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    Departmental Overhead Allocation

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    forede6066

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    Departmental Overhead Allocation

    Uploaded by

    forede6066
    4 views19 pages

    Original Title

    2. Departmental overhead allocation

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    Download as pptx, pdf, or txt
    4 views19 pages

    Departmental Overhead Allocation

    Uploaded by

    forede6066

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 19

    Overhead Cost

    Allocation
    (Departmental Costing)- Chapter 14, 15

    CLO 1: Students will be able to apply cost accumulation and


    absorption techniques
    Cost Allocation
    • Assigning indirect costs to cost objects
    • These costs are not traced
    • Indirect costs often comprise a large percentage of
    Total Overall Costs
    Purposes of Cost Allocation
    FACTORY OVERHEADS
    • COST ALLOCATION

    SPINNING WEAVING DYEING

    • COST APPORTIONMENT

    MAINTENANCE POWER
    SPINNING WEAVING DYEING

    • COST ABSORPTION

    OUTPUT/
    PRODUCT
    • Determine the total cost of product X which is processed for
    manufacture in department P1, P2 and P3 for 5 hours, 3 hours and 4
    hours respectively, given that its direct material cost is Rs. 625 and
    direct labour cost is Rs. 375.

    Manufacturing Overhead Cost heads Rs.


    Rent and rates 62,500
    General lighting 7,500
    Indirect Wages (based on direct wages) 18,750
    Power 25,000
    Depreciation on machinery 50,000
    Insurance of machinery 20,000
    P1 P2 P3 S1 S2
    Direct wages (Rs.)
    37,500 25,000 37,500 18,750 6,250
    Horse Power of Machines
    60 30 50 10 1
    used
    Cost of machinery (Rs.)
    3,00,000 4,00,000 5,00,000 25,000 25,000
    Floor space (Sq. ft)
    2,000 2,500 3,000 2,000 500
    Number of light points
    10 15 20 10 5
    Hours worked
    6,225 4,050 4,100  
    Ratio of Service departments’ services to production
    departments:

    P1 P2 P3 S1 S2

    S1 20% 30% 40%  10%

    S2 40% 30% 25% 5% 


    Criteria for Cost-Allocation Decisions

    • Cause and Effect – variables are identified that cause resources to


    be consumed
    • Most credible to operating managers
    • Integral part of ABC
    • Benefits Received – the beneficiaries of the outputs of the cost
    object are charged with costs in proportion to the benefits received
    Criteria for Cost-Allocation Decisions

    • Fairness (Equity) – the basis for establishing a price satisfactory


    to the government and its suppliers.
    • Cost allocation here is viewed as a “reasonable” or “fair” means of
    establishing selling price
    • Ability to Bear – cost are allocated in proportion to the cost
    object’s ability to bear them
    • Generally, larger or more profitable objects receive proportionally more
    of the allocated costs
    Allocating Costs of a Supporting
    Department to Operating Departments

    • Supporting (Service) Department – provides the


    services that assist other internal departments in the
    company
    • Operating (Production) Department – directly adds
    value to a product or service
    Methods of Allocating Support Costs to
    Production Departments

    1. Direct
    2. Step-Down
    3. Reciprocal
    Direct Method

    • Allocates support costs only to Operating


    Departments
    • No Interaction between Support Departments prior to
    allocation
    Direct Method
    Support Departments Production Departments

    Information Systems

    Manufacturing

    Packaging

    Accounting
    Step-Down Method
    • Allocates support costs to other support departments
    and to operating departments that partially
    recognizes the mutual services provided among all
    support departments
    • One-Way Interaction between Support Departments
    prior to allocation
    Step-Down Method
    Support Departments Production Departments

    Information Systems

    Manufacturing

    Packaging

    Accounting
    Reciprocal Method

    • Allocates support department costs to operating


    departments by fully recognizing the mutual services
    provided among all support departments
    • Full Two-Way Interaction between Support
    Departments prior to allocation
    Reciprocal Method
    Support Departments Production Departments

    Information Systems

    Manufacturing

    Packaging

    Accounting
    Choosing Between Methods

    • Reciprocal is the most precise


    • Direct and Step-Down are simple to compute and
    understand
    • Direct Method is widely used

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