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  • Allocation and Apportionment and Job and Batch Costing Worked Example Question 2

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    Roshan Ramkhalawon
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    This document summarizes an overhead analysis sheet for a manufacturing company. It allocates overhead costs like depreciation, maintenance, power, and rent across different cost centers like machining, assembly, stores, and canteen. It then calculates overhead absorption rates for each cost center to apply overhead costs to products. Some overhead costs from service centers like canteen and stores are reapportioned to production centers. The document also provides explanations of key cost accounting concepts like allocation, absorption costing, marginal costing, and reasons for using different costing methods.

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    This document summarizes an overhead analysis sheet for a manufacturing company. It allocates overhead costs like depreciation, maintenance, power, and rent across different cost centers like machining, assembly, stores, and canteen. It then calculates overhead absorption rates for each cost center to apply overhead costs to products. Some overhead costs from service centers like canteen and stores are reapportioned to production centers. The document also provides explanations of key cost accounting concepts like allocation, absorption costing, marginal costing, and reasons for using different costing methods.

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    © All Rights Reserved
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    43 views2 pages

    Allocation and Apportionment and Job and Batch Costing Worked Example Question 2

    Uploaded by

    Roshan Ramkhalawon
    This document summarizes an overhead analysis sheet for a manufacturing company. It allocates overhead costs like depreciation, maintenance, power, and rent across different cost centers like machining, assembly, stores, and canteen. It then calculates overhead absorption rates for each cost center to apply overhead costs to products. Some overhead costs from service centers like canteen and stores are reapportioned to production centers. The document also provides explanations of key cost accounting concepts like allocation, absorption costing, marginal costing, and reasons for using different costing methods.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    Allocation and Apportionment and Job and Batch Costing Solution

    Question 2
    (a). Overhead Analysis Sheet
    Overheads Basis Total Machining Assembly Stores Canteen
    90000 30000 12000 8000
    (140000X8750) (140000X8750) (140000X8750) (140000X8750)
    Depreciation Non-Current assets cost 8750 5625 1875 750 500
    14100 2650
    (16750X27000) (16750X27000)
    Machinery maintenance Maintenance hours 27000 22728 4272
    3750 2500 750 250
    (7250X15370) (7250X15370) (7250X15370) (7250X15370)
    Power Kilowatt hours 15370 7950 5300 1590 530
    750 500 150 50
    (1450X63510) (1450X63510) (1450X63510) (1450X63510)
    Rent of premises Floor area 63510 32850 21900 6570 2190
    Total Allocated and Apportioned
    overheads 114630 69153 33347 8910 3220
    First Re-Apportionment
    20 30 3
    (53X3220) (53X3220) (53X3220)
    - Canteen Staff 1215 1823 182 (3220)
    Second Re-Apportionment
    150 75
    (225X9092) (225X9092) (8 910 + 182)
    - Stores Stores requisitions 6061 3031 (9092)
    Total Budgeted Overheads 114630 76430 38200 - -

    (b).Overhead absorption rate


    OAR Machining = Budgeted overheads / Budgeted machine hours
    = 76 430 / 14 100 = $5.42 per machine hours

    OAR Assembly = Budgeted overheads / budgeted labour hours


    = 38 200 / 13 900 = $2.75 per labour hours
    (c). Total Cost
    Product A Product B
    Direct costs 5.75 8.25
    Add Overheads
    (1.5 X 5.42) (0.3 X 5.42)
    - Machining 8.13 1.63
    (0.5 X 2.75) (2 X 2.75)
    - Assembly 1.38 9.51 5.5 7.13
    Total cost per unit 15.26 15.38

    (d). Over and under absorption


    Machining Assembly
    (5.42 X 16 210) (2.75 X 12 650)
    Overhead absorbed (OAR X ACTUAL BASIS) 87 858 34 788
    Less actual overheads (76 750) (45 675)
    Over / (Under absorption) 11 108 (10 887)
    Over absorption Under absorption

    (e). Allocation is the process of charging whole costs directly to a cost unit or cost centre. There is no need to
    share overheads between cost centres. The overheads for each cost centre is already known.

    (f). An overhead cost is a cost that cannot be directly traced to a product manufactured.
    It is an indirect cost that is not used to produce a product directly.
    It helps in the production of goods.

    (g). So that each unit of production contains a share of total production overheads costs only.
    In a service cost centre, production does not take place. It is in the production cost centres that production
    take place. So, for a product to contain all overheads incurred, the service cost centres must be re-
    apportioned to the production cost centres.

    (h). Reasons for changing:


    - Simple and quick to operate
    - No apportionment of overheads needed
    - Fixed costs are treated as period costs and so remain unchanged at different activity levels
    - There is no over/under absorption of overheads
    - No further adjustment needed in the income statement for over/under absorption
    - Closing inventory is realistically valued at variable production cost
    - Allows easy calculation of profit when changes in activity occur
    - Helps in decision making such as accept or reject orders, number of units to produce in situations of limiting
    factor, make of buy decisions and accepting or rejecting orders.

    Reasons for absorption costing:


    - It shares fixed production costs to units of production, which is fair as these costs are incurred in order to
    make the output
    - It is easier to determine profitability of several products as they include a share of fixed overheads
    - It values closing inventory fairly and is acceptable by IAS 2
    - It is widely used for publication purposes

    Though marginal costing is very useful internally for decision making for publication purpose only
    absorption costing is acceptable. It is advisable to continue using absorption costing.

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