1.

Absorption costing: The direct (or prime) cost of an item plus a fair share of the
* Prime cost
+ Direct material (621)
+ Direct labour (622)
+ Direct expenses (627)
* fair share of the indirect (overhead) costs
Stage 1: Overhead allocation
Allocation: The process by which overheads are charged directly to
Allocation là quá trình mà toàn bộ cost items sẽ được xác định và phân lo
+ production overheads
+ administration overheads
+ sales and distribution overheads
+ overhead cost centre: rent, rates, heat, light and the canteen
Stage 2: Overhead apportionment
Apportionment là quá trình mà những chi phí gián tiếp được phân bổ lại g
First stage: apportioning general overheads
Production overheads
+ Rent, rates, heating and light, repairs and depreciation of buil
+ Depreciation, insurance of equipment
+ Personnel office, canteen, welfare, wages and cost offices, fir
+ Heating, lighting (see above)
Second stage: service cost centre cost apportionment
Service cost centre Basic
+ Stores Number of materials requisitions
+ Maintenance Hours of maintenance work done
+ Production planningDirect labour hours
Stage 3: Overhead absorption = Overhead recovery = Pre Determined Rate
Overhead absorption là quá trình mà những chi phí overhead đã được ph
giờ (hour) sẽ được phân chia cho từng đơn vị sản phẩm (unit), công việc
Step 1: Dự toán chi phí overhead phát sinh trong kì tới (Budgeted overhea
Step 2: Dự toán mức độ hoạt động cho kì đó (Budgeted activity level).
Step 3: Tính Overhead absorption rate – OAR theo công thức.
Step 4: Phân bổ chi phí overhead thực tế (actual overhead) cho từng đơn
are of the indirect (overhead) costs.

ds are charged directly to cost centres.

s sẽ được xác định và phân loại trực tiếp vào một cost unit hay cost center.

es, heat, light and the canteen

hí gián tiếp được phân bổ lại giữa các cost centers sao cho hợp lí.

ction overheads Basic

epairs and depreciation of buildings Floor area
Value of equipment (machinery)
are, wages and cost offices, first aid Number of employees/labour hours worked
Volume of cost centre
portionment
Basic
materials requisitions
aintenance work done Step 1: Primary allocation and apportionment
Step 2: Re-apportion the service centre costs
y = Pre Determined Rate
chi phí overhead đã được phân bổ và phân phối lại (allocation and apportionment) vào các production cost centers
n vị sản phẩm (unit), công việc (job) hay đơn hàng/ lô (batch) tương ứng.
trong kì tới (Budgeted overhead).
ó (Budgeted activity level).
AR theo công thức.
actual overhead) cho từng đơn vị sản phẩm (unit) sử dụng OAR.
=> Over-absorption: Overhead absorbed > Overhead incurred (Actual)
trong trường hợp chi phí dự tính hấp thụ bị phóng đại (cost is o
negative supplementary rate (-)
=> Under-absorption: Overhead absorbed < Overhead incurred (Actual)
trong trường hợp chí phí dự tính hấp thụ được đánh giá thấp h
positive supplementary rate (+)
ào các production cost centers tương ứng ở trên,
incurred (Actual)
hấp thụ bị phóng đại (cost is overstated)

incurred (Actual)
hấp thụ được đánh giá thấp hơn (cost is understated)
Interactive question 3: Apportioning overheads (66/WB)
Budgeted overhead costs £
Rent and rates 8,000
Power 750
Light, heat 5,000
Depreciation Plant 10,000
Depreciation Fixtures and fittings (F&F) 250
Insurance Plant 2,000
Insurance Buildings 500
production departments
Forming Machining Assembly
Repairs, maintenance 800 1,800 300
Departmental expenses 1,500 2,300 1,100
Indirect labour 3,000 5,000 1,500

Overheads are to be allocated and apportioned using:

production departments
Forming Machining Assembly
Floor area (m2) 2,000 4,000 3,000
Plant value (£) 25,000 60,000 7,500
F&F (£) 1,000 500 2,000
Effective horsepower 40 90 15

production departments
Forming Machining
£ £
Rent and rates
Power
Light, heat
Depreciation Plant
Depreciation Fixtures and fittings (F&F)
Insurance Plant
Insurance Buildings
Repairs, maintenance
Departmental expenses
Indirect labour

Worked example: Service centre cost apportionment (67/WB)

A B C
Floor area (sq metres) 5,000 5,000 4,000
Personnel (persons) 10 20 10
Remuneration per month:
Direct (£) 1,920 3,600 2,240
 Indirect (£) 360 480 240
Direct materials consumed (£) 5,500 250 400
Machine hours per month 600 2,400 200
Power costs per month (£) 50 500 20
General overheads per month (£ 1,000 2,000 1,200
The monthly takings of the canteen £ 600
Food bills for the canteen £ 470
The monthly electricity charge for heat and light £ 1,000
The monthly rent of the company's premises £ 6,000
The administration costs are made up mainly of personnel-related costs.
Apportion all overheads to the production cost centres?

Step 1: Allocation & apportionment

Cost item Basic A B

Indirect labour
Power
General overhead
Taking of the canteen
Food bills
Heat and light
Rent
Total overheads
Step 2: Re-apportion the service centre costs

Cost item Basic

Costs allocated and apportioned
First reapportionment (admin)
Revised total overheads
Second reapportionment (canteen)
Revised total overheads

Interactive question 5: Reapportioning overheads

Maintenance works 40% of the time for Machining, 10% for Canteen and 50% for Assemb
Machining
Total overhead (£) 520,000
Number of employees 50
First reapportionment
Revised total overheads
Second reapportionment
Revised total overheads

Context Example: Overhead absorption bases

Budget Production Department A Production Department B
 Production overhead cost £ 36,000 £ 5,000
Direct materials cost £ 32,000
Direct labour cost £ 40,000
Machine hours 10,000
Direct labour hours 18,000
Units of production 1,000
Required: Calculate the absorption rate using the various bases of apportionment.
Department A
+ Percentage of DIRECT MATERIAL COST
+ Percentage of DIRECT LABOUR COST
+ Percentage of PRIME COST
+ Rate per MACHINE HOUR
+ Rate per DIRECT LABOUR HOUR
Department B
OAR based on units of output
In this example, suppose that an individual product has a material cost of £80
+ Using Percentage of DIRECT MATERIAL COST
Direct material
Direct labour
Production overhead
Total production cost

+ Using Percentage of DIRECT LABOUR COST

Direct material
Direct labour
Production overhead
Total production cost

Interactive question 6: Overhead absorption rates (Pre Determined Rate)

Forming Machining
Budgeted cost centre overheads £ 13,705 £ 28,817
Budgeted direct labour hours per annum 5,482 790
Budgeted machine hours per annum 1,350 5,240

Forming OAR =
MachiningOAR =
AssemblyOAR =

Worked example: Blanket absorption rates and departmental absorption rates

* Blanket absorption rates = Blanket rate = Single factory rate
* Departmental absorption rates = Mutiple Overhead Rate = Separate departmental rates
Department 1 Department 2 Total
Budgeted overheads £ 360,000 £ 200,000 £ 560,000
Budgeted direct labour hours 200,000 40,000 240,000
* Single factory OAR =
 * Separate departmeny OAR:
Department 1 =
Department 2 =

Product A has a prime cost of £100, takes 30 hours in department 2 and does
Product B has a prime cost of £100, takes 28 hours in department 1 and 2 hours
What would be the production cost of each product?
* Using Single factory OAR
Product A Product B
Prime cost
Production overhead
Production cost
* Using separate department OAR
Product A Product B
Prime cost
Production overhead
Dep1
Dep2
Production cost

Interactive question 8: Under- and over-absorption of overheads

Forming Machining Assembly
Actual direct labour hours 5,370 950 5,400
Actual machine hours 1,300 6,370 100
Actual overhead £ 13,900 £ 30,300 £ 8,500

Budgeted direct labour hours 5,482 790 4,989

Budgeted machine hours 1,350 5,240 147
Budgeted overheads £ 13,705 £ 28,817 £ 9,978

The overhead in the forming department is absorbed by £

The overhead in the machining department is absorbed by £

The overhead in the assembly department is absorbed by £

 service departments
Maintenance General
200 100
900 1,500
4,000 2,000

service departments
Maintenance General
500 500
7,500 -
1,000 500
5 -

n departments service departments

Assembly Maintenance General
£ £ £ BASIC

Canteen Admin
4,000 2,000
10 5

- -
 320 870
- -
- -
80 -
650 1,230

C Canteen Admin

Basic A B C Canteen Admin

teen and 50% for Assembly.

Assembly Maintenance Canteen
600,000 200,000 70,000
40 30 15

duction Department B
 5,000

1,000
s of apportionment.

per machine hour

per direct labour hour

per unit produced

cost of £80, a labour cost of £85, and requires 36 labour hours and 23 machine hours to complete.
+ Using Percentage of PRIME COST
Direct material
Direct labour
Production overhead
Total production cost

+ Using Rate per MACHINE HOUR + Using Rate per DIRECT L

Direct material
Direct labour
Production overhead
Total production cost

Assembly
£ 9,978
4,989
147

e departmental rates
t 2 and does not involve any work in department 1
t 1 and 2 hours in department 2
rs to complete.

+ Using Rate per DIRECT LABOUR HOUR

Direct material
Direct labour
Production overhead
Total production cost