F2-07 Accounting For Overheads

Session 7
Accounting for Overheads
FOCUS
This session covers the following content from the ACCA Study Guide.
F. Cost Accounting Techniques

1. Accounting for material, labour and overheads
c) Accounting for overheads
i) Explain the different treatment of direct and indirect expenses.
ii) Describe the procedures involved in determining production overhead
absorption rates.
iii) Allocate and apportion production overheads to cost centres using an
appropriate basis.
iv) Reapportion service cost centre costs to production cost centres (using
the reciprocal method where service cost centres work for each other).
v) Select, apply and discuss appropriate bases for absorption rates.
vi) Prepare journal and ledger entries for manufacturing overheads
incurred and absorbed.
vii) Calculate and explain the under and over absorption of overheads.
Session 7 Guidance
Read through section 1, which illustrates the processes of allocation, apportionment and absorption,
and work through Example 1.
Note that complications arise when accounting for costs of service departments (s.2) and work
through Example 2, which demonstrates three methods of reapportionment (in increasing complexity).
(continued on next page)

F2 Management Accounting Becker Professional Education | ACCA Study System
Sadia sadia Afzal - gentledove004@gmail.com

VISUAL OVERVIEW
Objective: To describe the principles and processes of overhead cost analysis.
OVERHEADS
• Allocation, Apportionment
and Absorption
• Absorption Bases
SERVICE ABSORPTION ACCOUNTING FOR

DEPARTMENTS OVERHEADS
• Departmental
• Overview Rates • Pre-determined
• Explanation • Blanket Rate Rates
• Secondary • Journal and
Apportionment Ledger Entries
• Under and Over
Absorption
• Concluding
Remarks
Session 7 Guidance
Appreciate that the simplification of using "blanket" overhead absorption rates may under or over
cost products (s.3).
Note how under or over absorption of overhead is recorded in ledger accounts (s.4.2).
Work through Illustration 4 and Example 3.
© 2014 DeVry/Becker Educational Development Corp. All rights reserved. 7-1

Session 7 • Accounting for Overheads F2 Management Accounting
1 Overheads
1.1 Allocation, Apportionment and Absorption

Most businesses assign overheads to products by:
Overheads—costs
 allocation and apportioning overheads to cost centres; and that cannot be charged
 absorbing the costs accumulated in cost centres into cost units. directly to cost units
and must be shared
on some (equitable)
1.1.1 Allocation basis.
Overheads which result solely from the existence of a cost centre
are charged to that cost centre. For example:
Cost Centre Allocated Overhead Cost
Canteen Tea bags, spaghetti, chef's wages Know the nature of

overheads and their
Packing department Cardboard, string treatment in cost
accounting; this is
extremely important
1.1.2 Apportionment for later topics such
When an overhead is common to more than one cost centre it as absorption costing
v marginal costing,
must be shared out or split on an equitable basis. For example:
budgeting, variance
analysis and decision-
making topics.
Overhead Cost Possible Bases of Apportionment
Rent and rates Square metres occupied by

departments
Light and heat Cubic capacity or metered usage
Insurance of inventories Value of inventory holding at each
location
1.1.3 Absorption
Attributing the overheads accumulated by a cost centre to the
cost units passing through it.
Illustration 1 Overhead Absorption
Pocket calculators manufactured in a single production department with

$15,000 overheads. Planned production is 5,000 units, therefore:
Overhead absorption rate per unit = $15,000 = $3/unit

5,000
7-2 © 2014 DeVry/Becker Educational Development Corp. All rights reserved.

F2 Management Accounting Session 7 • Accounting for Overheads
1.2 Absorption Bases

1.2.1 Absorption per Unit
As shown in Illustration 1, this approach is appropriate if only one
type of unit is produced by a cost centre.
1.2.2 Absorption per Labour Hour

Appropriate where more than one type of unit is produced, with
each taking a different amount of time.
Illustration 2 Absorption per Labour Hour
Sam produces calculators and computers in one production department, with

$15,000 overheads. He has planned production of 3,000 calculators, each taking
1 hour, and 2,000 computers, each taking 6 hours.
Solution
Total overheads
Overhead absorption rate per hour =
Total planned hours worked
$15,000
=$1/hour
(3,000 × 1) + (2,000 × 6)
Overhead per calculator = 1 hr @ $1/hr = $1
Overhead per computer = 6 hrs @ $1/hr = $6
This is a fairer method of absorbing the overhead as it recognises the greater

time taken to produce a computer rather than a calculator.
1.2.3 Alternative Bases

 Per kg of material used.
 Per machine hour.
 Percentage of material cost (also labour cost or prime cost).

Example 1 Overheads Allocation and Absorption
Budget for May:
$
Canteen costs 4,100
Machine depreciation 1,700
Machine repairs 500
Factory rent and rates 6,300
Production manager's salary 7,200
Heat and light 3,200
Materials storage 2,000
25,000
Production data:
Sofas Chairs
Volume (units) 100 400
$ $
Direct costs per unit:
Materials ($10.00 per kg) 80.00 30.00
Labour ($2.50 per hour) 105.00 42.50
Other information
Sofas and chairs pass through two production cost centres; the Assembly department and the
Trimming department.
• A sofa takes 24 hours in the Assembly department and 18 hours in the Trimming department.
• A chair takes 9 hours in the Assembly department and 8 hours in the Trimming department.
Labour wage rates in both departments are the same.
The Assembly department occupies approximately three-quarters of the area of the factory.
The production manager, on average, spends twice as long supervising the 30 workers in the
Assembly department as he does supervising the 70 workers in the Trimming department.
The written down value of the equipment in the Assembly department and the Trimming
department is $104,500 and $115,500, respectively.
Materials storage costs should be apportioned two-fifths to Assembly and three-fifths to Trimming.
Required:
(a) Using appropriate bases apportion total overheads between the two cost
centres. Calculate an absorption rate per hour for each cost centre.
(b) Calculate the overhead cost per unit for each product.

Example 1 Overheads Allocation and Absorption

(continued)
Solution
Assembly to
(a) Overhead Trimming
Basis Ratio Assembly Trimming
$ $
Canteen
Machine depreciation
and machine repairs
Rent and rates
Production manager's salary
Heat and light
Materials storage
Workings
(1) Assembly—overhead absorption rate
Total direct labour hours:
Working Hours
Sofas
Chairs
Absorption rate = $ per direct labour hour
(2) Trimming—overhead absorption rate

Working Hours
Sofas
Chairs
Absorption rate = $ per direct labour hour
(b) Overhead cost per unit

Working $
Sofas Assembly
Trimming
Chairs Assembly
Trimming

2 Service Departments
2.1 Overview
OVERHEAD COSTS
Rent
Steps
Electricity
Establish cost centres
Indirect materials and
Indirect labour
1.(a) Allocate and
primarily
apportion
overheads to cost
Production cost Production cost Service cost centres
centre 1 (e.g. centre 2 (e.g. centre (e.g. 1.(b) Reapportion
assembly) packing) canteen) service
deptartment
costs to
production
cost centres
(secondary
apportionment)
Products 2. Absorb prod cost
X centre overheads
Y into cost units via
Direct absorption rates
Z
materials
Direct Labour
2.2 Explanation
 Absorption (s.3) is the process of charging overhead into a
cost unit. The overhead is absorbed while a product passes
through a cost centre.
The overview
 Products do not pass through service cost centres and visualises how we
therefore an absorption rate will not be calculated for the envisage costs first
service cost centre. Absorption rates are only calculated for being allocated
production departments. and then being
 This is why overhead in service cost centres must be apportioned before
they are absorbed.
reapportioned to production cost centres.
The complication is
 This secondary apportionment should be done on a fair basis that costs attributed to
to reflect the benefit derived from the service centre. service departments
(whether by allocation
or apportionment)
must be reapportioned
to production
departments.

2.3 Secondary Apportionment

Three approaches/treatments are possible:
 Direct method
 Step-down method
 Reciprocal method, which has two possible methods:
 Continuous reapportionment
 Algebraic (simultaneous equations)
Unless directed otherwise, a reciprocal method MUST be used for

secondary apportionment.
2.3.1 Direct Method

Reciprocal services (if any) are ignored. Service department costs
are reapportioned to production departments only.
2.3.2 Step (Down) Method

Services that do most work for other service departments are
allocated first. Reciprocal services (if any) are then ignored.

Example 2 Service Departments
A firm has two production departments and two service departments. It makes two products
and its total overhead bill for the year is as follows.
$
Rent 20,000
Depreciation – machinery 10,000
– buildings 8,000
Electricity 5,000
Indirect materials 15,000
58,000
The following statistics are available.
Production Production Service 1 Service 2
1 Pressing 2 Assembly Canteen Maintenance
Area (M2) 2,500 5,000 1,000 1,500
Machine value ($) 1,000 5,000 1,000 3,000
KW hour rating of machinery 10,000 10,000 2,500 2,500
Indirect materials consumed ($) 5,000 5,000 3,700 1,300
Usage of service department costs is estimated as:
Pressing Assembly Canteen Maintenance

Use of canteen 50% 30% 20%
Use of maintenance 55% 40% 5%
A situation of reciprocal services is apparent (i.e. the canteen does 20% of its work for the
maintenance department and the maintenance department does 5% of its work for the canteen).
Required:
(a) Allocate and primarily apportion overheads to cost centres.
(b) Reapportion service department costs to production cost centres
(secondary apportionment) using:
(i) Direct method
(ii) Step-down method
(iii) Continuous re-apportionment method

Example 2 Service Departments (continued)
Solution
Overhead Total Basis Pressing Assembly Canteen Maint.

$ $ $ $ $
Rent 20,000 Area
Machine Dept. 10,000 Value
Buildings 8,000 Area
Electricity 5,000 KW hrs
Indirect materials 15,000 Allocation
58,000

(secondary apportionment)
(i) Direct method

Pressing Assembly Canteen Maint.
$ $ $ $
15,000 26,000 8,000 9,000
Canteen (50:30)
Maintenance (55:40)

$ $ $ $
15,000 26,000 8,000 9,000
Canteen (50:30:20)
Maintenance (55:40)

2.3.3 Reciprocal Methods

Reciprocal services are fully recognised and may be solved by
continuous reapportionment or algebraically.
If you are required to solve a problem taking account of reciprocal

services you may choose either method. The key to the algebraic
method is defining the unknown total cost of each service departments
as its own cost + the percentage of cost being reapportioned
Example 2 Service Departments (continued)
Based on the data previously presented in Example 2 solve by continuous reapportionment method.
Solution
(b) Reapportion service department costs to production cost
centres (secondary apportionment)
(iii) Continuous reapportionment approach
$ $ $ $
15,000 26,000 8,000 9,000
Canteen
(50:30:20)
Maintenance
(55:40:5)
Canteen
(50:30:20)
Maintenance
(55:40:5)
Canteen
(50:30)
25,156 32,844

Illustration 3 Reciprocal Methods
Algebraic (simultaneous equations) approach

 Let c be the total cost of the canteen service department
 Let m be the total cost of the maintenance service department
 Thus:
c = 8,000 + 0.05m
m = 9,000 + 0.20c
Rearranging
c – 0.05m = 8,000 (1)

– 0.20c + m = 9,000 (2)
Multiply (1) by 0.2
0.20c – 0.01m = 1,600 (3)

– 0.20c + m = 9,000 (2)
Add: 0.99m = 10,600
10,600
m=
0.99
m = $10,707
Substitute into (1)
c – 535 = 8,000
c = $8,535
There are numerous ways in which these equations can be solved

either simultaneously and/or by substitution.
These total costs (c = 8,535 and m = 10,707) are now apportioned:

$ $ $ $
15,000 26,000 8,000 9,000
Canteen 4,267 2,561 (8,535) 1,707
(50:30:20)
Maintenance 5,889 4,283 535 (10,707)
(55:40:5)
25,156 32,844 - -

3 Absorption
3.1 Departmental Rates

 Are calculated by the "two-stage" process of:
1. Allocating and apportioning overheads to cost centres.
2. Absorbing costs into cost units.
 Non-machine departments—direct labour hours.
 Machine departments—machine hour rate.
Example 3 Absorption
Using the same data from Example 2, assuming secondary apportionment of service department
overheads occurred using the reciprocal method, with the following additional information:
The firm's two products have the following direct costs per unit.
Product A B
$ $
Direct materials 7.00 5.00
Direct labour
Pressing A: 3 hrs/unit 15.00
B: 2 hrs/unit 10.00
Assembly A: 2 hrs/unit 8.00
B: 1 hr/unit 4.00
Prime Cost 30.00 19.00
Production volume is 1,000 units of A and 2,000 units of B.

It has been decided to absorb overheads into products on the basis of labour hours and that
service centre costs will be reapportioned using the reciprocal method.
Required:
Calculate the overhead costs of the two products.
Solution
Units Pressing Assembly
Overhead $25,156 $32,844
Direct labour hours A
Rate per hour =

Overhead cost per unit Hours A B
Pressing
Assembly
Overhead cost per unit

3.2 Blanket Rate

 This is a single overhead rate computed for the entire factory
by omitting the first of the two stages above. It is sometimes
called a "plant-wide" rate.
 Not a satisfactory method where a factory consists of a
number of different production centres and products consume
cost centre overheads in different proportions:
 cost units passing through centres with high overhead costs
(e.g. machine shops) will be under-costed;
 those passing through low overhead centres (e.g. an
assembly department) will be over-costed.
 May be used where they are an approximation to
departmental rates as they simplify product cost calculations.
4 Accounting for Overheads
4.1 Pre-determined Overhead Absorption Rates

 In practice, the calculation of fixed overhead cost per unit will
be performed in advance, based on budgeted (planned) data.
 Management does not wait until the end of the budget period
before calculating the cost of each product, because:
 each month, cost of goods produced needs to be calculated
for management accounts;
 to make decisions (e.g. setting prices) management needs
to know how much it cost to make each product or service.
 The pre-determined (or budgeted or standard) overhead
absorption rate per unit is calculated at the start of the year
(or period) as:
Budgeted (forecast) overheads for the year

Budgeted (forecast) activity (e.g. direct labour hours)
 This standard absorption rate is then used during each period

(e.g. month) to calculate the fixed overhead included in cost
of goods produced (for the income statement).*
*For example, for every labour hour worked, a standard amount of

overhead is charged to the cost of production.

 At the end of the accounting period, the management

accountant compares the actual fixed production costs to
the total that has been absorbed already. Any difference is
charged (or credited) to profit or loss (income statement).
This is further explained in accounting entry terms below.
Pre-determined overhead absorption rates are simply budgeted (as

opposed to actual). Since actual (costs and levels of activity) are
highly unlikely to be exactly as budgeted, a difference will arise.
4.2 Journal and Ledger Entries

 All production overheads (rent, supervisor's salary, depreciation,
etc) are transferred to the "production overheads a/c":
Production overheads a/c

$ $
Rent, electricity, depreciation, x
etc
Indirect materials x
Indirect labour x
 Because the amount of overhead absorbed is based on a

standard (as explained above), there will usually be a balancing
figure that must be written off to the income statement:*
Production overheads a/c

$ $
Rent, electricity, depreciation, x Absorbed into production
etc
Indirect materials x (to production process) x
Indirect labour x
Balance = Over absorption Balance = Under absorption
(transfer to cost income (transfer to cost income
statement) statement)
*A balancing debit on the overhead account represents a credit to

the income statement (i.e. is a reduction in cost). A balancing credit
represents a debit to the income statement (i.e. an increase in cost).
 At the end of each period the cost accountant must compare

the actual overhead incurred with the overhead absorbed and
ascertain the reason for over or under absorption.

4.3 Under and Over Absorption
Total overhead absorbed = standard rate × actual activity in the period
Total overhead absorbed will differ from actual total overhead

incurred if actual activity and/or actual cost differ from that
budgeted in the calculation of the standard rate (as above).*
 If overhead absorbed > actual overhead incurred, then this is *Understanding the
concepts of under and
described as over absorption and the difference is credited, for
over absorption is
example, to cost of sales (there is no one rule about exactly absolutely fundamental
where the adjustment is made). to variance analysis of
 If overhead absorbed < actual overhead incurred, then this is fixed overheads (see
described as under absorption and the difference is written off Session 16).
as a debit to cost of sales (for example).
Illustration 4 Under and Over Absorption
A firm absorbs fixed production overheads based on labour hours, using a pre-determined
overhead absorption rate. At the start of the year, the following amounts were planned:
Overhead $32,844
Direct labour hours 4,000 hours
Actual data was as follows:

Overhead $35,742
Direct labour hours 4,200 hours
Solution
$32,844
Pre-determined (i.e. budgeted) absorption rate = = $8.211 per direct labour hour
4,000
$
Actual overhead incurred 35,742
Overhead absorbed (recovered)
Actual hours × Pre-determined
absorption rate
(4,200 × $8.211) 34,486
Under absorption 1,256
Under or over absorption occurs when actual overhead expenditure

incurred differs from the overhead absorbed in production. It has
nothing to do with sales volumes or inventory levels.

Example 4 Under/Over Absorption of Overheads
At the beginning of the year, Dorin planned to manufacture 30,000 bottles of wine at its
vineyard in Cricova. The expected fixed production overheads were $12,000.
Actual production during the year was 34,000 bottles of wine, and actual fixed production
overhead was $15,000.
Required:
(a) Calculate the under/over absorption of fixed overheads during the year.
(b) Quantify how much of (a) was:
(i) caused by difference between actual and budgeted fixed cost; and
(ii) due to the difference between actual and budgeted output.
Solution
(a) Calculate the under/over absorption of fixed overheads
Pre-determined overhead absorption rate:
Under/over absorption of fixed overheads:
Actual fixed overhead
Absorbed
Over or under absorption
(b) Analysis of the over or under absorption:

(i) The amount caused by difference between actual and
budgeted fixed cost =
(ii) The amount due to the difference between actual and

budgeted output =
Net effect:
4.4 Concluding Remarks

 This session is the most complex of those concerning resource
inputs. However, for decision-making, overhead apportionment
and absorption may be considered as irrelevant due to the
subjective nature of sharing overheads between products.
 That does not mean that the analysis of overheads becomes
redundant. For many organisations they constitute a large
proportion of total costs.
 Overheads may therefore need to be analysed more accurately
and ways of absorbing overheads looked at more closely, to
ensure appropriate costs per unit are calculated.

Session 7
Summary
 Overheads are indirect costs which cannot be traced directly to a particular unit of output.
However, for costing purposes, management may include overhead costs in each unit produced.
 As overhead costs are incurred, they are allocated and/or apportioned to the appropriate
cost centre.
 Costs attributed to cost centres which provide services to production cost centres must then
be reapportioned to those production cost centres (secondary apportionment).
 Having allocated and apportioned all overhead costs to production cost centres, an overhead
absorption rate must be calculated in order to calculate cost per unit of product.
 Overhead absorption rates are typically based on per-unit basis, per-labour-hour basis or
per-machine-hour basis.
 Overhead absorption rates are often calculated in advance (i.e. pre-determined), based on
budgeted overhead costs and production quantities. As units are produced, overheads
are absorbed.
 At the end of a period, the difference between actual overheads and overheads absorbed is
charged (if under absorbed) or credited (if over absorbed) directly to the income statement.
Session 7 Quiz
Estimated time: 10 minutes
1. True or false? Overheads are allocated and apportioned to cost centres. (1.1)
2. Suggest THREE bases for the absorption of production costs into cost units. (1.2)
3. True or false? Absorption rates may be calculated for service departments. (2.2)
4. State the TWO methods which may be used to fully recognise reciprocal services. (2.3.3)
5. State the circumstance in which a "blanket rate" may be used. (3.2)

6. True or false? If overheads incurred are less than overheads absorbed in actual product they
will be over absorbed. (4.3)
7. True or false? If overhead absorbed is less than the actual overhead incurred, the difference
will increase the cost of sales, or some similar account. (4.3)
Study Question Bank

Estimated time: 60 minutes
Priority Estimated Time Completed
Q20 Fixed overheads 30 minutes
Q25 MCQs 30 minutes

Additional
Q22 Fibre
Q23 Seattle
Q24 Sangazure

EXAMPLE SOLUTIONS
Solution 1—Overheads Allocation and Absorption
(a) Overhead Assembly to

Trimming
Basis Ratio Assembly Trimming
$ $
Canteen No of employees 30:70 1,230 2,870
Machine depreciation
WDV 104.5:115.5 1,045 1,155
and machine repairs
Rent and rates Area 3:1 4,725 1,575
Production manager's salary Time spent 2:1 4,800 2,400
Heat and light Area 3:1 2,400 800
Materials storage Allocation 2:3 800 1,200
15,000 10,000
Workings
(1) Assembly—overhead absorption rate
Working Hours
Sofas 100 × 8 = 2,400
Chairs 400 × 8 = 3,600
6,000
15,000
Absorption rate = = $2.50 per direct labour hour.
6,000
(2) Trimming—overhead absorption rate

Working Hours
Sofas 100 × 8 = 1,800
Chairs 400 × 8 = 3,200
5,000
10,000
Absorption rate = = $2.00 per direct labour hour.
5,000
(b) Overhead cost per unit
Workings $
Sofas Assembly 24 × 2.50 (1) = 60.00
Trimming 18 × 2.00 (W2) = 36.00
96.00
Chairs Assembly 22.50
Trimming 16.00
38.50

Solution 2—Service Departments
Overhead Total Basis Pressing Assembly Canteen Maint.

$ $ $ $ $
Rent 20,000 Area 5,000 10,000 2,000 3,000
Machine Dept. 10,000 Value 1,000 5,000 1,000 3,000
Buildings 8,000 Area 2,000 4,000 800 1,200
Electricity 5,000 KW hrs 2,000 2,000 500 500
Indirect materials 15,000 Allocation 5,000 5,000 3,700 1,300
58,000 15,000 26,000 8,000 9,000

(secondary apportionment)
(i) Direct method
$ $ $ $
15,000 26,000 8,000 9,000
Canteen (50:30) 5,000 3,000 (8,000)
Maintenance (55:40) 5,211 3,789 (9,000)
25,211 32,789 - -
$ $ $ $
15,000 26,000 8,000 9,000
Canteen (50:30:20) 4,000 2,400 (8,000) 1,600
19,000 28,400 - 10,600
Maintenance (55:40) 6,137 4,463 (10 ,600)
25,137 32,863 - -

(iii) Continuous reapportionment approach
$ $ $ $
15,000 26,000 8,000 9,000
Canteen (50:30:20)
4,000 2,400 (8,000) 1,600
0 10,600
Maintenance (55:40:5)
5,830 4,240 530 (10,600)
530 0
Canteen (50:30:20)
265 159 (530) 106
0 106
Maintenance (55:40:5)
58 42 6 (106)
6
Canteen (50:30)
3 3(say) (6)
25,156 32,844
Solution 3—Absorption
Units Pressing Assembly

Overhead $25,156 $32,844
Direct labour hours A 1,000 units × 3 hrs 3,000
1,000 units × 2 hrs 2,000
B 2,000 units × 2 hrs 4,000
2,000 units × 1 hr 2,000
7,000 4,000
Rate per hour
$25,156 $32,844
= $3.59 = $8.21
7,000 4,000
Overhead cost per unit Hours A B

Pressing 3 hrs × $3.59 10.77
2 hrs × $3.59 7.18
Assembly 2 hrs × $8.21 16.42
1 hr × $8.21 8.21
Overhead cost per unit 27.19 15.39

Solution 4—Under/Over Absorption of Overheads
(a) Pre-determined overhead absorption rate:
Budgeted overheads 12,000

= = = $0.40
Budgeted output 30,000
Under/over absorption of fixed overheads:

Actual fixed overhead 15,000
Absorbed (actual output × pre-determined
rate) (34,000 × $0.40) 13,600
Over or under absorption 1,400
(b) Analysis of the over or under absorption:

(i) Actual overheads are higher than budgeted. This is called
a fixed overhead "expenditure variance". The amount is
$3,000 ($15,000−12,000).
(ii) Actual output is higher than budgeted. This increases the

amount of overheads absorbed, and therefore reduces the
under absorption. This is called a fixed overhead "volume
variance". The amount is $1,600 = (34,000−30,000) × $0.40
Net effect: $3,000−1,600 = $1,400

F2-07 Accounting For Overheads

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Session 7

Accounting for Overheads

F. Cost Accounting Techniques

(continued on next page)

Sadia sadia Afzal - gentledove004@gmail.com

SERVICE ABSORPTION ACCOUNTING FOR

© 2014 DeVry/Becker Educational Development Corp. All rights reserved. 7-1

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1.1 Allocation, Apportionment and Absorption

Cost Centre Allocated Overhead Cost

Canteen Tea bags, spaghetti, chef's wages Know the nature of

Rent and rates Square metres occupied by

Illustration 1 Overhead Absorption

Pocket calculators manufactured in a single production department with

Overhead absorption rate per unit = $15,000 = $3/unit

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1.2 Absorption Bases

1.2.2 Absorption per Labour Hour

Illustration 2 Absorption per Labour Hour

Sam produces calculators and computers in one production department, with

This is a fairer method of absorbing the overhead as it recognises the greater

1.2.3 Alternative Bases

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Example 1 Overheads Allocation and Absorption

Budget for May:

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Example 1 Overheads Allocation and Absorption

Absorption rate = $ per direct labour hour

(2) Trimming—overhead absorption rate

Absorption rate = $ per direct labour hour

(b) Overhead cost per unit

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2.3 Secondary Apportionment

Unless directed otherwise, a reciprocal method MUST be used for

2.3.1 Direct Method

2.3.2 Step (Down) Method

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Example 2 Service Departments

Pressing Assembly Canteen Maintenance

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Example 2 Service Departments (continued)

(a) Allocate and primarily apportion overheads to cost centres.

Overhead Total Basis Pressing Assembly Canteen Maint.

(b) Reapportion service department costs to production cost centres

(i) Direct method

(ii) Step-down method

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2.3.3 Reciprocal Methods

If you are required to solve a problem taking account of reciprocal

Example 2 Service Departments (continued)

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Illustration 3 Reciprocal Methods

Algebraic (simultaneous equations) approach