# Example

ABC Co. Ltd has four production departments
P1, P2, P3 and P4 and three service departments
S1, S2 and S3.
S1 –stores
S2 –production control section
S3 –maintenance department
Calculate for each production department an
appropriate overhead absorption rate per machine
hour.
Calculate the total cost of each department.
The annual overheads are as follows:

Information

Cost

Total (Rs.’000)

Indirect labour

2,000

Supervision

200

Power

600

Rent

80

Insurance -Building

160

Insurance -Plant

100

Depreciation -Building

240

Depreciation -Plant

120

Information

Indirect Labour Costs
Cost centres
P1
P2
P3
P4
S1
S2
S3

Actual costs
Rs.’000
300
200
500
100
200
300
400

Information

P1

P2

P3

P4

S1

S2

S3

Total

No. of employee

400

400

500

600

30

20

50

2,000

Floor Area (Sq.M)

3,000

9,000

8,000

8,000

1,000

1,000

2,000

32,000

Power (KWHrs)

7,000

5,000

3,000

2,000

1,500

500

1,000

20,000

Pro.Cntrl Hours

4,000

5,000

5,000

3,000

-

-

1,000

18,000

Stores Requisitions

600

300

250

150

-

400

300

2,000

Maint. Dept Hours

6,000

8,000

5,000

6,000

-

-

-

25,000

Plant Hrs (‘000)

120

80

200

100

-

-

-

500

Book value of plant
(Rs.’000)

300

200

100

80

120

50

150

1,000

Allocation of costs to Production and Service Departments
Item

Basis

Ind. Labour

Actual

Supervision

Total

P1

P2

P3

P4

S1

S2

S3

2000

300

200

500

100

200

No. of
employee

200

40

40

50

60

3

2

5

Power

KWHr

600

210

150

90

60

45

15

30

Rent &
Rates

Floor area

80

7.5 22.5

20

20

2.5

2.5

5

Insurance
Building

Floor area

160

15

45

40

40

5

5

10

Insurance
Book value
Plant
Depreciation Floor area
Building

100

30

20

10

8

12

2

15

22.5 67.5

60

60

7.5

7.5

15

Depreciation Book value
Plant

120

36

24

12

9.6

14.4

6

18

3500

661

569

782

357.
6

289.4

Total

240

300 400

343 498

Calculation
Item

Basis

Ind. Labour

Actual

Supervision

No. of
Employee

200 (200/2,000)*400

= 40.0

Power

KWHr

600 (600/20,000)*7000

= 210.0

Rent & rates

Floor area

80 (80/32,000)*3000

Insurance -B

Floor area

160 (160/32,000)*3000

= 15.0

Insurance-P

Book value

100 (100/1,000)*300

= 30.0

Depreciation-B

Floor area

240 (240/32,000)*3000

= 22.5

Depreciation-P

Book value

120 (120/1,000)*300

= 36.0

Total

Total P1
2000

3500

300.0

=

7.5

661.0

Reallocation of Service Department Overheads to
Production Departments
Item

Basis

Total
costs

Total P1

P3

P4

S1

S2

S3

661.0

569.0

782.0

357.6

289.4

343.0

498.0

86.8

43.4

36.2

21.7

289.4

57.9

43.4

S2-Pro Prodn 3500
Control control

748.8
89.1

612.4
111.35

818.2
111.35

379.3
66.8

-

400.9
-400.9

541.4
22.3

S3Maint

3500

837.9
135.3

723.75
180.4

929.55
112.7

446.1
135.3

-

-

563.7
563.7

3500

973.2

904.15 1042.25

581.4

-

-

-

S1stores

Total

3500

P2

Store
req

Main
Hrs

-

S1stores

• S1

Store
req

P1
P2
P3
P4
S2
S3

-

87.8

43.4

36.2

21.7

(289.4)

(289.4/2000)*600 = 86.82 ≈ 86.8
(289.4/2000)*300 = 43.41 ≈ 43.4
(289.4/2000)*250 = 36.18 ≈ 36.2
(289.4/2000)*150 = 21.71 ≈ 21.7
(289.4/2000)*400 = 57.88 ≈ 57.9
(289.4/2000)*300 = 43.41 ≈ 43.4
Total
289.4

57.9

43.4

S2-Pro Prodn
Control control

• S2

3500

748.8
89.1

612.4
111.35

818.2
111.35

379.3
66.8

P1 (400.9/18,000)* 4000= 89.08 ≈ 89.1
P2 (400.9/18,000)* 5000=111.35
P3 (400.9/18,000)* 5000=111.35
P4 (400.9/18,000)* 3000=66.81 ≈ 66.8
S3 (400.9/18,000)* 1000=22.27 ≈ 22.3

- 400.9
- (400.9)

541.4
22.3

S3Maint

S3

Plant
Hrs

3500

837.9
135.3

723.75 929.55 446.1
180.4
112.7 135.3

P1 (563.7/25,000)*6000
P2(563.7/25,000)*8000
P3(563.7/25,000)*5000
P4 (563.7/25,000)*6000
Total

=135.288
=180.384
=112.74
=135.288

-

-

≈ 135.3
≈ 180.4
≈ 112.7
≈ 135.3
563.7

563.7
(563.7)

Calculation of appropriate departmental
• Based on machine hours
P1
P2
P3
P4

= 973.3/120
= 904.15/80
=1042.25/200
= 581.4/100

= 8.11
= 11.30
= 5.21
= 5.81

per M/C hour
per M/C hour
per M/C hour
per M/C hour

Overhead costs in each cost centre should be
absorbed by the products, at an absorption rate
of each product.
Pro.Dep.
P1
P2
P3
P4

Job1(hours)
3
2.5
0
5

Job2(hours)
12
0
5
0

Job3(hours)
1.5
4
10
3

• Then, based on the production hours the
overhead costs chargeable are as follows:
• Job 1 = 3*8.11+2.5*11.3+5*5.81 = 81.63

• Job 2 = 12*8.11+5*5.21 = 123.37
• Job 3 = 1.5*8.11+4*11.3+10*5.21+3*5.81 =

Allocation service department costs
Example
A manufacturing firm has three production
departments, P1, P2 and P3, and two service
departments, S1and S2. the following costs are
shown in the overhead distribution sheet.
production dep. P1 = Rs. 5000
production dep. P2 = Rs. 8000
production dep. P3 = Rs. 6000
service dep. S1
= Rs. 1280
service dep. S2
= Rs. 3000
Total
= Rs.23,280

• The costs of the two service departments S1
and S2 are to be re-apportioned to production
departments using the following basis.
S1
S2
P1
20%
30%
P2
40%
30%
P3
10%
20%
S1
20%
S2
30%
Total
100%
100%

There are 3 basic methods of allocating
service department costs.
1. Continuous Allotment
2. Simultaneous Equation method
3. Specified order of Re-Allocation

Continuous Allotment
Costs of service departments are re-allocated to other
departments repeatedly until the amount remaining is too
insignificant.

P1
P2
P3
S1
S2
Total

s1
20%
40%
10%
30%
100%

s2
30%
30%
20%
20%
100%

Total
Cost before
re-allocation
Dept S1
Dept. S2

Total

P1

P2

P3

S1
1280

S2

23280

5000

8000 6000

3000

2380

256
1015
135
61
8
3.6
4
6479

512 128 (1280)
384
1015 677
677 (3384)
271
68 (677)
203
62
40
40 (203)
16
4
(40)
12
3.6
2.4
2.4
(12)
4
3
9880 6920

Simultaneous equation method
X=total cost of S1 after receiving 20% cost of S2
Y=total cost of S2 after receiving 30% cost of S1
X=1280+0.2Y
Y=3000+0.3X
By solving two equation above,
X=2000
and Y=3600

As above

Total

P1

P2

P3

19000

5000

8000

6000

Cost before
re-allocation
Dept S1

2000

1400*

400*

800*

200*

Dept S2

3600

2880

1080

1080

720

23280

6480

9880

6920

Total
(2000/100)*70
=1400

(1400/70)*20
=400

(1400/70)*40
=800

(1400/70)*10
=200

Specified order of Re-allocation

Assume that service dept. costs are first allocated to S1 and then to
S2.

P1
P2
P3
S1
S2
Total

S1
20%
40%
10%
30%
100%

S2
37.5%
37.5%
25.0%
100%

30*(100/80)
30*(100/80)
20*(100/80)

Total

Cost before
re-allocation

P1

P3

5000

8000

Dept S1

256

512

Dept. S2

1269

1269

846

6525

9781

6974

Total

23280

P2

2380

(1280/100)*20 (1280/100)*40
=256
=512

(1280/100)*10
=128

6000

S1

S2

1280

3000

128 (1280)

384

(1280)

- (3384)
-

(1280/100)*30
=384

-