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Areas to be covered:
• Revenue And Capital Expenditure
• Reapportionment Methods
• Non-Manufacturing Overheads
REVENUE EXPENDITURE AND CAPITAL EXPENDITURE
maintain existing fixed assets. It is charged to the profit and loss account as an expense.
Capital expenditure is expense incurred in the acquisition of fixed assets. It is not charged to
the profit and loss account as an expense. The expenditure is capitalised as a fixed asset and
a depreciation amount is charged to the profit and loss account to write off the capital
They become part of the production cost. For example, Production supervisor’s salary, Nails
indirectly, related to the production. They cover Selling, Distribution, Administration and
Overheads are not charged directly into cost units. However, they charged to the cost units
to avoid under-estimation of product costs which may end up with under-setting the product
selling price. They charge to cost centers, where they converted to unit rate and than
cost centre (production cost centre and service cost centres) then share overheads of
service cost centres to production cost centres and charge them to cost units.
In absorption costing system there are four steps of charging overhead costs to cost centres
1. Allocation.
2. Apportionment.
3. Re-apportionment.
4. Absorption.
Designing
(200 Sq.m)
Stitching
(500 Sq.m)
Cutting
(300 Sq.m)
1. Allocation
Costs that relate to a single cost centre are allocated to that cost centre. Mostly
It relates to costs that can be identified with a specific cost centre, which is why it is directly
centres and therefore needs to be shared out amongst the relevant cost centres on the
square feet. The assembly department takes up 6,000 square feet and the stores department
How much of the total rent should be apportioned to the assembly department and the stores
department?
3. Reapportionment
Service departments are cost centres, which exist to provide services to other departments. The
canteen is a common example. Having allocated and apportioned the costs to the production
and service departments, the totals of service cost centres, then latter need to be
reapportioned to the production cost centres.
Formula:
BASIS OF REAPPORTIONMENT
Ignores work between Step down Method (1 way method): One service department
provides services to other service departments but others do not.
service departments.
Service department which does most work for other departments is
reapportioned first. Other reciprocal services are ignored.
of each cost unit. The amount of overhead that is to be treated as a cost of each cost unit
ℎ
ℎ
The total of the overheads in each production department must now be absorbed into the
b. Machine hour
e. Prime cost
f. Production cost
Blanket rate: It is when single OAR is used for the whole factory or organisation. It is
appropriate if;
• Similar processing
With this use, some products will receive a higher overhead proportion and some will be
under charged.
Blanket and Departmental Rate System
Departmental rate: It uses a separate rate for each department or cost centre. It is suitable
when:
The use of blanket rate saves time and thus cost, but less accurate then departmental rates.
Therefore a careful selection of which type of rate to use is essential, taking into account the
cost-benefit analysis.
Over / Under Absorption of Overheads
Overhead absorption rate (OAR) is based on budgeted overheads and budgeted activity
Absorbed overheads are compared with actual overheads incurred in a period; the
Actual overheads =X
Under/Over-Absorbed =X
• Absorbed OH > Actual OH = OVER absorption (deduct from Cost of goods sold or add in profit)
• Absorbed OH < Actual OH = UNDER absorption(add to Cost of goods sold or deduct from profit)
If actual overheads incurred are not given then an assumption can be taken that
Example 14:
There are two options available for apportioning non-manufacturing costs to cost units:
• Method-1
Choose a basis for apportioning non-manufacturing overheads which fairly reflects non-
such cost. For example manufacturing cost may be used to apportion non-manufacturing
cost to product