,000 ÷ 9,000 = ₹ 40.
- practice — not a real PYQ
A firm sets its fixed overhead absorption rate on a normal output of 10,000 machine hours. If the hours actually worked in the period turn out to be 11,000 while the fixed overhead incurred is exactly as budgeted, the fixed overhead will be
- (a)under-absorbed
- (b)over-absorbed
- (c)absorbed exactly, since the overhead incurred was as budgeted
- (d)unaffected, because fixed overhead is not absorbed at all
Answer(b) over-absorbed — overhead is absorbed at the predetermined rate times the hours ACTUALLY worked, so 11,000 hours absorb more than the budgeted lump the rate was built from, and the excess is over-absorption. Option (c) confuses the overhead incurred with the overhead absorbed: the two agree only when actual activity equals the normal activity used as the denominator.