### Cambrige AS and A Level Accounting Notes (9706)/ ZIMSECĀ  Advanced Accounting Level Notes: 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

#### 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 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
• The following additional information is also provided
 Base Processing Department Packing Department Canteen Department Space in cubic metres 50 000m3 25 000m3 5 000m3 Carrying Amount Equipment \$300 000 \$300 000 \$100 000 No. of Employees 50 40 10

Required

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

#### Solution

• 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
 Overheads Apportionment Basis Processing Packing Canteen Total Factory Rent Space 12 500 6 250 1 250 20 000 Factory Heat Space 3 125 1 563 312 5 000 Supervisor Wages Allocation 15 000 10 000 - 25 000 Depriciation Carrying Amounts 3 000 3 000 1 000 7 000 Canteen Allocation - - 18 000 18 000 Welfare No. of employees 2 500 2 000 500 5 000 Total 36 125 22 813 21 062 80 000
• 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 the ZIMSEC Advanced Level Accounting page

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