KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo

Subject: cost accounting Date: 22/11/2014

Lec. No : 4
KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo

CH 15

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
Cost allocation
Allocation overhead (indirect costs)
How we can allocate or trace overhead?
1 – By estimated average cost method, where we divide estimated oh
by estimated volume of production.
To solve problem of allocation we use:
Cost center approach: is a group of different cost elements, which
will produce on services such as maintenance dep- include 100 of
cost elements, but finally produce a maintenance services.
Steps of applying the cost center approach
1 – Divide the factory to two types of centers (production center and
service center)
2 – Then 3 words (assign, distribute, and allocate)
-assigning the special costs to the related center special cost such as
indirect material, indirect wages, and depreciation and the like.
3 – Distribution of common costs (benefit with more than one center,
example: - rent (allocating of rent between different centers
according to space)
-social expense: trips, visits, according to number of workers
-maintenance expense distributed according to machine running hour
-motive power distributed according to machine running hour or size,
capacity
4-allocation of service centers between production centers
There are 3 methods to allocate overhead costs:

5 ‫ من‬1 ‫الصفحة‬

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
 KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
Subject: cost accounting Date: 22/11/2014
Lec. No : 4
KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo

1 – Direct method or straight method, how to be applied?

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
As a follows:
Each service dep- to be allocated only the production dep-, nothing
else, the method has limited allocation of services production
Ex- suppose that 2 production center A,B in addition to 2 service
center and the following information are related to these centers:

items A B C D
Overhead 20,000 10,000 6,000 4,000
Basis of allocating c 2 1
Basis of allocating d 1 1
Require : prepare the overhead analysis sheet according to the direct
method ?

Items A B C D
Overhead 20000 10000 6000 4000
Allocation of C 4000 2000 --- ---
Allocation of D 2000 2000
Total 26000 14000
This method is simple but the problem is that :-
1-it does not realize the benefit of one service center from another
service center
2- it does not realize the exchange of services between different
service center

5 ‫ من‬2 ‫الصفحة‬

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
 KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
Subject: cost accounting Date: 22/11/2014
Lec. No : 4
KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo

2- Step-down method

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
Allocates service center costs to other service centers
and to production centers in a sequential manner that
partially recognizes the mutual services provided among
all services center according to the importance of each
center.
The level of importance is determined based on the
number of other centers served by means if we have
departments C  8 services
D  10 services
So D is the most important, to be distributed first
Note, there are some basis for allocating the overhead
Department of services Basis of distribution
Building Space
personal Number of worker
Maintenance Machine running hour
Motive power Machine run hour
Stores Quantities or costs issuance
Ex-
Suppose that the firm is including 2 production centers
A&B in addition to service centers
And the following information is related to these
centers:

5 ‫ من‬3 ‫الصفحة‬

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
 KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
Subject: cost accounting Date: 22/11/2014
Lec. No : 4
KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
items A B build person maint
OH 20,000 10000 8000 6000 4000
Space in feet 30 20 20 30 20
Number of worker 20 20 10 10 10
Machine running hours 3000 2000 -- -- --

Require:
Prepare the overhead analysis sheet according to step-
down method.
Solution
Overhead analysis sheet
items A B maint person build
OH 20,000 10,000 4000 6000 8000
Dist- of build 2400 1600 2400 2400 --------
Dist-of personal 3360 3360 1680 8400
Dist- of maintenance 4368 2912 7280

Total 30128 17872

Here we must distribute building first because it serve more centers

than personal and maintenance,
1- Distribution of building according to space
Overhead rate = total costs ÷ total space

5 ‫ من‬4 ‫الصفحة‬

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
 KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
Subject: cost accounting Date: 22/11/2014
Lec. No : 4
KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo

= 8000 ÷ 100 = 80 per feet

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo
Share of A = 30X 80 = 2400
Share of B = 20 X 80 = 1600
Share of personal = 30 X 80 = 2400
Share of maintenance = 20 X 80 = 1600
2- dist- personal department
Dist- according to the number of worker
Overhead rate = total cost / total number of worker
= 8400 ÷ 50 = 168
Share of A = 20 X 168 = 3360
Share of B = 20 X 168 = 3360
Share of maint = 10 X168 = 1680
3- dist-of maintenance according to machine running hour
Overhead rate = 7280 ÷ 5000 = 1.456 per hour
Share of A = 1.456 X 3000 = 4368
Share of B = 1.456X 2000= 2912

Benefit of this method: it has realized the benefit of one service

center from another service center
Problem: it has not realized the exchange of services between
different services centers.

The end of lecture 4

5 ‫ من‬5 ‫الصفحة‬

KiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesoooKiesooo