ENGINEERING ECONOMY AND FINANCE

Dr. Jitesh J. Thakkar

Department of Industrial Engineering & Management

Indian Institute of Technology (IIT) Kharagpur

West Bengal, India

Function of finance department

Is concerned with money
Bringing into company Looking at how it used Paying it out

The Aim of finance to ensure that this control provides the organization with the financial stability to meet it corporate goals

Organization of finance department

Medium and large size organization : usually with director of the company Small company under owner or an executive director Other staff:
Accountants Ledger clerk Payroll clerk Taxation clerk/ officer Purchasing clerk/ officer

Defining spending limits and procedure of committing expenditure Deal with other organizations such as revenue, banks, customers and suppliers

Activities of finance department

1. Bringing money into company 2. Using money 3. Paying money out

Activities of finance department

1. Bringing money into company:
i. Capital planning ii. Indication of implications of proposed plans iii. Manage funding e.g. taking loans, using reserves or increasing share holding iv. Accounting activities v. Invoicing for payments of the goods

Activities of finance department

2. Using money: To ensure that its money is being used effectively
How much its products cost Sales prices to be set Cash flow requirements The data is provided by operations departments products cost profit margin, turnover budgets
Production data cash flow forecasting

Activities of finance department

3. Paying money out:
i. ii. Payments for goods and services Payments to labours (taxes, insurance, PF, etc)

Activities of finance department

4. Reporting on financial activities
i. Financial information for internal use
Budgets Sales figures Capital spend Cost of overheads Cash flow

ii. Preparation for financial statements required by law

iii.

Balance sheet Profit and loss accounts

Financial information for other external sources e.g. for loan

The ideal financial system

The most cot effective method of ensuring that the organization can operate its financial affairs in such a way that the organization goals may be best served

Annual audited accounts for government requirements : financial accounting Business performance data with sufficient accuracy for internal use : management accounting

financial accounting

The Balance sheet

1. 2. 3. A Financial snap shot of the organization Generally prepared on last day of the financial year The balance sheet is to be considered along with other documents such as profit and loss account 4. It operates on the principle that if you have something it must have been paid for somehow 5. To represent this on a balance sheet : one side would show where money comes from The other side shows what has done been with it

6. Assets equal the sources of the funds Assets = Liabilities

The Balance sheet

Assets 1. Fixed assets 2. Current assets Total assets Liabilities 1. Long term liabilities 2. Current liabilities Total liability 3. Capital and reserves

Assets & Liabilities

Fixed assets:
a. Tangible assets: plant, machinery, building, (depreciation is allowed for and value of given asset falls down with time), goodwill (loyal customer prepared to pay over market rates) b. Investments : long term investments (more than 1 financial year, such as loan made to other companies, fixed deposits, mutual funds, debentures purchased),

Total fixed assets =a +b

Assets & Liabilities

Current assets:
a. b. c. d. e. Cash on hand Cash in bank Stock (useful components , raw materials, work in progress) Debtor (someone who is shortly to pay money) short term investments (known as money market investments)

Assets & Liabilities

Liabilities
a. Long term liabilities (due after more than 1 year)
Loan taken Debenture sold (an agreement with lender to repay money at fixed rate over a period of time in return for lump sump)

b. Current liabilities (due in less than 1 year)

Creditor (people to whom organization owes money, normal period 30 days) Tax Unpaid bills to be paid within 1 year

Total liabilities =a +b

Capital and Reserves

1. Called-up share capital : money raised through sale of shares at their nominal value. 2. Reserves : the reserve transferred out profit to at discretion of the directors. Reserve may include balancing amounts of money caused by revaluation of property. 3. Share premium account : the amount of money raised by issuing share at a price above their nominal value.

Profit and loss account

profit and loss

=total assets (total liabilities + total capital and reserves)

Example: 1
Prepare a balance sheet for CNZ Limited as on date with the help of given financial details along with the entry of profit and loss account

Financial details
Details 1. Building 2. Cash in hands 3. Debentures purchased for 5 years 4. Debentures sold for 3 years 5. Equipment 6. Finished products 7. Loan from ICICI 8. Loan given to XYZ for 10 years 9. Payment collected 10.Raw material 11.Reserve 12.Share capital 13.Unpaid bills 14.WIP Consider depreciation @10% for tangible assets Value in Lakh Rs. 82.0 30.0 60.0 20.0 48.0 16.0 40.0 10.0 22.0 18.0 15 300 25.0 12.0

Identify assets
Details 1. Building 2. Cash in hands 3. Debentures purchased for 5 years 4. Debentures sold for 3 years 5. Equipment 6. Finished products 7. Loan from ICICI 8. Loan given to XYZ for 10 years 9. Payment to be collected 10. Raw material 11. Reserve 12. Share capital 13. Unpaid bills 14. WIP Asset/ liabilities/surplus 82.0 A 30.0 A 60.0 A 20.0 48.0 A 16.0 A 40.0 10.0 A 22.0 A 18.0 A 15 300 25.0 12.0 A

Identify Financial Liabilities

Details 1. Building 2. Cash in hands 3. Debentures purchased for 5 years 4. Debentures sold for 3 years 5. Equipment 6. Finished products 7. Loan from ICICI 8. Loan given to XYZ for 10 years 9. Payment collected 10.Raw material 11.Reserve 12.Share capital 13.Unpaid bills 14.WIP Value in Lakh Rs. 82.0 30.0 60.0 20.0 L 48.0 16.0 40.0 L 10.0 22.0 18.0 15 300 25.0 L 12.0

Identify capital and reserves

Details 1. Building 2. Cash in hands 3. Debentures purchased for 5 years 4. Debentures sold for 3 years 5. Equipment 6. Finished products 7. Loan from ICICI 8. Loan given to XYZ for 10 years 9. Payment collected 10.Raw material 11.Reserve 12.Share capital 13.Unpaid bills 14.WIP Value in Lakh Rs. 82.0 30.0 60.0 20.0 48.0 16.0 40.0 10.0 22.0 18.0 15 C 300 C 25.0 12.0

Financial details
Details
Building Equipment Debentures purchased for 5 years Loan given to XYZ for 10 years Cash in hands Raw material WIP Finished products Payment collected

Category
A1 A2 A3 A4 A5 A6 A7 A8 A9

Loan from ICICI Debentures sold for 3 years Unpaid bills Reserve Share capital

L1 L2 L3 C1 C2

Profit and loss and appropriation

1. It is the objective of the business is to make profit Buying raw material / things value addition selling at sufficient high price pay labour, material cost and cost of running business the money left is Profit 2. The profit is disposed as per desire:
Payments to shareholders Purchase of new assets Bonuses to employees

3. Unlike the balance sheet , the profit and loss account applies to a period of time and shows the cumulative effect of all the transactions over a period of time, usually a year

Profit and loss and appropriation

Turn over Net operating cost Profit before tax Tax Profit after tax Dividends Profit retained
Year 5 year 4 9070083800 7150066600 1920017200 6200 5800 1300011400 1900 1700 111009700

Cash flow projections

Cash flow projections are covered to any situation where the disbursement of cash is important
Year sale loan
5. 6. 7. 8. 9. 10. 105 125 130 130 139

cost
80 95 89 87 87

profit loan repayment

19 22 33 35 35 2 10 12 6 0

outstanding
30 28 18 6 00 00

Financial Ratios
The Use Of Financial Ratios Analyzing Liquidity Analyzing Activity Analyzing Debt Analyzing Profitability A Complete Ratio Analysis

Groups of Financial Ratios

1.Liquidity 2.Activity 3.Debt 4.Profitability

Analyzing Liquidity
1. Liquidity refers to the solvency of the firm's overall financial position, i.e. a "liquid firm" is one that can easily meet its short-term obligations as they come due. 2. A second meaning includes the concept of converting an asset into cash with little or no loss in value.

Three Important Liquidity Measures

Net Working Capital (NWC) NWC = Current Assets - Current Liabilities Current Ratio (CR) Current Assets CR = Current Liabilities Quick (Acid-Test) Ratio (QR)

QR =

Current Assets - Inventory Current Liabilities

Return on capital employed (ROCE) ROCE= (Pre tax Profit) / capital employed The capital employed means the capital used in creation of the profit, which is defined as total asset less current liability it indicates how much money was used in the generation of the profit.

Profit margin
Profit margin=

(trading profit) / (total sales) = (value of sales cost of sales) / sales value

(stock) Turnover (ST)

Inventory (stock) Turnover (ST) (stock)

Cost of Goods Sold

Inventory (stock)

Analyzing Debt
Debt is a true "double-edged" sword as it allows for the generation of profits with the use of other people's (creditors) money, but creates claims on earnings with a higher priority than those of the firm's owners. Financial Leverage is a term used to describe the magnification of risk and return resulting from the use of fixed-cost financing such as debt and preferred stock.

Four Important Debt Measures

Debt Ratio (DR) Debt-Equity Ratio (DER) Times Interest Earned Ratio (TIE)
DR= Total Liabilities

Total Assets
Long-Term Debt Stockholders Equity

DER=

Earnings Before Interest & Taxes (EBIT) TIE= Interest

Earnings Before Interest & Taxes + Lease Payments Interest + Lease Payments +{(Principal Payments + Preferred Stock Dividends) X [1 / (1 -T)]}

FPC= Fixed Payment Coverage Ratio (FPC)

Analyzing Profitability
Profitability Measures assess the firm's ability to operate efficiently and are of concern to owners, creditors, and management A Common-Size Income Statement, which expresses each income statement item as a percentage of sales, allows for easy evaluation of the firms profitability relative to sales.

Seven Basic Profitability Measures

Gross Profit Margin (GPM) Operating Profit Margin (OPM) Net Profit Margin (NPM) Return on Total Assets (ROA) Return On Equity (ROE) Earnings Per Share (EPS) Price/Earnings (P/E) Ratio
GPM= OPM = NPM= ROA= ROE= Gross Profits Sales

Operating Profits (EBIT)

Sales Net Profit After Taxes Sales

Net Profit After Taxes

Total Assets Net Profit After Taxes Stockholders Equity Earnings Available for Common Stockholders Number of Shares of Common Stock Outstanding Market Price Per Share of Common Stock Earnings Per Share

EPS =

P/E =

Other ratios
Gearing ratio = (fixed term loan+ debentures sold) / Net asset This ratio indicates commitment for repayment of borrowed money, the higher ratio indicates that the profit is likely to be diverted for repaying the loans

Other ratios
Output per employee = (value of sales)/ Number of employees

Example : 1
Liquidity ratio
Quick (Acid-Test) Ratio (QR)

QR =

Current Assets - Inventory Current Liabilities

= (98-18-12-16)/25 = 2.08

A measure of firms ability to pay off short-term obligation without relying on the sales of its inventories

management accounting

Costing
1. It is the process of calculating how much something costs to make. 2. The most important use of information is in determining the realistic selling price. 3. Helps to determine which product areas are worth investing 4. Provides information for decisions relating to making or buying-in parts 5. Allows to decide which product need further developments for desired profit 6. The term costing generally applies to existing products

Components of costing
1. 2. 3. 4. 5. 6. 7. 8. Material Labour Lighting Heating Transportation Professional services Human resources development Administration

Methods of costing
1. The first method is based on direct and indirect costs. 2. The second is based on variable and fixed cost.

Direct and indirect costs

1. Direct costs: can be directly attributed to the product for which a cost is being prepared.
i. ii. Direct labours for the particular product Direct material based on bill of material for a particular product iii. Direct expenses relates to the costs incurred in buying services for the particular product

Direct and indirect costs

2. Indirect costs: are also called overheads, are the costs associated with operating the business which can not be directly assigned to product or services being provided. i. Material used for other products also: e.g. soldering flux, rags, cutting fluid etc. ii. Indirect Labour would include design engineers, supervisors and administrative staff iii. Indirect expenses would include heating, lighting and rent of premises

Recovery of overheads
1. Apportionment (distribution) to cost centre 2. Absorption (inclusion) by product

Apportionment to cost centre

1. A Cost centre is part of business that can be identified for the purpose of determining the costs
i. ii. iii. iv. v. Whole factory Particular department Specific machine Particular product Particular person

2. Each cost centre should bare a fair share of indirect costs

Apportionment to cost centre

3. Typical bases for apportionment
i. ii. Floor area for rent Number of employees for indirect labour and personnel costs iii. Book value of assets for depreciation and insurance

Absorption of overhead by product

1. Indirect costs charged to a individual product 2. Calculated on the bases of :
i. Standard or expected rate , volume of production ii. Units of output and machine hours iii. Material rates is divided by the actual or expected costs of direct materials

Full costing
1. The cost of product based on both direct and overhead costs

fixed and variable costs

1. Sometimes the cost of a product is divided into: fixed and variable costs 2. The variable costs are those that vary in proportion to the amount of output and so would include:
i. ii. iii. Direct materials Use of temporary labour Overtime charges Cost of employing people Cost of having premises Cost of machinery available

3.

The fixed costs are paid irrespective of output

i. ii. iii.

Break-even point for the manufacture of any product

This the point at which the income from sales is equal to the cost of manufacture, where no profit or loss is made, and company breaks even.

Example : 2
Following data is the cost incurred by a manufacturing company
Department Overhead in Rs. 52,000 65,000 1,25,000 1,00,000 6,20,000 1,75,000 Direct material cost in Rs. Number of employees 4 2 8 6

Personnel Purchase Machine shop Assembly shop

Example : 2
Above mentioned job is manufactured in a machine shop for which direct material cost is Rs. 25; direct labour cost is Rs. 18 and direct expenses is Rs. 10 per unit. The overhead should be absorbed on the basis of direct material rate. Find the total cost of the job.

Example : 2- solution
1. The problem is to be solved by apportion and absorption of overhead costs 2. Eliminate the cost of personnel department by distributing the overhead of personnel department proportionately to other departments. Basis of distribution= number of employees in a particular department
i. ii. iii. iv. Total number of employees from other than personnel = 2+8+6 = 16 Towards purchase department = (2/16)*52,000 = 6,500 Towards m/c shop = (8/16)*52,000 = 26,000 Towards assembly shop = (6/16)*52,000 = 19,500

3. Total overhead purchase dept. =6,50,000+ 6,500 =71,500

Example : 2- solution
3. Apportioning of purchase overheads to production shops Basis of distribution= direct material cost in a particular department TOTAL DIRECT MATERIAL COST= 6,200,00 + 1,75,000=
7,95,000 i. i. Towards machine shop = (71,500* 6,20,000) / 7,95,000= 55,761 Towards assembly shop = (71,500*1,75,000) / 7,95,000= 15,738

4.

Total overhead of machine shop = m/c shop overhead +personnel portion + purchase portion = 1,25,000+26,000+55,761=2,06,761

Example : 2- solution
5. Total overhead of assembly shop = assembly shop overhead +personnel portion + purchase portion = 1,000,00 + 19,500 + 15,738 = 1,35,238 6. Total overheads of production shops = overhead of machine shop + overhead of assembly shop= 2,06,761 + 1,35,238 = 3,42,000 7. Material recover rate (MRR) : for processing every Rupee of material in machine shop the overhead = machine shop overhead / direct material cost = 2,06,761 / 6,20,000 = 0.33, As the cost of direct material is Rs. 25 , MRR = 25+25*0.33 = 33.25

Example : 2- solution
8. Total cost of job which is manufactured in machine shop = 25 + 8.25 + 18 + 10 = 61.25

Example : 3
The running cost of a machine is as follows:
Values are in Rs. 1. Tooling cost 35,000 2. Maintenance 18,000 3. Spare parts 23,000 4. Power cost 4.5 per hour The machine is depreciated at the rate of Rs. 6,000 every year The expected run time is 313 days with two shifts of 8 hours each day i.e. 16 hours per day

Example : 3
Find out overhead recovery rate and total cost of a job manufactured on this machine with the following additional information:
Direct material cost : Rs. 180 Direct labour cost: Rs. 250 Direct expenses : Rs. 120 Machine usage time : 6.5 hours

Example : 3 - solution
1. Total working hours =

2. 3.

4. 5.

313*16=5,008 per year Power cost per year =5,008*4.5=22,536 Total overhead for the machine = Tooling cost 35,000+Maintenance 18,000 +Spare parts 23,000 + Depreciation 6,000 + Power cost 22,536 = 98,536 Machine hour rate = total overhead / number of working hours = 98,536 / 5,008 =20.87 Rs. Per hour Total cost = 180 + 250 + 120 + (6.5*20.87) = 685.67

Investment appraisal
1. It is way of analyzing the financial value of cost of investment decisions. 2. This is not only technique to be used and there will be always many factors that affect a decision 3. This helps in comparing investments and forcing you to think about the cost of a particular decision 4. Investment appraisal is not a costing exercise 5. Example : the cost and returns associated with the purchase of a new equipment

Techniques of Investment appraisal

1. Payback period :
i. It is the time that a project must run in order that the cash generated will repay the initial investment. ii. Payback is calculated on the basis of absolute values of the expected income after tax. iii. This is simple a technique and therefore widely used iv. The early returns are generally preferred to the longer ones v. It does not recognize that that money devalues with

time

Example : 4
1. Investment = Rs. 1,00,000 2. Annual return = Rs. 20,000 3. Payback =
(1,00,000 / 20,000) = 5 years

Techniques of Investment appraisal

2. Discounted cash flow:
i. Looks at the earning the life of the project and the time at which returns are received , and it allows for the fall in value a period of time. It is a fact that Rs. 100 today is worth more than Rs. 100 would be in a few years time. This comes about not because of inflation, which evens out over a period of time and also affects both costs and profit equality , but because Rs. 100 invested today will attract interest at some rate and therefore investment will increase in value.

ii.

The present value

If the interest rate is 10% and we invest Rs. 500 today and in five years of time the investment will be worth Rs. 805, assuming that the interest is immediately reinvested at the same rate and that capital is left untouched.
500*1.10*1.10*1.10*1.10*1.10 = 805

In a similar way we can work backward and say that if the interest rate is 10% then Rs.500 payable in fivers time will be worth Rs. 310 today. 500/ (1.1)5 = 310 310*1.10*1.10*1.10*1.10*1.10 = 500

This called the present value

The present value

P = S / (1+i)n Where P = Present value S = Sum in future i = interest rate (also called discount rate) n = number of years

Net present value

1. An investor get 8% interest per annum by investing money in a building society . The investor is offered an alternative investment by another company which will provide Rs. 3,88,000 at the end of each of three following years 2. In order to calculate the value of this second investment we need to asses what it is worth today

Net present value

P = ((3,88,000) / 1.081) + ((3,88,000) / 1.082) + ((3,88,000) / 1.083) = 3,59,259.3 + 3,32,647.5 + 3,08,006.9 = 9,99,913.6 The present value of the investment is Rs. 9,99,913.6 therefore if the capital cost of the second investment is less than Rs. 9,99,913.6 then this investment will make more money Net Present Value = present value of the return capital cost

Example : 5
An investment of Rs. 13000 yields return of Rs. 4000 per year for first three years and Rs. 2000 per year the next two years By calculating net present values determine whether this is a worth investment, if the money could otherwise be invested at 5 % per annum or at 10 % per annum

Example : 5 solution
1. Present value at 5 % interest
P = (4000/1.051)+(4000/1.052) +(4000/1.053) +(2000/1.054)+ (2000/1.055) = Rs. 14105

2. Net Present value at 5 % interest = 14195 13000 = +1105 3. If the money could only be invested at 5 % then this is worthwhile investment as it would bring a positive net present value

Example : 5 solution
1. Present value at 10 % interest
P = (4000/1.101)+(4000/1.102) +(4000/1.103) +(2000/1.104)+ (2000/1.105) = Rs. 12555

2. Net Present value at 5 % interest = 12555 13000 = - 445 3. If the money could be invested elsewhere at 10 % then this is not profitable investment as it would bring a negative net present value

Internal rate of return

1. This is the discount rate, or rate of interest , at which net present value is zero 2. it is a point at which you break even. 3. Data of example : 5
@ 5 % NPV = + Rs. 12555 @ 10 % NPV = - Rs. 445 IRR = 5 + ((1105/(1105+445)) = 8.56 %

DETERMINATION OF INTERNAL RATE OF RETURN

1200

N 1000 P V i n R s .
800 600 400 200

1105 771 449 140

0 1 2 3 4 5 6 7 8 9 10 -158 11

0
-200 -400 -600

-445 interest rate %

Depreciation
1. Investments in terms of cost to buy are considered as asset to the company in successive years with decreasing value 2. The term used to describe this reduction in value is depreciation . The reduced vale is considered as book value 3. There are accounting techniques to calculate depreciation

4. The factors for depreciation :

i. Wear and tear ii. Shelf-life iii. Damage due to misuse

Depreciation
5. Depreciation must be incorporated in balance sheet to show the reduction in asset value 6. Book value = cost of asset - depreciation 7. Stock is not to be depreciated because it is valued annually 8. Methods for calculating depreciation
i. Straight-line method ii. Reducing-balance method iii. Production unit method

Straight-line method
1. Asset is depreciated by equal annual charges spread over assets estimated life

2. D= (c-s)/n
D= depreciation charge, c= cost, s=scrap value, n= estimated life 1. Example
i. ii. iii. iv. Cost : Rs. 6,00,000 Scrap value : Rs. 40,000 Estimate life : 10 years Annual depreciation = (6,00,000 40000) /10 = 56,000

Reducing-balance method
1. The depreciation charge is a constant proportion of balance remaining at the end of each accounting period. 2. Example
i. ii. iii. Cost : Rs. 6,00,000 Scrap value : Rs. 40,000 Estimate life : 10 years

value
Rs. 600000 Rs. 6,00,000 10% =54,0000 1 Rs. 54,0000 10%=48,600 0

year

Production unit method

1. The depreciation charge is based on number of units of work produced 2. D= (c-s)/N
D= depreciation charge, c= cost, s=scrap value, N= estimated production units

3. Example
i. ii. iii. iv. Cost : Rs. 13,00,000 Scrap value : Rs. 50,000 Estimate production : 2,50,000 units Depreciation charge = (13,00,000- 50,000)/ 2,50,000 = Rs. 5 per unit

Example : 6
A transport vehicle was purchased at a cost of Rs.18,50,000 . The useful life in terms of number of kilometer is 4,50,000 and scrap value is Rs. 50,000 . Calculate the depreciation rate and find out deprecation for 1st and 2nd year and also calculate the book value of vehicle if it has travelled 13,000 km in 1st year and 18,500 km in 2nd year

Example : 6 - Solution
1st year: Cost C=18,50,000 Rs. Working units N=4,50,000 km Scarp value s = 50,000 Rs. 1. Depreciation rate = (18,50,000 - 50,000)/ 4,50,000 = 4 Rs./km. 2. Depreciation for 13,000 km. = 4* 13,000
= 52,000 Rs.

3. Book value = cost of asset depreciation =18,50,000 - 52,000 = 17,98,000 Rs.

Example : 6 - Solution
2nd year:
Cost C=18,50,000 Rs. Working units N=4,50,000 km Scarp value s = 50,000 Rs.

1. Depreciation rate = (18,50,000 - 50,000)/ 4,50,000 = 4 Rs./km.

2. Depreciation for 18,500 km. = 4* 18,500

= 74,000 Rs.

3. Book value = cost of asset after 1 year depreciation in 2nd year =17,98,000 - 74,000 = 17,24,000 Rs.

Example : 7
The following data is given for a company
Department Direct Material cost Rs. 5,00,000 2,50,000
2,00,000 0 0 9,50,000

No. Of Floor employees area m2

14 500

M/c shop

Dept overhead Rs. 90,000 74,000

82,000 50,000 70,000 30,000 3,96,000

Ass shop
Moulding shop Personnel Purchase Total

20
14 5 6 3 62

1,000
1,000 0 0 0 2,500

Maintenance 0

Example : 7
Apportion the overhead to 3 production shops and calculate the cost of a job which is manufactured a moulding shop where material cost is Rs. 74 and labour cost is Rs. 50

Example : 7 - solution
1. The problem is to be solved by apportion and absorption of overhead costs 2. Eliminate the cost of personnel department by distributing the overhead of personnel department proportionately to other departments. Basis of distribution= number of employees in a particular department 3. Machine shop
i. ii. iii. Total number of employees from other than personnel = 62-5= 57 Towards m/c shop = (14/57)*50,000 = 12,280.7 Updated overhead of m/c shop =90,000+12,280= 1,02,280.7

Example : 7 - solution
4. Assembly shop : personnel apportionment = (20/57)*50,000 = 17,543 Updated overhead of assembly shop =74,000 + 17,543 = 91,543 5. Moulding shop : personnel apportionment = (14/57)*50,000 = 12,280 Updated overhead of moulding shop =83,000 + 12,280 = 94,280

Example : 7 - solution
6. Purchase department: personnel apportionment = (6/57)*50,000 = 5,263 Updated overhead of Purchase department =70,000 + 5,263 = 75,263 7. Maintenance department: personnel apportionment = (3/57)*50,000 = 2,631 Updated overhead of Purchase department =30,000 + 2,631 = 32,631

1. Eliminate the cost of purchase department by distributing the overhead of personnel department proportionately to other departments. Basis of distribution= cost of direct material in a particular department 2. Machine shop
i. ii. iii. Total cost of material= 5,00,000 +2,50,000 +2,00,000 = 9,50,000 Towards m/c shop = (14/57)*50,000 = 12,280.7 Updated overhead of m/c shop =90,000+12,280= 1,02,280