COST ACCOUNTING

APPORPTIONMENT OF OVERHEADS

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OVERHEADS APPORTIONMENT
1. PRIMARY APPORTIONMENT
Direct costs such as direct materials, direct labor and direct expenses can be easily traced (identified)
directly and in full to the physical units produced.

Indirect (overheads) costs cannot be specifically traced to physical units produced. However the
making of products would be impossible without incurring such overhead costs
Overhead (i.e. indirect) costs include depreciation, fuel, heating, lighting, material handling,
repairs, property taxes, cost of services facilitating the day to day operations etc. that are
essential for any production activity.

Cost centres
A cost centre is any location in a business to which costs may be attributed. A cost centre is
usually a department or process.

Specific overheads
These are overheads which may be identified and allocated to specific cost centre

General overheads
These overheads which are incurred for the business generally and are apportioned to cost
centres on suitable basis

SUITABLE BASES FOR APPORTIONMENT OF INDIRECT COSTS

OVERHEADS BASIS OF
APPORTIONMENT
• All labour related expenses e.g. time keeping expenses, Number of employees or
staff welfare expenses, canteen expenses and wages paid for each
department.
• indirect labour Direct labour hours are
used as a basis for indirect
labour
• General department expenses Direct expenses
• Maintenance expenses Machine hours
• Rent
• Rates FLOOR SPACE AREA
• Property tax OCCUPIED
• Insurance of building
• Telephone charges (when the number of telephone point
or estimated usage are not given)
• Depreciation of factory building
• Heating and lighting (when not separately metered the Number of light points,
cost centres) floor space area occupied
• Supervising costs Time Spent in each
department

Fuel and Power (if metered separately to cost cetres) Actual consumption (this
is allocation rather than
apportionment) or
horsepower

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 Insurance of plant and machinery On cost or book value or
replacement values of
assets in each department
Depreciation of plant and machinery On the cost or book value
of assets in each
department
Building maintenance Area occupied
Machine maintenance Machine hours
Supervisor salary Direct labor hours
Employees salary Number of employees

2. SECONDARY APPORTIONMENT
INTER-SERVICE DEPARTMENT REALLOCATIONS
Once the overheads are allocated and apportioned to the production and service cost centres we
need to re-apportion the service cost centre overheads to the production cost centres. This is
because these service cost centres provide services to the production cost centres. Although the
products are not actually processed in these services cost centres, costs are still incurred

• Production cost centres

Are directly involved in producing goods, for example shaping raw materials, assembling
components etc

• Service cost centres

Are not involved in the production of goods, but provide services for the production cost
centres, for example store, building and plant and maintenance, canteen, etc.

Service departments provide services for other service department as well as for production
departments. For example, a personnel department provides services for other service
departments such as power generating plant, maintenance department and stores. The power
generating department also provides heat and light for other service departments including the
personnel department and so on.

APPORTIONMENT OF SERVICE COST CENTRE OVERHEADS TO PRODUCTION

COST CENTRE
SERVICE COST CENTRE APPORTIONMENT
Stores Number or value of stores requisitions
raised by production cost centre
Canteen Number of employees
Most of the times services department costs are apportioned basing on the percentage given
in question

QUESTION 1
A furniture- making business manufactures quality future to customer’s orders. It has three production departments
and two services departments. Budgeted overhead costs for the coming year are as follows:
Total($)
Rent and Rates 12,800
Machine Insurance 6,000
Telephone charges 3,200
Depreciation 18,000
Production Supervisor’s salaries 24,000
Heating Lighting 6,400
70,400
The three production departments –A,B and C, and the two services departments –X and Y, are in the new
premises, the details of which, together with other statistics and information, are given below

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 Departments
A B C X Y
Floor area occupied (sq. meters) 3000 1800 600 600 400
Machine value ($000) 24 10 8 4 2
Direct Labor hrs budgeted 3200 1800 1000
Direct labor rates per hour $3.80 $3.50 $3.40 $3.00 $3.00
Allocated Overheads:
Specific to each department ($000) 2.8 1.7 1.2 0.8 0.6
Servce Department X`s costs apportioned 50% 25% 25%
Service Department Y`s costs apportioned 20% 30% 50%
Required:
i. Prepare a statement showing the overhead cost budgeted for each department, showing the basis of apportionment used. Also calculate
suitable overhead absorpition rates.
ii. Two pieces of furniture are to be manufactured for customers. Direct costs are as follows:
Job 123 Job 124
Direct Material $154 $108
Direct Labour 20 hours Dept A 16 hours Dept A
12 hours Dept B 10 hours Dept B
10 hours Dept C 14 hours Dept C
• Calculate the total of each costs of each job.
• If the firm quotes prices to customers that reflect a required profit of 25% on selling price, calculate the quoted selling price for each job.

QUESTION 2
The annual overhead cost for the Enterprise Company which has three production centers (two machine centers and
one assembly centre) and two service centers (store and Canteen) are as follows:
$ $
Indirect wages and supervision
Machine centres: X 1,000,000
Y 1,000,000
Assembly 1,500,000
Store 1,100,000
Canteen 1,480,000 6,080,000
Indirect materials
Machine centres: X 500,000
Y 805,000
Assembly 105,000
Stores 0
Canteen 10,000 1,420,000
Lighting and heating 500,000
Property taxes 1,000,000
Insurance of machinery 150,000
Depreciation of machinery 1,500,000
Insurance of buildings 250,000
Salaries of works management 800,000 4,200,000
11,700,000
The following information is also available:
Book Area occupied Number Direct labor machine
Value of (sq. meters) of hours hours
Machinery employees
Machine shop: X 8,000,000 10,000 300 1,000,000 2,000,000
Machine shop: Y 5,000,000 5,000 200 1,000,000 1,000,000
Assembly: 1,000,000 15,000 300 2,000,000
Stores 500,000 15,000 100
Canteen 500,000 5,000 100
15,000,000 50,000 1000

Machine shop X Machine shop Y Assembly Stores

Service Canteen`s costs apportioned 20% 30% 40% 10%
Service store`s costs apportioned 40% 35% 25% -
Required:
a) You are required to allocate the costs of service department to production department
using the step down method
b) Compute suitable absorption rate

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QUESTION 3
Bookdon Public Limited Company manufactures three products in two production departments, a machine shop and a fitting section; it also has
two service departments, a canteen and a machine maintenance section. Shown below are next years budgeted production data and manufacturing
costs for the company
Products product product
X Y Z
Production 4200 units 6900 units 1700 units
Prime cost:
Direct materials $11 per unit $14 per unit $ 17 per unit
Direct Labor:
Machine shop $ 6 per unit $ 4 per unit $ 2 per unit
Fitting section $ 12 per unit $ 3 per unit $ 21 per unit
Machine hours per unit 6 hours per unit 3 hours per unit 4 hours per unit

Machine Fitting canteen Machine section Total

Shop section maintenance
Budget overheads ($):
Allocation overheads 27,660 19,470 16,600 26,650 90,380
Rents, rate, heat and light 17,000
Depreciation and Insurance of equipment 25,000
Additional data:
Gross book value of equipment ($) 150 000 75,000 30,000 45,000

Number of employees 18 14 4 4
Floor space occupied (square meters) 3600 1400 1000 800
It has been estimated that approximately 70% of the machine maintenance section’s costs are incurred servicing the machine shop and the
remainder incurred servicing the fitting section.
a) Prepare an overhead analysis sheet for the year ending 31 st December 2004 detailing overhead for machine shop and a fitting section
b) Calculate the following budgeted over head absorption rates:
• A machine hour rate for the machine shop
• A rate expressed as a percentage of direct wages for the fitting section.
c) Give reasons for the two methods used in (b)
d) Calculate the budgeted manufacturing overhead cost per unit of product X

QUESTION 4
Show the apportionment of the following costs
Costs at the end of the year
Tshs ‘000
Fixed costs
Rent and rates 4,000
Insurance 20,000
Depreciation on plant and machinery 25,000
General and department expenses 37,500
Variable costs
Indirect wages 15,000
Fuel and power 20,000
Maintenance expenses 10,000
Additional cost related data (amounts in tshs’000)
Dept A Dept B Dept C Dept D Total
Floor area (sq. ft) 2,000 2,000 4,000 2,000 10,000
Costs of plant and machinery 100,000 250,000 50,000 100,000 500,000
Horsepower 16 24 20 20 80
Labour hours 5,000 10,000 15,000 20,000 50,000
Machine hours 12,000 9,000 6,000 3,000 30,000
Direct expenses 25,000 25,000 20,000 5,000 75,000
Direct wages 30,000 30,000 26,000 15,000 101,000
Direct materials 27,000 19,500 15,500 - 62,000

DIFFERENT METHODS OF REAPPORTIONMENT SERVICES DEPARTMENT COSTS TO

PRODUCTION CENTRE
DIFFERENT METHODS OF ALLOCATING THE SERVICE DEPARTMENT COSTS
1. DIRECT ALLOCATION METHOD
It ignores inter-service department service reallocations.
Therefore service department costs are allocated only to production departments

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 2. SPECIFIED ORDER OF CLOSING METHOD (STEP DOWN METHOD)
• If this method is used the service departments’ overheads are allocated to the production departments
in a certain order.
• The service department that does the largest portion of work for other service department is closed first,
the service department that does the second largest portion of work for other service department is closed
second and so on.
• Return charges are not made to service departments whose cost have previously been allocated.

3. RESPROCAL SERVICE METHOD

a) REPEATED DISTRIBUTION METHOD
Where this method is adopted, the service department costs are repeatedly allocated in the specified
percentages until the figure is too small to be significant.

b) THE MODIFIED REPEATED DISTRIBUTION METHOD (starting distribution among the

service cost centre)
Step 1: the overheads cost of one service centre is apportioned to the other service centres according to
the given percentages. Then, the cost of the second service centre is apportioned to the first and other
service centres in the given percentages. Thus, the distribution of overheads takes place among the
service centres.

Step 2: the total overhead cost of each service centre (as computed in step 10 is apportioned among
the production cost centres.

c) SIMULTANEOUS EQUATION METHOD

When this method is used simultaneous equations are initially established
QUESTION 5
A company has three production departments and two services departments. The overhead
analysis sheet provides the following total of the overheads analyzed to production and service
departments:
Shs
Production department X 48,000
Y 42,000
Z 30,000
Services department 1 14,040
2 18,000
152,040
The expenses of the services departments are apportioned as follows:
Production department service department
X Y Z 1 2
Service department 1 20% 40% 30% - 10%
Service department 2 40% 20% 20% 20% -
You are required to allocate the costs of service department to production department using the
following methods
a) Direct allocation method
b) Specified order of closing method
c) Repeated distribution method
d) Reciprocal method
i. Repeated distribution method
ii. Modified repeated distribution method
iii. Simultaneous equation method

QUESTION 6
Ace Ltd has three production departments and two service departments. The expenses for these
departments as per primary distribution summary are as follows:
Tshs’000 Tshs’000
Production departments
A 6,000

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 B 5,200
C 4,800 16,000

Service departments
Stores 800
Time-keeping and 600 1,400
accounts
Additional information:
Dept Dept Dept
A B C
Number of workers 16 12 12
Value of stores requisition 5,000 3,000 2,000
(tshs’000)
By using direct method apportion the costs of service departments over the production departments

QUESTION 7
The overheads relating to two production departments, P1 and P2, and three service departments,
timekeeping (S1) and Stores (S2) and maintenance (S3) are given below:
Production Departments Service departments
Production Departments Service departments
P1 P2 S1 S2 S3
Overheads as per 16,000,000 20,000,000 8,400,000 18,000,000 8,000,000
primary distribution

The expenses of the services departments are apportioned as follows:

Production department service department
P1 P2 P3 S1 S2
Service department S1 40% 30% 20% - 10%
Service department S2 30% 30% 20% 20% -

You are required to allocate the costs of service department to production department using the
modified repeated distribution method

QUESTION 8
A company has three production departments and two services departments. The overhead
analysis sheet provides the following total of the overheads analyzed to production and service
departments:
Shs
Production department A 4,800,000
B 4,200,000
C 3,000,000
Services department X 1,400,000
Y 1,800,000
15,200,000
The expenses of the services departments are apportioned as follows:
Production department service department
A B C X Y
Service department X 20% 40% 30% - 10%
Service department Y 40% 20% 20% 20% -
You are required to allocate the costs of service department to production department using the
repeated distribution method

QUESTION 9

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The overheads relating to two production departments, P1 and P2, and three service
departments, timekeeping (S1) and Stores (S2) and maintenance (S3) are given below:
Production Departments Service departments
P1 P2 S1 S2 S3
Overheads as per 800,000,000 1,400,000,000 400,000,000 500,000,000 300,000,000
primary
distribution

Further information is available and is used as a basis for distribution:

Production Service
departments departments
P1 P2 S1 S2 S3
No of employees 40 30 - 20 10
No of stores 24 20 - - 6
requisitions
Machine hours 2,400 1,600 - - -

By using step down/specific order of closing method apportion the costs of service departments
over the production departments

QUESTION 10
A company has three production departments and two services departments. The overhead analysis sheet provides
the following total of the overheads analyzed to production and service departments:
Shs
Production department A 16,000,000
B 13,000,000
C 14,000,000
Services department : stores 4,680,000
Tool room 6,000,000
53,680,000
The expenses of the services departments are apportioned as follows:
Production department service department
A B C stores tool room
Stores 20% 25% 35% - 20%
Service department Y 25% 25% 40% 10% -
You are required to allocate the costs of service department to production department using the simultaneous
equation method