Example

ABC is preparing its departmental budgets and product cost estimates for the year ended 31
December. The company has three manufacturing departments Machining, Assembly, and
Finishing and one service department, maintenance. The following costs and related data
have been estimated for the year to 31 December:
Machining Assembly Finishing Maint
Total
Costs: $’000 $’000 $’000 $’000
$’000
Indirect wages 10 6 8 30 54
Indirect materials 15 4 8 20 47
Power 102
Light and heat 10
Depreciation 7
Rent and rates 25
Personnel 63
Other data:
Direct labour hours 12,000 8,000 16,000 6,000
42,000
Machine hours 40,000 5,000 6,000 -
51,000
Employees 6 4 8 3 21
Floor area (m2) 1,000 400 300 300
2,000
Net book value of fixed assets 20,000 8,000 3,000 4,000
35,000

The maintenance department is expected to spend 60% of its time working for the machining
department with the remainder of its time being shared equally between assembly and
finishing.
Required:
Prepare an overhead analysis sheet for ABC Ltd for its year ended 31 December

Solution

From the question we can see that the costs for indirect wages and materials have been
allocated directly to the cost centres. This is because we can identify these costs directly to
the cost centres concerned. The remainder of the costs must be shared over the cost centres in
relation to the amount of usage of the cost. This can be established by looking at the
additional information and deciding which piece of information relates to which cost. For
example the power costs would be determined by the number of hours the machines had been
working and the light and heat by the overall area of the building. To apportion costs we need
to take the total of the overhead cost and divide it by the total of the basis used. The resulting
figure can then be multiplied by the individual usage of the cost.
e.g power (for machining dept) 1,000 * 102 000
2,000
=$51 000
This process can then be repeated for each cost centre. The figures can then be inserted into
the table above and the columns totalled.
Costs Basis Machining Assembly Finishing Maint
Total
Indirect wages Allocated 10.000 6.000 8.000 30.000
54.000
Indirect materials Allocated 15.000 4.000 8.000 20.000
47.000
Power floor area 51.000 20.400 15.300 15 300
102.000
Light & Heat Floor area 5.000 2.000 1.500 1.500
10.000
Depreciation NBV 4.000 1.600 0.600 0.800
7.000
Rent & Rates Floor area 12.500 5.000 3.750 3.750
25.000
Personnel Employees 18.000 12.000 24.000 9.000
63.000
Stage 1 115.500 51.000 61.150 80 350
308.000
Stage 2
Re apportionment(60%) 48.210 16 070 16 070 (80 350)
163 710 67 070 77 220
Stage 3
Appropriate basis(hours) machine Labour Labour
40 000 8 000 16 000
OAR 163 710 67 070 77 220
40 000 8 000 16 000
$4.09/hr $8.38/hour $4.83/hour

Example

Prepare an overhead analysis using the following data and calculate suitable overhead absorption
rates for the Milling, Assembly and Spraying departments. The data relate to one accounting period.

Basic data

Production cost centres Service cost centres

Milling Assembly Spraying Stores Maintenanc totals

e

No of 30 75 25 6 14 150
employees

Labour hours 1 510 3 320 950 252 595 6 627

Plant and $225 000 $75 000 $45 000 $17 000 $85 000 $447 000
machinery
 values

Area (m²) 7 500 10 000 3 500 500 1 000 22 500

Material 1 400 300 250 550 2 500

requisitions

Maintenance 75 30 45 150
hours (minor
work)

KWH (‘000) 300 70 50 10 170 600

Machine 8 400 1 100 300 9 800

hours

During the period the following data was recorded:

Indirect $2 500 $1 000 $1 500 $300 $1 700 $7 000

materials

Indirect $5 250 $2 500 $2 250 $4 250 $11 750 $26 000

labour

Major $18 500 $7 500 $4 500 $30 500

maintenance
work

The followings details were obtained from the accounts relating to the period.

Fire insurance 1 250

Power 4 500

Heating and lighting 2 000

Rates 1 800

Machine depreciation 8 400

Machine insurance 850

Canteen deficit 4 250

Balance of maintenance costs (exclu. Major works) 17 500

1. All apportionment follows a similar principle. For example, the total fire and machine
insurance of $2 100 is divided by the total plant value of $447 000 which is then multiplied,
in turn, by the value of the plant in each cost centres.
 2. The secondary apportionment is carried out using a net plant value of $345 000 i.e. less the
values in stores and maintenance.

3. The additional complications which can arise with Service Depts. are dealt with below.

4. Maintenance is apportioned on Plant Values because maintenance hours are not available
for the service C.C.s which naturally must have some maintenance.

OVERHEAD ANALYSIS

Overhead Apportionment Total Production cost centres Service cost centres

item basis

Milling Assembl spraying Store Maintenance

y s

$ $ $ $ $ $

Allocated
items

Indirect Allocated 7 000 2500 1 000 1500 300 1 700

material

Indirect Allocated 26000 5250 2 500 2250 4 250 11 750

labour

Major 30500 18500 7500 4500

maintenance

Apportioned
items

Fire and Plant values 2100 1057 352 211 80 399

machine (1.)
insurance

Power Kwh 4500 2250 525 375 75 1275

Heating and Floor area 2000 667 889 311 44 89

lighting

Rates Floor area 1800 600 800 280 40 80

canteen No. Of 4250 850 2125 708 170 397

deficit employees
 Minor Plant values 17 500 8806 2936 1762 666 3328
maintenance

Plant Plant values 8400 4227 1411 847 316 1599

depreciation

STAGE 1 Totals 104050 44706 2003 12747 5932 20622

Secondary apportionment

Stores Material 3322 712 593 -5932 1305

requisitions

maintenance Plant values (2) 14300 4767 2860 -21927

Total production dept $104050 62328 25522 16200

overheads STAGE 2

Overhead absorption basis Machine Labour Labour

hrs hrs hrs

Overhead absorption rates $62 328 $25 522 $16 200

STAGE 3 $8400 $3320 $950

=$7.42 =$7.69 =$17.05

per per lab per lab
machine hour hour
hour

Example

The annual overhead cost for the Enterprise Company which has three production centres (two
machine centres and one assembly centre) and has two service centres (material procurement and
general factory support) are as follows:

Machine Machine Assembly Material General Total

Centre x Centre y Procurement Factory
support

($000) ( $000) ($000) ($000) ($000) ($000)

Indirect wages and supervision 1 000 1 000 1 500 1 100 1 480 6 080

Indirect materials 500 805 105 10

1 420

Lighting and heating

500

Property taxes 1
000

Insurance of machinery 150

Depreciation of machinery 1
500

Insurance of buildings
250

Salaries of works management 800

11 700

Other information available:

Book value of machinery ($000) 8 000 5000 1 000 500 500 15 000

Area occupied (sq metres (000) 10 5 15 15 5 50

Number of employees 300 200 300 100 100 1 000

Direct labour hours (000) 1 000 1 000 2 000 4 000

Machine hours (000) 2 000 1 000 3 000

Material issues (000) 4 000 3 000 1 000

8 000

Required

Show all the 3 stages of accounting for overheads