Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ  Advanced Accounting Level Notes: Reapportionment of service costs no interwork

  • In the the example found here we looked at how to allocate and apportion overheads using bases and an overhead analysis sheet
  • 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
  • Now we will look at how we deal with a case where there is a service department
  • As explained in the introduction the whole point of absorption costing is so that products can absorb a fair share of overheads
  • In a simple set up where there are just production departments (production cost centres) this is simple
  • Costs are apportioned and allocated among different departments, the total for each department is used to create an OAR which is used to absorb costs
  • For example if a labour hour based OAR is calculated we as shown here, products absorb costs depending on how much time they spend in a certain department
  • Where there are service departments it becomes necessary to distinguish between:
  • Production cost centres-these are centres that actually produce the products for example the assembly and finishing departments
  • Service cost centres-these work for the production departments and provide services to one another (inter-work) for example the maintenance department repairs machinery in both the production departments as well as the canteen. On the other hand maintenance workers eat in the canteen
  • All service cost centre overheads must be transferred to production centres
  • Thus all production overheads for the period are shared between the production cost centres alone
  • This way they can be absorbed by units produced
  • In this example we will show how service centre costs can be reapportioned in a case where there is no inter-work between the service departments

The Question

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

Overhead item$
Factory rent20 000
Factory heat5 000
Processing Department supervisor15 000
Packing Department-supervisor10 000
Depreciation of equipment7 000
Factory canteen expenses18 000
Welfare costs of factory employees5 000
Total Overheads

80 000

  • The following additional information is also provided
BaseProcessing DepartmentPacking DepartmentCanteen Department
Space in cubic metres50 000m325 000m35 000m3
Carrying Amount Equipment$300 000$300 000$100 000
No. of Employees504010

Required

  1. Allocate and apportion production overhead costs amongst the three departments using a suitable basis
  2. Reapportion the service centre costs

Solution

  • First we allocate and apportion the overheads as usual
  • The explanation for the solution below can be found here
OverheadsApportionment BasisProcessingPackingCanteenTotal
Factory RentSpace12 5006 2501 25020 000
Factory HeatSpace3 1251 5633125 000
Supervisor WagesAllocation15 00010 000-25 000
DepriciationCarrying Amounts3 0003 0001 0007 000
CanteenAllocation--18 00018 000
WelfareNo. of employees2 5002 0005005 000
Total

36 125

22 813

21 062

80 000

  • Once this is done it is time to reapportion the service centre costs
  • Since there is no inter work among the service departments ( in this case we really have just one department) the costs can be reapportioned to production cost centres only using a suitable rationale
OverheadsApportionment BasisProcessingPackingCanteenTotal
Factory RentSpace12 5006 2501 25020 000
Factory HeatSpace3 1251 5633125 000
Supervisor WagesAllocation15 00010 000-25 000
DepriciationCarrying Amounts3 0003 0001 0007 000
CanteenAllocation--18 00018 000
WelfareNo. of employees

2 500

2 000

500

5 000

Total36 12522 81321 06280 000
Reapportionment of canteen costsNo. of employees11 7019 361(21 062)
Total after reapportionment

47 826

32 174

------

80 000

  • Number of employees is the most suitable base here as the more employees the more they eat so the processing department clearly benefits more from the canteen
  • After this step Overhead Absorption Rates for each department can then be calculated

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