OVERHEAD ANALYSIS

Slides Prepared and Presented by

Nelson Pande
Overheads allocated to Production Centre 1: $58,200, Production Centre 2: $71,600,
and Service Centre: $48,000.
Overheads which require to be apportioned to the cost centres are: Electricity
$13,000, Cleaning $5,000, and Human resource costs $16,000
You are given the following data about the cost centres:
Prod Cost Prod Cost Service Cost Total
Centre 1 Centre 2 Centre

Staff numbers 25 9 6 40
Labour hours 15,000 10,000 6,000 31,000
Machine hours 20,000 6,000 0 26,000
Floor area in Sqm 5,000 4,500 500 10,000

a) Select an appropriate apportionment basis for each overhead cost.

b) Calculate the overhead to be apportioned to each cost centre.
Kitana has incurred the following overhead costs:
Depreciation of factory $100,000 Factory repairs and maintenance $60,000 Factory
office costs (treat as production overhead) $150,000 Depreciation of equipment
$80,000 Insurance of equipment $20,000 Heating $39,000 Lighting $10,000 Canteen
$90,000.
DEPARTMENTS
PROD PROD SERVICE SERVICE TOTALS
1 2 A B
Floor space (square metres) 1,200 1,600 800 400 4,000
Volume (cubic metres) 3,000 6,000 2,400 1,600 13,000
Number of employees 30 30 15 15 90
Book value of equipment $30,000 $20,000 $10,000 $20,000 $80,000

Required
Determine how the overhead costs should be apportioned between the four
departments.
A manufacturing company has two production cost centres (P1 and P2) and
two service cost centres (S1 and S2). The following shows the work done by the
two service cost centres:

P1 P2 S1 S2

Work done by S1 55% 35% 10%

Work done by S2 30% 65% 5%

After the initial allocation and apportionment of overheads, the totals for each
cost centre were:
P1 P2 S1 S2
$ $ $ $
Initial Allocation 150,000 205,000 21,000 15,000
A manufacturing company has two production cost centres (P1 and P2) and
two service cost centres (S1 and S2). The following shows the work done by the
two service cost centres:

P1 P2 S1 S2

Work done by S1 55% 35% 10%

Work done by S2 30% 65% 5%

After the initial allocation and apportionment of overheads, the totals for each
cost centre were:
P1 P2 S1 S2
$ $ $ $
Initial Allocation 150,000 205,000 21,000 15,000
A manufacturing company has two production cost centres (P1 and P2) and
two service cost centres (A and B). The following shows the work done by the
two service cost centres:

P1 P2 A B

Work done by A 60% 25% 15%

Work done by B 45% 45% 10%

After the initial allocation and apportionment of overheads, the totals for each
cost centre were:
P1 P2 A B
$ $ $ $
Initial Allocation 200,000 210,000 30,000 20,000
From the following calculate OAR for Production Centre 1 and 2. Note that
Centre 1 is more machine intensive while Centre 2 is more labour intensive.

PROD COST CENTRE 1 PROD COST CENTRE 2

Total overheads $108,802 $102,998
Labour hours 15,000 10,000
Machine hours 20,000 6,000
 EXAMPLE
Consider the following data:

Budgeted labour hours 12,000

Budgeted overheads $175,000
Actual labour hours 11,500
Actual overheads $182,000

Calculate the over or under absorption of overheads.

 PRACTICE QUESTION
Consider the following data:

Budgeted machine hours 10,000

Budgeted overheads $200,000
Actual machine hours 15,000
Actual overheads $160,000

Calculate the over or under absorption of overheads.