Cambrige AS and A Level Accounting Notes (9706)/ ZIMSEC  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

To access more topics go the ZIMSEC Advanced Level Accounting page

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