### 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 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
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
 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
• 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
 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 Reapportionment of canteen costs No. of employees 11 701 9 361 (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

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