Absorption of Overheads: Reapportionment of service costs where there is interwork

• We have already looked at the need for reapportioning the portion of overheads that would have been allocated and apportioned to service cost centres
• We also looked a simple example where there was no inter work among departments here
• 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 in real world scenarios service departments usually provide services to one another
• A simple example of a furniture factory where there are four departments: assembly, finishing, canteen and maintanance
• Assembly and Finishing would be the production cost centres while canteen and maintenance are the service cost centres
• It is most likely that workers from the maintenance department eat in the canteen
• On the other hand these same workers would occasionally service canteen equipment
• This is known as inter work
• In such cases it would be incorrect to simply directly apportion the overhead costs of the service departments to the production departments only as the other service department also benefits from the service department whose costs are being reapportioned
• The solution to this is to use the reciprocal method
• There are two ways to implement the reciprocal method:
  1. Repeated reapportionment where costs from each cost centre are reapportioned in turn and repeatedly until there is nothing left to reapportion in all the cost centres. This method is labour intensive
  2. Algebraic methods where algebraic methods are used to apportioned costs to production departments from the service cost centers
• Repeated reapportionment where costs from each cost centre are reapportioned in turn and repeatedly until there is nothing left to reapportion in all the cost centres. This method is labour intensive
• Algebraic methods where algebraic methods are used to apportioned costs to production departments from the service cost centers
• Due to rounding errors the methods can yield slightly different results but the results must be very close to one another
• Both methods will now be demonstrated using an example below.

Example Question

Joe King Shoes allocated and apportioned overhead costs among their four departments: Sewing, Finishing, Stores and Maintenance and the results are shown below:

Required:

1. Reapportion service department costs to departments using:
   1. repeated distribution method; and
   2. algebraic method.

Solution

• The solution for this question can be found here

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