Absorption of Overheads: Overhead Analysis Sheet Example

In this example we will look at how you can use an overhead analysis sheet to allocate and apportion overhead costs
It is important to note that while the format shown below is the most popular
It is entirely up to management what format they want since unlike financial accounting there are no set formats
We have already looks at the theory of overhead absorption here
We have also looked at allocation and apportionment here
We have also looked at the theory of how to calculate overhead absorption rates (OARs) and why
The purpose of this question is to show how an overhead analysis sheet is prepared
It also demonstrates the use of various bases to apportion and allocate costs

Patoking is a furniture store in the capital city. For the year 20×8 the following production overheads were anticipated:

Overhead item	$
Factory rent	20 000
Factory heat	5 000
Processing Department supervisor	15 000
Packing Department-supervisor	10 000
Depreciation of equipment	7 000
Factory canteen expenses	18 000
Welfare costs of factory employees	5 000
Total Overheads	80 000

Required

Allocate and apportion production overhead costs amongst the three departments using a suitable basis

Here we deliberately asked you to come up with the rational base to use during apportionment, make sure you come up with a reasonable base

As shown in the solution sheet above everything here seems straight forward
Rent is apportioned using space because one would be right to assume the bigger the floor area the more the rent so a department that has larger floor space should be apportioned more of the rent payable
For heating we use space as the larger the floor area the more heating required, the converse is also true
For depreciation we use the carrying amounts (NBV) as one would assume that higher valued items would contribute more to the depreciation expense
Welfare expenses are apportioned using the number of employees because the more employees one has the more in welfare benefits they pay
Supervisor wages are allocated as these can be easily traced to the relevant department
The tricky part are the canteen expenses
The temptation here is to apportion these to all the departments using the number of employees
That would still be the correct treatment but there is no need to do this at this stage
The next stage after we have done what is shown above would involve reassigning service costs to the production departments anyway so we can leave the figure as is and apportion it later in its entirety to the production departments
The effect would be the same as apportioning the costs among the three departments and later reapportioning the canteen expense to the two departments

To access more topics go to the Cambridge AS/A level page

Absorption of Overheads: Overhead Analysis Sheet Example- Updated 2024