More than 1 cost centre…

1. If an organisation has more than one cost centre (as Athena

Limited which has 2 – many organisations have very many
more), there may be some overheads which relate specifically
to a cost centre and will be allocated, and some ‘general’
overheads relating to the organisation as a whole, requiring
apportionment.
2. It may be that the nature of operations and activities may be
such that one area uses one particular overhead
absorption/recovery rate and another area uses a different
one.
3. A major issue is: how might general overheads relating to the
business as a whole be apportioned across the cost centres?
Determining the Overheads
Total (£) Machining (£) Fitting (£)
Heating and lighting 25,000 12,500 12,500
Machine power 10,000 10,000 -
Indirect Labour * 50,000 12,500 37,500
Depreciation 30,000 30,000 -
Total Overheads 115,000 65,000 50,000

*Note that direct labour and direct materials are not included
in this schedule because they are not indirect costs.
Determining the Overheads
Machining Department
Machining overheads/Number of Machine Hours
The machine hour rate = £65,000/20,000
= £3.25 per hour

Fitting Department
Fitting overheads/Number of Direct Labour Hours
The direct-labour hour rate = £50,000/(150,000/10)
= £3.33 per hour
Determining the Overheads
Calculations £ Notes
Direct materials 1,200 We are told this (1)

Direct labour
- Machining 10h x £10 100
- Fitting 20h x £10 200
Overheads 50 Machine H x £3.25 163 to the nearest £

20 Labour H x £3.33 67 to the nearest £

Reported full cost 1,730

Profit loading 20% 346
Thus the price will be £2,076 Allow rounding