Example
ABC Co. Ltd has four production departments
P1, P2, P3 and P4 and three service departments
S1, S2 and S3.
S1 stores
S2 production control section
S3 maintenance department
Calculate for each production department an
appropriate overhead absorption rate per machine
hour.
Calculate the total cost of each department.
The annual overheads are as follows:
Information
Cost
Total (Rs.000)
Indirect labour
2,000
Supervision
200
Power
600
Rent
80
Insurance -Building
160
Insurance -Plant
100
Depreciation -Building
240
Depreciation -Plant
120
Information
Indirect Labour Costs
Cost centres
P1
P2
P3
P4
S1
S2
S3
Actual costs
Rs.000
300
200
500
100
200
300
400
Information
P1
P2
P3
P4
S1
S2
S3
Total
No. of employee
400
400
500
600
30
20
50
2,000
Floor Area (Sq.M)
3,000
9,000
8,000
8,000
1,000
1,000
2,000
32,000
Power (KWHrs)
7,000
5,000
3,000
2,000
1,500
500
1,000
20,000
[Link] Hours
4,000
5,000
5,000
3,000
1,000
18,000
Stores Requisitions
600
300
250
150
400
300
2,000
Maint. Dept Hours
6,000
8,000
5,000
6,000
25,000
Plant Hrs (000)
120
80
200
100
500
Book value of plant
(Rs.000)
300
200
100
80
120
50
150
1,000
Allocation of costs to Production and Service Departments
Item
Basis
Ind. Labour
Actual
Supervision
Total
P1
P2
P3
P4
S1
S2
S3
2000
300
200
500
100
200
No. of
employee
200
40
40
50
60
Power
KWHr
600
210
150
90
60
45
15
30
Rent &
Rates
Floor area
80
7.5 22.5
20
20
2.5
2.5
Insurance
Building
Floor area
160
15
45
40
40
10
Insurance
Book value
Plant
Depreciation Floor area
Building
100
30
20
10
12
15
22.5 67.5
60
60
7.5
7.5
15
Depreciation Book value
Plant
120
36
24
12
9.6
14.4
18
3500
661
569
782
357.
6
289.4
Total
240
300 400
343 498
Calculation
Item
Basis
Ind. Labour
Actual
Supervision
No. of
Employee
200 (200/2,000)*400
= 40.0
Power
KWHr
600 (600/20,000)*7000
= 210.0
Rent & rates
Floor area
80 (80/32,000)*3000
Insurance -B
Floor area
160 (160/32,000)*3000
= 15.0
Insurance-P
Book value
100 (100/1,000)*300
= 30.0
Depreciation-B
Floor area
240 (240/32,000)*3000
= 22.5
Depreciation-P
Book value
120 (120/1,000)*300
= 36.0
Total
Total P1
2000
3500
300.0
7.5
661.0
Reallocation of Service Department Overheads to
Production Departments
Item
Basis
Total
costs
Total P1
P3
P4
S1
S2
S3
661.0
569.0
782.0
357.6
289.4
343.0
498.0
86.8
43.4
36.2
21.7
289.4
57.9
43.4
S2-Pro Prodn 3500
Control control
748.8
89.1
612.4
111.35
818.2
111.35
379.3
66.8
400.9
-400.9
541.4
22.3
S3Maint
3500
837.9
135.3
723.75
180.4
929.55
112.7
446.1
135.3
563.7
563.7
3500
973.2
904.15 1042.25
581.4
S1stores
Total
3500
P2
Store
req
Main
Hrs
S1stores
S1
Store
req
P1
P2
P3
P4
S2
S3
87.8
43.4
36.2
21.7
(289.4)
(289.4/2000)*600 = 86.82 86.8
(289.4/2000)*300 = 43.41 43.4
(289.4/2000)*250 = 36.18 36.2
(289.4/2000)*150 = 21.71 21.7
(289.4/2000)*400 = 57.88 57.9
(289.4/2000)*300 = 43.41 43.4
Total
289.4
57.9
43.4
S2-Pro Prodn
Control control
S2
3500
748.8
89.1
612.4
111.35
818.2
111.35
379.3
66.8
P1 (400.9/18,000)* 4000= 89.08 89.1
P2 (400.9/18,000)* 5000=111.35
P3 (400.9/18,000)* 5000=111.35
P4 (400.9/18,000)* 3000=66.81 66.8
S3 (400.9/18,000)* 1000=22.27 22.3
- 400.9
- (400.9)
541.4
22.3
S3Maint
S3
Plant
Hrs
3500
837.9
135.3
723.75 929.55 446.1
180.4
112.7 135.3
P1 (563.7/25,000)*6000
P2(563.7/25,000)*8000
P3(563.7/25,000)*5000
P4 (563.7/25,000)*6000
Total
=135.288
=180.384
=112.74
=135.288
135.3
180.4
112.7
135.3
563.7
563.7
(563.7)
Calculation of appropriate departmental
overhead rates
Based on machine hours
P1
P2
P3
P4
= 973.3/120
= 904.15/80
=1042.25/200
= 581.4/100
= 8.11
= 11.30
= 5.21
= 5.81
per M/C hour
per M/C hour
per M/C hour
per M/C hour
Charging Overhead Rates to Products
Overhead costs in each cost centre should be
absorbed by the products, at an absorption rate
of each product.
[Link].
P1
P2
P3
P4
Job1(hours)
3
2.5
0
5
Job2(hours)
12
0
5
0
Job3(hours)
1.5
4
10
3
Then, based on the production hours the
overhead costs chargeable are as follows:
Job 1 = 3*8.11+2.5*11.3+5*5.81 = 81.63
Job 2 = 12*8.11+5*5.21 = 123.37
Job 3 = 1.5*8.11+4*11.3+10*5.21+3*5.81 =
Allocation service department costs
Example
A manufacturing firm has three production
departments, P1, P2 and P3, and two service
departments, S1and S2. the following costs are
shown in the overhead distribution sheet.
production dep. P1 = Rs. 5000
production dep. P2 = Rs. 8000
production dep. P3 = Rs. 6000
service dep. S1
= Rs. 1280
service dep. S2
= Rs. 3000
Total
= Rs.23,280
The costs of the two service departments S1
and S2 are to be re-apportioned to production
departments using the following basis.
S1
S2
P1
20%
30%
P2
40%
30%
P3
10%
20%
S1
20%
S2
30%
Total
100%
100%
There are 3 basic methods of allocating
service department costs.
1. Continuous Allotment
2. Simultaneous Equation method
3. Specified order of Re-Allocation
Continuous Allotment
Costs of service departments are re-allocated to other
departments repeatedly until the amount remaining is too
insignificant.
P1
P2
P3
S1
S2
Total
s1
20%
40%
10%
30%
100%
s2
30%
30%
20%
20%
100%
Total
Cost before
re-allocation
Dept S1
Dept. S2
Total
P1
P2
P3
S1
1280
S2
23280
5000
8000 6000
3000
2380
256
1015
135
61
8
3.6
4
6479
512 128 (1280)
384
1015 677
677 (3384)
271
68 (677)
203
62
40
40 (203)
16
4
(40)
12
3.6
2.4
2.4
(12)
4
3
9880 6920
Simultaneous equation method
X=total cost of S1 after receiving 20% cost of S2
Y=total cost of S2 after receiving 30% cost of S1
X=1280+0.2Y
Y=3000+0.3X
By solving two equation above,
X=2000
and Y=3600
As above
Total
P1
P2
P3
19000
5000
8000
6000
Cost before
re-allocation
Dept S1
2000
1400*
400*
800*
200*
Dept S2
3600
2880
1080
1080
720
23280
6480
9880
6920
Total
(2000/100)*70
=1400
(1400/70)*20
=400
(1400/70)*40
=800
(1400/70)*10
=200
Specified order of Re-allocation
Assume that service dept. costs are first allocated to S1 and then to
S2.
P1
P2
P3
S1
S2
Total
S1
20%
40%
10%
30%
100%
S2
37.5%
37.5%
25.0%
100%
30*(100/80)
30*(100/80)
20*(100/80)
Total
Cost before
re-allocation
P1
P3
5000
8000
Dept S1
256
512
Dept. S2
1269
1269
846
6525
9781
6974
Total
23280
P2
2380
(1280/100)*20 (1280/100)*40
=256
=512
(1280/100)*10
=128
6000
S1
S2
1280
3000
128 (1280)
384
(1280)
- (3384)
-
(1280/100)*30
=384
