COST ACCOUNTING

Overheads- Apportionment and Reapportionment

University Institute of Legal Studies,

Panjab University
B.Com. LL.B. (Hons.) – Semester III
2020-21

Presented To: Presented By:

Prof. Abha Shruti Garg
281/19
Section: E
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ACKNOWLEDGEMENT

The success and final outcome of this presentation required a lot of guidance, assistance and
supervision and I am extremely privileged to have got this, all along the completion of my
presentation. All that I have done is only due to such direction and assistance.
I respect and thank Miss. Abha, for providing me with an opportunity to do a presentation on
“Overheads- Apportionment and Reapportionment.” and giving me all the guidance and
motivation, which made me complete it duly and efficiently. I am extremely thankful to her for
providing the support and guidance till the completion of my presentation providing all the
necessary information.
I am thankful to and fortunate enough to get constant encouragement, support and direction.

SHRUTI GARG

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TABLE OF CONTENTS
ACKNOWLEDGEMENT

INTRODUCTION

TYPES OF DEPARTMENT

APPORTIONMENT OF OVERHEAD EXPENSES

& BASES OF APPORTIONMENT
RE-APPORTIONMENT
a. Direct redistribution method
b. Step down method
c. Simultaneous equation method
d. Repeated distribution
e. Trial and error method
SOURCES

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INTRODUCTION

When all the items are collected properly under suitable account headings, the next step is
allocation and apportionment of such expenses to cost centres. This is also known as
departmentalization of overhead. Departmentalization of production overheads is the process of
identifying production overhead expenses with different production/service departments or cost
centres. It is done by means of allocation and apportionment of overheads among various
departments.

(i) Allocation and apportionment of overheads among production and service departments
and

(ii) Reapportionment of service departments overheads among production departments.

A factory is administratively divided into sub-divisions known as departments for running it

smoothly and efficiently. This sub-division is done in such a manner that each department
represents a division of activity of the concern such as repairs department, power department, tools
department, stores department, cash department, cost department etc. Following factors must be
taken into consideration while organizing a concern into a number of departments:

(i) Every manufacturing process is divided into its natural divisions in order to maintain
natural flow of raw materials from the time of the purchase till its conversion into
finished goods and sale.

(ii) For ensuring smooth flow of production, the sequence of operations is taken into
consideration while determining the location of the various departments.

(iii) For physical control on production and maintaining efficiency of the concern, division of
responsibility must be taken into consideration while organising departments. Division of
responsibility as far as possible should be clear, without ambiguity and dual control.

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TYPES OF DEPARTMENTS

In a manufacturing concern, there are three types of departments:

1. Producing Departments:
A department where actual process of manufacturing is carried on is called manufacturing or
producing department. It covers direct manufacture and is engaged in converting raw
materials into finished goods by performing some manual and/or machine operations on
any part of the product. The number of such departments and their number will depend
upon the nature of industry, type of work performed and the size of the factory. For
example, in Steel Rolling Mill, Hot Mill, Cold Mill, Pickling Shop, Annealing Shop,
Hardening, Polishing and Grinding are the producing departments.

2. Service Departments:
Service department is an auxiliary and is not directly engaged in production though its
existence is very essential for smooth and efficient running of production departments.
Such departments are not directly engaged in the conversion of raw materials into finished
goods. Such departments render a particular type of service for the benefit of other
departments.The number of departments in a factory and the names to be assigned to them
depends upon size of the factory, nature of industry and the nature of service rendered. The
service departments, common to most concerns are stores, cost office, personnel
department, planning and progress department, tool room, hospital and dispensary, machine
maintenance and electrical maintenance section etc.

3. Partly Producing Departments:

A department may normally be a service department but sometimes does some productive
work, so it becomes partly producing department. For example, a carpentry shop which is
mainly responsible for the repairs and upkeep of sundry fixtures and fittings may
occasionally be required to manufacture packing boxes for direct charge to outturn, will be
a partly producing department.

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APPORTIONMENT OF OVERHEAD EXPENSES

Cost apportionment is the allotment of proportions of items to cost centres or cost units on an
equitable basis. The term refers to the allotment of expenses which cannot identify wholly with a
particular department. Such expenses require division and apportionment over two or more cost
centres or units.So cost apportionment will arise in case of expenses common to more than one cost
centre or unit. It is defined as the allotment to two or more cost centres of proportions of the
common items of cost on the estimated basis of benefit received. Common items of overheads
are rent and rates, depreciation, repairs and maintenance, lighting, works manager’s salary etc.

BASES OF APPORTIONMENT:
Suitable bases have to be found out for apportioning the items of overhead cost to production and
service departments and then for reapportionment of service departments costs to other service and
production departments. The basis adopted should be such by which the expenses being
apportioned must be measurable by the basis adopted and there must be proper correlation between
the expenses and the basis. This is known as primary distribution.

Basis of apportionment Overheads

1. Direct labour General overheads
2. Value of materials Material handling expenses, stores overheads etc.
3. Direct wages Worker’s insurance, worker’s compensation, fringe benefits,
contribution to provident fund etc.
4. No. of workers Canteen expenses, welfare and recreation expenses,
Time keeping expenses, medical expenses, supervision,
fringe benefits etc.
5. Relative area of Rent, rates and taxes on building, lighting expense,
department Air-conditioning etc.
6. Light points Lighting expenses.
7. Capital value of Depreciation of plants and machinery, repairs an
assets maintenance, insurance charges etc.
8. No. of female Crèche expenses.
employees
9. Kilowatt hours Power

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10. Technical estimate Works manager salary, internal transport, steam, water etc.
Illustration 1.The Modern company is divided into four departments:P1, P2, P3, are production
department and S1 is service department. The actual costs for a period are as follows:
Rent 1000 Power 900
Repairs 600 Light 120
Supervision 1500 Dep. Of plant 450

Following information is available in respect of the four departments:

P1 P2 P3 S1
Area 1500 1100 900 500
Number of employees 20 15 10 5
Total wages 6000 4000 3000 2000
Value of plant 24000 18000 12000 6000
Value of stock 15000 9000 6000 --
H.P. of plant 24 18 12 6

SOLUTION:
Basis of Production department Service
ITEMS apportionment P1 P2 P3 department(S1)
Rs Rs Rs Rs
1.Rent Floor area 375 275 225 125
2.Repairs to plant Plant value 240 180 120 60
3.Depriciation Plant value 180 135 90 45
4.Light Floor area 45 33 27 15
5.Power H.P.of plant 360 270 180 90
6.Supervision No. of employees 600 450 300 150

TOTAL 1800 1343 942 485

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RE-APPORTIONMENT

Service department costs are to be reapportioned to the production departments or the cost centres
where production is going on. This process of reapportionment of overhead expenses is known as
secondary distribution.

Service Department cost Basis of Apportionment

1.Maintenance department
2.Payroll or time-keeping
3.Employment department
4.Store keeping department
5.Purchase department
6.Welfare,ambulance,
service, recreation room expense
7.Building service department
8.Transport department
9.Power house(electric power)
10.Power house
Hours worked for each department.
Total labour or machine hours or number of employees
in each department.
Rate of labour turnover or number of employees in
each department
No. of requisition or value of materials of each
department.
No. of purchase orders or value of materials for each
department
canteen
No. of employees in each department.
Relative area in each department.
Crane hours, truck hours, truck mileage, truck tonnage,
no. of packages.
Wattage, horse power, horse power machine hours, no.
of electric points etc.
Floor area, cubic content etc.

METHODS OF RE-APPORTIONMENT

Direct Re-distribution Step down Reciprocal service

Method Method Method

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Simultaneous Repeated distribution Trial and error

Equation method Method method

DIRECT RE-DISTRIBUTION METHOD

Under this method, the costs of service departments are directly apportioned to production
departments without taking into consideration any service from one service department to another
service department. Thus, proper apportionment cannot be done and the production departments
may either be overcharged or undercharged. The share of each service department cannot be
ascertained accurately for control purposes. Budget for each department cannot be prepared
thoroughly. Therefore Department Overhead rates cannot be ascertained correctly.

ILLUSTRATION 2. In a light engineering factory, the following particulars have been collected
for the three months period ended on 31st march 2019. Re apportion the service department
expenses to production departments.
Production department service department
Expenses as per primary p1 p2 p3 s1 s2
Distribution
Summary 8850 7165 6285 4515 6010
Apportion the expenses of service department s2 in proportion 3:3:4 and those of service
department s1 in the ratio 3:1:
SOLUTION:

PRODUCTION OVERHEADS DISTRIBUTION SUMMARY

For the quarter ending 31st march 2019
Production department Service department
P1 P2 P3 S1 S2
Total expense as per
primary distribution 8850 7165 6285 4515 6010
Reapportionment of s1 2709 903 903 (4515)
Reapportionment of s2 1803 7165 6285 (6010)

Total 13362 9871 9592 -- --

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STEP DOWN METHOD

Under this method the cost of most serviceable department is first apportioned to other service
departments and production departments. The next service department is taken up and its cost is
apportioned and this process goes on till the cost of the last service department is apportioned.
Thus, the cost of last service department is apportioned only to the production departments.

ILLUSTRATION 3:

The Robert Company uses the step method for allocating the costs of its service departments to
operating departments. The company has two service departments and two operating departments.
The selected information for the four departments is given below:

Operating department Service department

X Y A B
Departmental cost before allocation $130500 $344500 $180000 $45000

Employee hours $9000 $15000 $6000 $3000

Space occupied 3000 22000 5000 100

The company uses employee hours as the base for allocating the cost of department A and space
occupied for allocating the cost of department B.

Required: Allocate the cost of service departments to operating departments using step down
method

SOLUTION:

Operating department Service department

X Y A B

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Departmental cost before allocation $130500 $344500 $180000 $45000

Department A cost $60000 $100000 ($180000) $20000

Department B cost $7800 57200 ($65000)

TOTAL $198300 $501700 -- --

SIMULTANEOUS EQUATION METHOD

Under this method, the true cost of the service departments are ascertained first with the help of
simultaneous equations; these are then redistributed to production departments on the basis of given
percentage. This method is preferable and is widely used even if the number of service departments
are more than two. Due to the availability of computer it is not difficult to solve sets of
simultaneous equations. Following illustration may be taken to discuss the application of this
method.

ILLUSTRATION 4: Y ltd. has three production departments (P, Q and R) and two service
departments (X and Y). The total overheads for the departments are given below:

Department Overheads:
P $35,000 Q $64,000 R $19,000 X $22,000 Y$38,000
The reallocation percentages of the service departments' costs are given below:
Department P Q R X Y
X 20% 25% 25% — 10%
Y 25% 30% 30% 15% —

Use the simultaneous equation method to allocate the service department overheads to production
departments.

SOLUTION:
x = total overheads of department X after reallocation
y = total overheads of department Y after reallocation

Then total overhead of department X will be 22,000 + 15% of department Y overhead after
reallocation whereas the total overhead of department Y will be 38,000 + 10% of department X
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overhead after reallocation. Therefore,

x = 22,000 + 0.15y
y = 38,000 + 0.10x

Solving the above equations for x and y we get: X= 28122 AND Y=40182

Total overheads of department X after reallocation = x = 28,122

Total overheads of department Y after reallocation = y = 40,812

NOW:
DEPARTMENT P Q R
Initial overheads 35000 64000 19000
Dept. X reallocation 5624 7030 7030
Dept. Y reallocation 10203 12244 12244
TOTAL 50827 83274 38274

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REPEATED DISTRIBUTION METHOD

Instead of having an algebraic equation, the expenses of one service department may be
apportioned to all other departments (production as well as service) and then the expenses of other
service departments may be similarly treated until the amount apportioned to a service department
becomes insignificant. Then the service departments may be ignored for apportioning the expenses.

ILLUSTRATION 5:

Y ltd. has three production departments (P, Q and R) and two service departments (X and Y). The
total overheads for the departments are given below:
Department Overheads:
P $35,000
Q $64,000
R $19,000
X $22,000
Y $38,000
The reallocation percentages of the service departments' costs are given below:
Department P Q R X Y
X 20% 25% 25% -- 10%
Y 25% 30% 30% 15% —
Reallocate the service department costs in the specified percentages using repeated distribution
method.
SOLUTION:
Departments P Q R X Y
Allocated Overheads 35,000 64,000 19,000 22,000 38,000
Overheads
Dept. X Reallocation 4,400 5,500 5,500 (22,000) 2,200
Total 39,400 69,500 24,500 0 40,200
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Dept. Y Reallocation 10,050 12,060 12,060 6,030 (40,200)

Total 49,450 81,560 36,560 6,030 0
Dept. X Reallocation 1,206 1,508 1,508 (6,030) 603
Total 50,656 83,068 38,068 0 603
Dept. Y Reallocation 151 181 181 90 (603)
Total 50,807 83,248 38,248 90 0
Dept. X Reallocation 18 23 23 (90) 9
Total 50,825 83,271 38,271 0 9
Dept. Y Reallocation 2 3 3 1 (9)
Total 50,827 83,274 38,274 1 0

TRIAL AND ERROR METHOD

Under this method, the cost of one service department is apportioned to another service department.
Now, the cost of another service department plus the share of costs received from the first service
department is again apportioned to first service department. In this way, this process is going on till
the balancing figure becomes negligible.

ILLUSTRATION 6:
The cost of service department X is Rs.234 and that of Y is 300; an analysis reveals that X
department renders 10% of its service to Y and Y renders 20% of its service to X.

SOLUTION:
Departments X Y
Original 234 300
Apportionment (23) 23
65 (323)
(65) 7
1 (7)
TOTAL 300 330

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Sources

Books referred

a. Cost accounting by SPJain and KL Narang (Kalyani publishers)

b. Cost accounting by ML Aggarwal (sahitya bhavan publications)

Web sources

https://www.yourarticlelibrary.com/cost-accounting/overheads-cost-accounting/
allocation-and-apportionment-of-overhead-to-cost-centres/55631

https://icmai.in/upload/CASB/icwaicas3.pdf

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