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 Direct wages related costs Supervisory salaries Maintenance wages Lighting and heating Power Production scheduling Re-apportionment: Canteen (14:8:3) Cleaning 23.73 16.589 13.56 33.178 5.085 (53.085) (42.375) 3.318 210 92 42 54 88 26 512 112 30 8.4 16.875 17.600 9.75 194.625 Sawing 63 36 25.2 33.75 52.800 16.25 227.000 48.000 42.375 Cleaning 21 14 4.2 0 8.800 Canteen 14 12 4.2 3.375 8.800

(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.

ACCA F2 Management Accounting

Question 3 Shown below are next years budgeted operating costs for Octopus Ltd, a company with three production and two service departments.
Production Dept Weaving dept $000 Direct materials Direct wages Indirect materials & wages Power Rent & rates Factory admin & supervision Machine insurance 7,000 2,500 1,100 5,200 Proofing dept $000 2,000 5,500 900 1,000 Finishing dept $000 1,500 2,000 300 200 Service Dept Personnel service $000 1,500 100 Equipment maintenance $000 3,800 800 Total $000 10,500 10,000 7,600 7,300 8,000 10,000 2,400

Additional data extracted from next years budget is shown below.

Weaving dept Floor area sq metres Machine hours Direct labour hours Number of employees Gross BV of equipment 12,000 1,600,000 1,200,000 600 $4.0m Proofing dept 27,000 400,000 1,800,000 1,000 $1.0m Finishing dept 6,000 400,000 600,000 400 $1.0m Personnel service 12,000 100 Equipment maintenance 3,000 400 Total 60,000 2,400,000 3,600,000 2,500 $6.0m

Production Dept Weaving dept $000 Direct materials Direct wages Indirect materials & wages Power Rent & rates Factory admin & supervision Machine insurance Reapportionment: Personnel Maintenance 900 4,800 1,500 1,200 600 1,200 7,000 2,500 1,100 5,200 1,600 2,400 1,600 21,400 Proofing dept $000 2,000 5,500 900 1,000 3,600 4,000 400 17,400 Finishing dept $000 1,500 2,000 300 200 800 1,600 400 6,800

Service Dept Personnel service $000 1,500 100 1,600 400 3,600 (3,600) Equipment maintenance $000 3,800 800 400 1,600 6,600 600 (7,200) Total $000 10,500 10,000 7,600 7,300 8,000 10,000 2,400 55,800 -

Floor area sq metres Rent & rates

12,000

27,000

6,000

12,000

3,000

60,000 8,000

1600 Number of employees Factory admin supervision & 600

3600 1,000

800 400

1600 100

400 400

0.1333 2,500 10,000

ACCA F2 Management Accounting

2400 Gross BV of equipment Machine insurance 1600 $4.00

4000 $1.00

1600 $1.00

400

1600 $6.00

2,400 $400.00 $400.00 400

Calculate the budgeted overhead absorption rates for each production department using the following methods. (a) (b) (c) A machine hour rate in the weaving department A direct labour hour rate on the proofing department 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.

ACCA F2 Management Accounting

Short Questions
Q1: 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 B Q2: Apportionment Allocation C D Re-apportionment Absorption

A method of dealing with overheads involves spreading common costs over cost centres on the basis of benefit received. This is known as: A B Overhead Absorption Overhead Allocation C D Overhead Apportionment Overhead Analysis

Q3:

A company is considering the following methods for apportioning heating and lighting costs to its various departments: 1 2 3 The relative floor areas of departments The relative cubic capacity (volume) of departments The relative usage ascertained from meters

Which of the above would be acceptable? A B Q4: Method 1 and 2 only Method 1 and 3 only C D Method 2 and 3 only Method 1, 2 and 3

The following extract of information is available concerning the four cost centres of EG Limited. Machining Number of direct employees Number of indirect employees Overhead allocated and apportioned 7 3 $28,500 Finishing 6 2 $18,300 Packing 2 1 $8,960 Canteen 4 $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 B $1,200 $9,968 C D $10,080 $10,160

ACCA F2 Management Accounting

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 1 Allocated and apportioned Work done by: Stores Maintenance 60% 75% 30% 20% 5% 10% $17,500 2 $32,750 Service departments Stores $6,300 Maintenance $8,450 $65,000 Total

What are the total overheads included in production department 1 if the reciprocal method is used to reapportion service centre costs? A B Q5: $27,618 $28,171 C D $28,398 $28,453

Overheads distribution schedule Production 1 Allocated and apportioned Re-apportionment: Stores (6:3:1) Maintenance (75:20:5) Stores (6:3:1) Maintenance (75:20:5) Total overheads Answer: C 3,780 6,810 272 36 28,398 1,890 1,816 136 10 36,602 (6,300) 454 (454) 630 (9,080) 46 (46) 65,000 $17,500 2 $32,750 Stores $6,300 Service Maintenance $8,450 $65,000 Total

The following information relates to Q6 and Q7: A company has established the following budgeted fixed overheads for the forthcoming period: $000 Heating and Lighting Welfare costs Power Total Other information: Department 1 Cubic capacity (m ) Employees (number) Power (kwh usage) Labour hours Machine hours
3

Bases of apportionment Cubic capacity Number of employees Kwh usage

12 7 42 61

Department 2 7,500 30 25,000 48,500 39,000

Maintenance 2,500 6

Total 16,000 56 60,000 76,500 79,000

6,000 20 35,000 28,000 40,000

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:

ACCA F2 Management Accounting

Department 1 $ Heat and Light Welfare Power Total Q6: 4,500 2,500 24,500 31,500

Department 2 $ 5,625

Maintenance $ 1,875

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 B $0788/machine hour $0814/machine hour C D $1125/labour hour $1163/labour hour

Answer: Q6 & Q7 Departments 1 Heat and Light Welfare Power Total Reapportionment: Maintenance Total overheads Machine hours Labour hours Overhead absorption rate $0.814/ mach hr (2:3) 1,050 32,550 40,000 48,500 $0.587/ lab hr 1,575 28,450 (2,625) 4,500 2,500 24,500 31,500 2 5,625 3,750 17,500 26,875 Maintenance 1,875 750 2,625

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 $40,000 H $50,000 J $30,000 K $18,000

The work done by the service cost centres can be represented as follows: G Percentage of service cost centre J to Percentage of service cost centre K to 30% 50% H 70% 40% J 10% K

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

ACCA F2 Management Accounting

all service cost centre costs? A B $58,000 $58,540 C D $59,000 $59,540

Q8:

Answer: G Overheads allocated and apportioned Reapportionment: K G (5:4:1) (3:7:-) 9,000 9,540 58,540 7,200 22,260 79,460 1,800 (31,800) (18,000) $40,000 H $50,000 J $30,000 K $18,000

Machine hours are used to absorb overheads in a production cost centre. Overheads allocated and apportioned to the cost centre are: $ Allocated Apportioned Reapportioned from service cost centres 13,122 7,920 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 B $7.29 $11.13 C D $11.69 $13.35

ACCA F2 Management Accounting

Overheads Absorption: Over/ Under Absorption of overheads

~ Overheads incurred for a period of time. It is time related (period costs). the actual overheads incurred will only be known or determined at the end of the period. ~ However, evaluation of cost units (calculation of cost/ unit) is an on-going process throughout the period. predetermined overhead absorption rates are required in advance of the period using estimated or budgeted figures for overhead and for the number of units of the absorption base. ~ During the period: Cost per unit: Direct materials cost Direct labour cost Direct expenses Prime cost Production overhead absorbed Cost per unit (for stock valuation & cost of sales calculation) As a result of the absorption, some adjustments are required in the year end profit statement: Period: START Budgeted overheads Budgeted base OAR Period: DURING OAR x Actual base Overheads absorbed Period: END Total overheads absorbed ~ Total actual overheads incurred Over/ under absorption of overheads X X X X X X

Example 1: Machining Dept Budgeted overheads Budgeted direct labour hours Overhead absorption rate $100,000 10,000 $10.00 per DLH Finishing Dept $25,000 10,000 $2.50 per DLH Total $125,000 20,000 $6.25 per DLH

If the firm has to price two jobs where:

Job 1 requires 1 machine hour and 6 finishing hours Job 2 requires 12 machine hours and 2 finishing hours

Calculate the overhead charge using: (a) A single plant wide (blanket) absorption rate Job 1 OAR Labour hours Oh absorbed Job 2 OAR Labour hours Oh absorbed 10.00 12 12.00 2.50 2 5.00 17.00 Machining 10.00 1 10.00 Finishing 2.50 6 15.00 25.00 Total

ACCA F2 Management Accounting

(b)

A separate departmental overhead absorption rates Job 1 OAR Total labour hours OH absorbed 6.25 7 43.75 Job 2 6.25 14 87.50 Total

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 Budget: Printing Packing Direct Wages ($) 24,000 70,000 94,000 Actual: Printing Packing 30,000 59,500 89,500 Labour Hour 4,000 10,000 14,000 5,000 8,500 13,500 Machine hours 12,000 1,000 13,000 14,000 800 14,800 Production O/H Costs 180,000 100,000 280,000 200,000 95,000 295,000

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 Budgeted labour hours OAR Cost of the batch Materials Labour Prime cost Overheads (20 x 500) Cost per batch : Print (24,000/4,000 x 200) : Pack (70,000/ 10,000 x 300) 1,200 2,100 3,300 4,190 10,000 14,190 890 280,000 14,000 $20 per hour

(b)

It has been suggested that appropriate departmental overhead absorption rate (OAR) may be more realistic. Calculate the OAR for: (i) (ii) the printing department (absorbed based on machine hours) the packing department (absorbed based on labour hours) and Print Budgeted overheads Labour hours Machine hours OAR 12,000 15 per m hr 10 per lab hr 180,000 Pack 100,000 10,000

ACCA F2 Management Accounting

(iii)

using departmental OARs, the cost of the batch Prime cost overheads Total cost : Print (15 x 400) : Pack (10 x 300) 6,000 3,000 9,000 13,190 4,190

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 Stores charged to Maintenance charged to 40% 70% Assembly 30% 20% Stores 10% Maintenance 30%

Cost information for period seven was as follows. Cutting Actual overhead $77,000 Cutting Budgeted overhead * Budgeted activity Actual activity * after recharges $180,000 7,200 machine hours 7,030 machine hours Assembly $99,000 Stores $125,000 Assembly $156,000 48,000 direct labour hours 52,580 direct labour hours Maintenance $50,000

(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 Actual overhead Re-apportionment: S (4:3:3) M (7:2:1) S (4:3:3) M (7:2:1) S (4:3:-) Total overheads 50,000.00 61,250.00 3,500.00 1,837.50 150.00 193,737.50 37,500.00 17,500.00 2,625.00 525.00 112.50 157,262.50 (125,000) 8,750 (8,750) 262.50 (262.50) 37,500 (87,500) 2,625 (2,625) $77,000 A $99,000 S $125,000 M $50,000

(b)

Calculate the predetermined absorption rates for the cutting and assembly departments.

ACCA F2 Management Accounting

(c)

Determine any over or under absorption of overhead for the cutting and the assembly departments for Period 7. Show all your workings. Cutting Budgeted overheads Budgeted activity OAR Actual activity OH absorbed Actual OH Over/ (under) absorption 180,000 7,200 25.00/ m hr 7,030 175,750.00 193,737.50 (17,987.50) Assembly 156,000 48,000 3.25/ l hr 52,580 170,885.00 157,262.50 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 Production overheads Expected production hours Casting $225,000 7,500 Dressing $175,000 7,000 Assembly $93,000 6,200

During period 2, actual results were as follows for an output level of 117,500 units. Department Production overheads Production hours (a) Casting $229,317 7,950 Dressing $182,875 7,280 Assembly $94,395 6,696

Calculate predetermined departmental overhead absorption rates for period 2. Department Production overheads Expected production hours OAR Casting $225,000 7,500 $30 Dressing $175,000 7,000 $25 Assembly $93,000 6,200 $15

(b)

Calculate the under/over-absorption of overheads for each department for period 2. Department Production overheads Expected production hours OAR Actual production hours Overheads absorbed Overheads incurred Over/ (under) Casting $225,000 7,500 $30 7,950 238,500 $229,317 9,183 Dressing $175,000 7,000 $25 7,280 182,000 $182,875 (875) Assembly $93,000 6,200 $15 6,696 100,440 $94,395 6,045

ACCA F2 Management Accounting

Short Questions
Q1: A company has two production departments, Cutting and Finishing. The budgeted overheads and operating hours for the two departments for next year are: Cutting Finishing : : $210,000 $200,000 60,000 machine hours 5,000 machine hours 4,000 labour 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 D Q2: both be based on machine hours both be based on labour hours

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 B C D Budgeted overheads and actual overheads incurred Budgeted overheads and actual hours worked Actual overheads incurred and budgeted hours Actual overheads incurred and actual hours worked

Q3:

Which of the following are acceptable bases for absorbing production overheads? 1 2 A B direct labour hour machine hours method 1 and 2 only method 3 and 4 only 3 4 C D as a percentage of prime cost per unit method 1, 2, 3 or 4 method 1, 2 or 3 only

Q4:

An overhead absorption rate is used to: A B C D Share out common costs over benefiting cost centres (allo) Find the total overheads for a cost centre (allo+app+re-app) Charge overheads to product Control overheads

Q5:

Over-absorbed overheads occur when: A B C D Absorbed overheads exceed actual overheads Absorbed overheads exceed budgeted overheads Actual overheads exceed budgeted overheads Budgeted overheads exceed absorbed overheads

ACCA F2 Management Accounting

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 B $270 under absorbed $690 over absorbed C D $960 over absorbed $960 under absorbed 25,200 2,100 12.00 2,180 261,60 25,470 690

Budgeted overheads Budgeted labour hours OAR Actual labour hours Overheads absorbed Overheads incurred Over/ (under) absorption

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 B 89,000 90,000 C D 91,000 92,000

Budgeted overheads Budgeted machine hours OAR Actual machine hours Overheads absorbed Overheads incurred Over/ (under) absorption Q8:

180,000 90,000 2.00 91,000 182,000 178,000 4,000

A company had the following budgeted and actual production overhead costs in its two production cost centres, Machining and Assembly: Budget Machining Assembly What statement is true? A B C D From the data available it is not possible to determine overhead over/under absorption Machining overheads were over-absorbed: Assembly overheads were under-absorbed Machining overhead were over-absorbed: Assembly overheads were over-absorbed Machining overhead were under-absorbed: Assembly overheads were over-absorbed $210,000 $136,000 Actual $212,000 $134,000

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.

ACCA F2 Management Accounting

If actual production overheads were $295,000 what was the overhead absorption rate per machine hour (to the nearest $)? A B $4.00 $4.08 C D $4.21 $4.35 $280,000 4.08 70,000 285,600 295,000 (9,400)

Budgeted overheads Budgeted machine hours OAR Actual machine hours Overheads absorbed Overheads incurred Over/ (under) absorption Data for Q10 and Q11: Budgeted labour hours Budgeted overheads Q10: : 8,500 : $148,750

Actual labour hours Actual overheads

: 7,928 : $146,200

Based on the data given above, what is the labour hour overhead absorption rate? A B $17.50 per hour $17.20 per hour C D $18.44 per hour $18.76 per hour

Q11:

Based on the data given above, what is the amount of overhead under/over-absorbed? A B $2,550 under-absorbed $2,529 over-absorbed C D $2,550 over-absorbed $7,460 under-absorbed 148,750 8,500 17.50 7,928 138,740 146,200 (7,460)

Budgeted overheads Budgeted labour hours OAR Actual labour hours Overheads absorbed Overheads incurred Over/ (under) absorption Q12:

A management consultancy recovers overheads on chargeable consulting hours. Budgeted overheads were $615,000 and actual consulting hours were 32,150. Overheads were underrecovered by $35,000. If actual overheads were $694,075, what was the budgeted overhead absorption rate per hour? A B $19.13 $20.50 C D $24.59 $22.68

Budgeted overheads Budgeted labour hours OAR Actual labour hours Overheads absorbed

615,000 20.50 32,150 659,075

ACCA F2 Management Accounting

Overheads incurred Over/ (under) absorption Q13:

694,075 (35,000)

The following production overhead costs relate to a production cost centre: (1) (2) (3) Budget Actual Absorbed : : : $124,000 $126,740 $125,200

Which of the following statements is true? A B C D Q14: overheads were over-absorbed by $1,200 overheads were over-absorbed by $1,540 overheads were under-absorbed by $1,200 overheads were under-absorbed by $1,540

Overheads are absorbed at a pre-determined rate based on direct labour hours. The following additional information is available for a period: Budget Overhead expenditure Direct labour hours $164,000 10,000 Actual $158,000 9,800

What was the overhead over/under-absorption in the period? A B $2,720 over-absorbed $3,224 over-absorbed C D $3,280 under-absorbed $6,000 under-absorbed 164,000 10,000 16.40 9,800 160,720 158,000 2,720

Budgeted overheads Budgeted labour hours OAR Actual labour hours Overheads absorbed Overheads incurred Over/ (under) absorption 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. 2. Fixed production overheads would be over-absorbed. 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 A B C D Cannot determine Cannot determine True True Statement 2 Cannot determine True Cannot determine True

ACCA F2 Management Accounting