Overheads Example 24 (1)

7/28/2019 Overheads Example 24 (1)

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ACCA F2 Management Accounting

Example 24

(a) Prepare an overhead analysis sheet showing the allocation and apportionment of

overhead costs to cost centres.

(b) Using appropriate bases, re-apportion the service cost centres overheads to production

cost centres, applying the repeated distribution and commencing with the canteen.

(c) Calculate an appropriate overhead absorption rate for each production cost centre (to 2

decimal places).

Bark removal Sawing Cleaning Canteen

Direct wages related costs 210 112 63 21 14

Supervisory salaries 92 30 36 14 12

Maintenance wages 42 8.4 25.2 4.2 4.2

Lighting and heating 54 16.875 33.75 0 3.375

Power 88 17.600 52.800 8.800 8.800

Production scheduling 26 9.75 16.25

512 194.625 227.000 48.000 42.375

Re-apportionment:

Canteen (14:8:3) 23.73 13.56 5.085 (42.375)

Cleaning 16.589 33.178 (53.085) 3.318

(d) Distinguish between the terms allocation and apportionment in the context of accounting

for overhead, giving an example of each from the question.

Allocation: overheads are charged to specific cost centre without sharing with other departments

(cost centres). Examples of allocated costs are supervisors salaries

Apportionment: overheads are shared between two or more cost centres. Basis of apportionment

has to be determined. Examples of apportioned costs are maintenance wages, lighting and heating

costs.


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Question 3

Shown below are next years budgeted operating costs for Octopus Ltd, a company with three production

and two service departments.

Production Dept Service Dept

Weavingdept Proofingdept Finishingdept Personnelservice Equipmentmaintenance Total

$000 $000 $000 $000 $000 $000

Direct materials 7,000 2,000 1,500 - - 10,500

Direct wages 2,500 5,500 2,000 - - 10,000

Indirect materials & wages 1,100 900 300 1,500 3,800 7,600

Power 5,200 1,000 200 100 800 7,300

Rent & rates 8,000

Factory admin & supervision 10,000

Machine insurance 2,400

Additional data extracted from next years budget is shown below.

Weavingdept

Proofingdept

Finishingdept

Personnelservice

Equipmentmaintenance

Total

Floor area sq metres 12,000 27,000 6,000 12,000 3,000 60,000

Machine hours 1,600,000 400,000 400,000 - - 2,400,000

Direct labour hours 1,200,000 1,800,000 600,000 - - 3,600,000

Number of employees 600 1,000 400 100 400 2,500

Gross BV of equipment $4.0m $1.0m $1.0m $6.0m

Production Dept Service Dept

Weavingdept

Proofingdept

Finishingdept

Personnelservice

Equipmentmaintenance

Total

$000 $000 $000 $000 $000 $000

Direct materials 7,000 2,000 1,500 - - 10,500

Direct wages 2,500 5,500 2,000 - - 10,000

Indirect materials & wages 1,100 900 300 1,500 3,800 7,600

Power 5,200 1,000 200 100 800 7,300

Rent & rates 1,600 3,600 800 1,600 400 8,000

Factory admin & supervision 2,400 4,000 1,600 400 1,600 10,000

Machine insurance 1,600 400 400 - - 2,400

21,400 17,400 6,800 3,600 6,600 55,800

Reapportionment:Personnel 900 1,500 600 (3,600) 600 -

Maintenance 4,800 1,200 1,200 - (7,200) -

Floor area sq metres 12,000 27,000 6,000 12,000 3,000 60,000

Rent & rates 8,000

1600 3600 800 1600 400 0.1333

Number of employees 600 1,000 400 100 400 2,500

Factory admin &supervision

10,000


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2400 4000 1600 400 1600 4

Gross BV of equipment $4.00 $1.00 $1.00 $6.00

Machine insurance 2,400

1600 $400.00 $400.00 400

Calculate the budgeted overhead absorption rates for each production department using the

following methods.

(a) A machine hour rate in the weaving department

(b) A direct labour hour rate on the proofing department

(c) Another suitable method in the finishing department

It may be assumed that the equipment maintenance department does not service the personnel services

department. All workings and assumptions should be clearly shown.


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Short QuestionsQ1: It is possible for an item of overhead expenditure to be shared amongst many departments.

It is also possible that this same item may relate to just one specific department.

If the item was charged specifically to a single department this would be an example of:

A Apportionment C Re-apportionment

B Allocation D Absorption

Q2: A method of dealing with overheads involves spreading common costs over cost centres on the

basis of benefit received. This is known as:

A Overhead Absorption C Overhead Apportionment

B Overhead Allocation D Overhead Analysis

Q3: A company is considering the following methods for apportioning heating and lighting costs to its

various departments:

1 The relative floor areas of departments

2 The relative cubic capacity (volume) of departments

3 The relative usage ascertained from meters

Which of the above would be acceptable?

A Method 1 and 2 only C Method 2 and 3 only

B Method 1 and 3 only D Method 1, 2 and 3

Q4: The following extract of information is available concerning the four cost centres of EG Limited.

Machining Finishing Packing Canteen

Number of direct employees 7 6 2 -

Number of indirect employees 3 2 1 4

Overhead allocated and apportioned $28,500 $18,300 $8,960 $8,400

The overhead cost of the canteen if to be re-apportioned to the production cost centres on the

basis of the number of employees in each production cost centre.

After the re-apportionment, the total overhead cost of the packing department, to the

nearest $, will be:

A $1,200 C $10,080

B $9,968 D $10,160


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Q5: The management accountant of Gympie Limited has already allocated and apportioned the fixed

overheads for the period although she has yet to reapportion the service centre costs. Information

for the period is as follows:

Production departments Service departments Total

1 2 Stores Maintenance

Allocated and apportioned $17,500 $32,750 $6,300 $8,450 $65,000

Work done by:

Stores 60% 30% - 10%

Maintenance 75% 20% 5% -

What are the total overheads included in production department 1 if the reciprocal

method is used to reapportion service centre costs?

A $27,618 C $28,398

B $28,171 D $28,453

Q5: Overheads distribution schedule

Production Service Total

1 2 Stores Maintenance

Allocated and apportioned $17,500 $32,750 $6,300 $8,450 $65,000

Re-apportionment:

Stores (6:3:1) 3,780 1,890 (6,300) 630 -

Maintenance (75:20:5) 6,810 1,816 454 (9,080)

Stores (6:3:1) 272 136 (454) 46

Maintenance (75:20:5) 36 10 - (46)Total overheads 28,398 36,602 - - 65,000

Answer: C

The following information relates to Q6 and Q7:

A company has established the following budgeted fixed overheads for the forthcoming period:

$000 Bases of apportionment

Heating and Lighting 12 Cubic capacity

Welfare costs 7 Number of employees

Power 42 Kwh usageTotal 61

Other information:

Department 1 Department 2 Maintenance Total

Cubic capacity (m3) 6,000 7,500 2,500 16,000

Employees (number) 20 30 6 56

Power (kwh usage) 35,000 25,000 60,000

Labour hours 28,000 48,500 76,500

Machine hours 40,000 39,000 79,000

The maintenance department splits its time between Department 1 and Department 2 on a ratio

of 2:3. The management accountant has partially completed an allocation and apportionment

statement:


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Department 1 Department 2 Maintenance

$ $ $

Heat and Light 4,500 5,625 1,875

Welfare 2,500

Power 24,500

Total 31,500

Q6: What would be the total cost allocated and apportioned to Department 2 excluding the

reapportionment of the maintenance costs?

A $21,250 B $26,875 C $27,625 D $29,500

Q7: What would be the overhead absorption rate in Department 1 (to 3 decimal places)?

A $0788/machine hour C $1125/labour hour

B $0814/machine hour D $1163/labour hour

Answer: Q6 & Q7Departments

1 2 Maintenance

Heat and Light 4,500 5,625 1,875

Welfare 2,500 3,750 750

Power 24,500 17,500 -

Total 31,500 26,875 2,625

Reapportionment:

Maintenance (2:3) 1,050 1,575 (2,625)

Total overheads 32,550 28,450 -

Machine hours 40,000

Labour hours 48,500

Overhead absorption rate $0.814/ $0.587/

mach hr lab hr

Q8: A factory consists of two production cost centres (G and H) and two service cost centres (J and

K). The total overheads allocated and apportioned to each centre are as follows:

G H J K

$40,000 $50,000 $30,000 $18,000

The work done by the service cost centres can be represented as follows:

G H J K

Percentage of service cost centre J to 30% 70%

Percentage of service cost centre K to 50% 40% 10%

The company apportions service cost centre costs to production cost centres using a method that

fully recognises any work done by one service cost centre for another.

What are the total overheads for production cost centre G after the reapportionment of


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all service cost centre costs?

A $58,000 C $59,000

B $58,540 D $59,540

Q8: Answer:

G H J K

Overheads allocated and apportioned $40,000 $50,000 $30,000 $18,000

Reapportionment:

K (5:4:1) 9,000 7,200 1,800 (18,000)

G (3:7:-) 9,540 22,260 (31,800)

58,540 79,460 - -

Machine hours are used to absorb overheads in a production cost centre. Overheads allocated and

apportioned to the cost centre are:

$

Allocated 13,122

Apportioned 7,920

Reapportioned from service cost centres 2,988

216,000 units of product are manufactured at a rate of 120 units per machine hour.

What is the overhead absorption rate per machine hour?

A $7.29 C $11.69

B $11.13 D $13.35


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(b) A separate departmental overhead absorption rates

Job 1 Job 2 Total

OAR 6.25 6.25

Total labour hours 7 14

OH absorbed 43.75 87.50

Example 2:

A company has two departments, Printing and Packing. Both departments use a single overhead

absorption rate based on labour hours.

The budget and actual data for period are as follow:

Department Direct Wages ($) Labour Hour Machine hours Production O/H Costs

Budget: Printing 24,000 4,000 12,000 180,000

Packing 70,000 10,000 1,000 100,000

94,000 14,000 13,000 280,000

Actual: Printing 30,000 5,000 14,000 200,000

Packing 59,500 8,500 800 95,000

89,500 13,500 14,800 295,000

During the period, a batch of product S was made. The direct material cost of the batch was $890.

Total labour hours worked was 500 hours (200 in printing and 300 in packing) and total machine hours

worked was 400 hours.

(a) Using a single blanket OAR based on labour hours, calculate the cost of the batch.

Budgeted overheads 280,000

Budgeted labour hours 14,000

OAR $20 per hour

Cost of the batch

Materials 890

Labour : Print (24,000/4,000 x 200) 1,200

: Pack (70,000/ 10,000 x 300) 2,100 3,300

Prime cost 4,190

Overheads (20 x 500) 10,000

Cost per batch 14,190

(b) It has been suggested that appropriate departmental overhead absorption rate (OAR) may be

more realistic. Calculate the OAR for:

(i) the printing department (absorbed based on machine hours)

(ii) the packing department (absorbed based on labour hours) and

Print Pack

Budgeted overheads 180,000 100,000

Labour hours 10,000

Machine hours 12,000

OAR 15 per m hr 10 per lab hr


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(iii) using departmental OARs, the cost of the batch

Prime cost 4,190

overheads : Print (15 x 400) 6,000

: Pack (10 x 300) 3,000 9,000

Total cost 13,190

Question 4

ACD has two production departments, cutting and assembly, which are supported by a further two service

departments, stores and maintenance. Both of the service departments undertake work for each other as

well as for the production departments.

The costs of the service departments are recharged as follows.

Cutting Assembly Stores Maintenance

Stores charged to 40% 30% 30%

Maintenance charged to 70% 20% 10%

Cost information for period seven was as follows.

Cutting Assembly Stores Maintenance

Actual overhead $77,000 $99,000 $125,000 $50,000

Cutting Assembly

Budgeted overhead * $180,000 $156,000

Budgeted activity 7,200 machine hours 48,000 direct labour hours

Actual activity 7,030 machine hours 52,580 direct labour hours

* after recharges

(a) Calculate the total actual overhead for both the cutting and the assembly departments in

Period 7, after apportionment of the two service departments using the repeated

distribution method (show workings to the nearest $).

C A S M

Actual overhead $77,000 $99,000 $125,000 $50,000

Re-apportionment:

S (4:3:3) 50,000.00 37,500.00 (125,000) 37,500

M (7:2:1) 61,250.00 17,500.00 8,750 (87,500)

S (4:3:3) 3,500.00 2,625.00 (8,750) 2,625

M (7:2:1) 1,837.50 525.00 262.50 (2,625)

S (4:3:-) 150.00 112.50 (262.50) -

Total overheads 193,737.50 157,262.50 - -

(b) Calculate the predetermined absorption rates for the cutting and assembly departments.


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(c) Determine any over or under absorption of overhead for the cutting and the assembly

departments for Period 7. Show all your workings.

Cutting Assembly

Budgeted overheads 180,000 156,000

Budgeted activity 7,200 48,000

OAR 25.00/ m hr 3.25/ l hrActual activity 7,030 52,580

OH absorbed 175,750.00 170,885.00

Actual OH 193,737.50 157,262.50

Over/ (under) absorption (17,987.50) 13,622.50

Question 5

PPS Limited has three main departments Casting, Dressing and Assembly and for period 2 has

prepared the following production overhead budgets for an output level of 110,000 units.

Department Casting Dressing Assembly

Production overheads $225,000 $175,000 $93,000

Expected production hours 7,500 7,000 6,200

During period 2, actual results were as follows for an output level of 117,500 units.



Production hours 7,950 7,280 6,696

(a) Calculate predetermined departmental overhead absorption rates for period 2.

Department Casting Dressing AssemblyProduction overheads $225,000 $175,000 $93,000


OAR $30 $25 $15

(b) Calculate the under/over-absorption of overheads for each department for period 2.




OAR $30 $25 $15Actual production hours 7,950 7,280 6,696

Overheads absorbed 238,500 182,000 100,440

Overheads incurred $229,317 $182,875 $94,395

Over/ (under) 9,183 (875) 6,045


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Short QuestionsQ1: A company has two production departments, Cutting and Finishing.

The budgeted overheads and operating hours for the two departments for next year are:

Cutting : $210,000 60,000 machine hours 4,000 labour hours

Finishing : $200,000 5,000 machine hours 14,000 labour hours

From the information given the pre-determined overhead absorption rates for the

departments should:

A be based on machine hours for the cutting department and labour hours for the finishing

department

B be based on labour hours for the cutting department and machine hours for the finishing

department

C both be based on machine hours

D both be based on labour hours

Q2: A company absorbs production overheads using a machine hour basis. In order to calculate any

over or under absorbed overheads which of the following would be needed, in

additional to the pre-determined machine hour rate?

A Budgeted overheads and actual overheads incurred

B Budgeted overheads and actual hours worked

C Actual overheads incurred and budgeted hours

D Actual overheads incurred and actual hours worked

Q3: Which of the following are acceptable bases for absorbing production overheads?

1 direct labour hour 3 as a percentage of prime cost

2 machine hours 4 per unit

A method 1 and 2 only C method 1, 2, 3 or 4

B method 3 and 4 only D method 1, 2 or 3 only

Q4: An overhead absorption rate is used to:

A Share out common costs over benefiting cost centres (allo)

B Find the total overheads for a cost centre (allo+app+re-app)

C Charge overheads to product

D Control overheads

Q5: Over-absorbed overheads occur when:

A Absorbed overheads exceed actual overheads

B Absorbed overheads exceed budgeted overheads

C Actual overheads exceed budgeted overheads

D Budgeted overheads exceed absorbed overheads


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Q6: An overhead absorption rate of $12.00 per direct labour hour was established based on a budget

of 2,100 hours.

Actual direct labour hours worked was 2,180 and actual overhead expenditure was $25,470.

What was the over/under absorption of overhead?

A $270 under absorbed C $960 over absorbed

B $690 over absorbed D $960 under absorbed



OAR 12.00

Actual labour hours 2,180

Overheads absorbed 261,60

Overheads incurred 25,470

Over/ (under) absorption 690

Q7: In a given year a production department incurred actual overheads of $178,000. Overheads are

absorbed using actual machine hours and pre-determined rate per hour. The budgeted overhead

for the year was $180,000 and the budgeted machine hours were 90,000. The overheads for the

year were over-absorbed by 4,000. What were the actual machine hours?

A 89,000 C 91,000

B 90,000 D 92,000


Budgeted machine hours 90,000

OAR 2.00

Actual machine hours 91,000



Over/ (under) absorption 4,000

Q8: A company had the following budgeted and actual production overhead costs in its two

production cost centres, Machining and Assembly:

Budget Actual

Machining $210,000 $212,000

Assembly $136,000 $134,000

What statement is true?

A From the data available it is not possible to determine overhead over/under absorption

B Machining overheads were over-absorbed: Assembly overheads were under-absorbed

C Machining overhead were over-absorbed: Assembly overheads were over-absorbed

D Machining overhead were under-absorbed: Assembly overheads were over-absorbed

Q9: The production overhead of department D is absorbed using a machine hour rate. Budgeted

production overheads for the department were $280,000 and the actual machine hours were

70,000. Production overheads were under absorbed by $9,400.


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If actual production overheads were $295,000 what was the overhead absorption rate per

machine hour (to the nearest $)?

A $4.00 C $4.21

B $4.08 D $4.35

Budgeted overheads $280,000

Budgeted machine hours

OAR 4.08

Actual machine hours 70,000



Over/ (under) absorption (9,400)

Data for Q10 and Q11:

Budgeted labour hours : 8,500 Actual labour hours : 7,928

Budgeted overheads : $148,750 Actual overheads : $146,200

Q10: Based on the data given above, what is the labour hour overhead absorption rate?

A $17.50 per hour C $18.44 per hour

B $17.20 per hour D $18.76 per hour

Q11: Based on the data given above, what is the amount of overhead under/over-absorbed?

A $2,550 under-absorbed C $2,550 over-absorbed

B $2,529 over-absorbed D $7,460 under-absorbed



OAR 17.50





Q12: A management consultancy recovers overheads on chargeable consulting hours. Budgeted

overheads were $615,000 and actual consulting hours were 32,150. Overheads were under-

recovered by $35,000.

If actual overheads were $694,075, what was the budgeted overhead absorption rate per

hour?

A $19.13 C $24.59

B $20.50 D $22.68


Budgeted labour hours

OAR 20.50




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Q13: The following production overhead costs relate to a production cost centre:

(1) Budget : $124,000

(2) Actual : $126,740

(3) Absorbed : $125,200

Which of the following statements is true?

A overheads were over-absorbed by $1,200

B overheads were over-absorbed by $1,540

C overheads were under-absorbed by $1,200

D overheads were under-absorbed by $1,540

Q14: Overheads are absorbed at a pre-determined rate based on direct labour hours. The following

additional information is available for a period:

Budget Actual

Overhead expenditure $164,000 $158,000

Direct labour hours 10,000 9,800

What was the overhead over/under-absorption in the period?

A $2,720 over-absorbed C $3,280 under-absorbed

B $3,224 over-absorbed D $6,000 under-absorbed

Budgeted overheads 164,000Budgeted labour hours 10,000

OAR 16.40




Over/ (under) absorption 2,720

Q15: A company uses absorption costing. In a period, 34,000 units of the companys single product

were manufactured and 33,000 units were sold.

Consider the following two statements:

1. Fixed production overheads would be over-absorbed.

2. Profit would be higher than in the previous period.

Are the statements true in relation to the situation described or is it not possible to

determine whether or not they are true?

Statement 1 Statement 2

A Cannot determine Cannot determine

B Cannot determine True

C True Cannot determine

D True True


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Documents

Overheads Example 24 (1)