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Overheads
Overheads
• Reapportionment Methods
• Non-Manufacturing Overheads
REVENUE EXPENDITURE AND CAPITAL EXPENDITURE
maintain existing fixed assets. It is charged to the profit and loss account as an expense.
Capital expenditure is expense incurred in the acquisition of fixed assets. It is not charged to
the profit and loss account as an expense. The expenditure is capitalised as a fixed asset and
a depreciation amount is charged to the profit and loss account to write off the capital
They become part of the production cost. For example, Production supervisor’s salary, Nails
indirectly, related to the production. They cover Selling, Distribution, Administration and
Overheads are not charged directly into cost units. However, they charged to the cost units
to avoid under-estimation of product costs which may end up with under-setting the product
selling price. They charge to cost centers, where they converted to unit rate and than
cost centre (production cost centre and service cost centres) then share overheads of
service cost centres to production cost centres and charge them to cost units.
In absorption costing system there are four steps of charging overhead costs to cost centres
1. Allocation.
2. Apportionment.
3. Re-apportionment.
4. Absorption.
1. Allocation
Costs that relate to a single cost centre are allocated to that cost centre. Mostly
It relates to costs that can be identified with a specific cost centre, which is why it is directly
centres and therefore needs to be shared out amongst the relevant cost centres on the
100,000 square feet. The assembly department takes up 6,000 square feet and the stores
How much of the total rent should be apportioned to the assembly department and the stores
department?
Production Cost Centers Service Cost Centers
Particulars Basis Total
Machining Assembly Finishing Stores Maintenance
ALLOCATION
APPORTIONMENT
Production Cost Centers Service Cost centers
Particulars Basis Total
Machining Assembly Finishing Stores Maintenance
After
415,358 325,714 245,000 159,219 59,709 1,205,000
Apportionment
REAPPORTIONMENT
Stores
Maintenance
3. Reapportionment
Service departments are cost centres, which exist to provide services to other departments.
The canteen is a common example. Having allocated and apportioned the costs to the
production and service departments, the totals of service cost centres, then latter need to
be reapportioned to the production cost centres.
BASIS OF REAPPORTIONMENT
Formula:
Reapportionment Methods
of each cost unit. The amount of overhead that is to be treated as a cost of each cost unit
ℎ
ℎ
The total of the overheads in each production department must now be absorbed into the
Example 8:
Example 9:
Example 10:
Example 11:
Example 12:
The following data was collected for a water supply factory:
b. Machine hour
e. Prime cost
f. Production cost
Actual overheads =X
Under/Over-Absorbed =X
• Absorbed OHs > Actual OHs = OVER absorption (add in profit as income)
• Absorbed OHs < Actual OHs = UNDER absorption (deduct from profit as expense)
If actual overheads incurred are not given then an assumption can be taken that
Example 13:
There are two options available for apportioning non-manufacturing costs to cost units:
• Method-1
Choose a basis for apportioning non-manufacturing overheads which fairly reflects non-
such cost. For example manufacturing cost may be used to apportion non-manufacturing
cost to product