OVE RHEAD QU ES TION

WALKTHR OU G H
DECEMBER 2019
DECEMBER 2019 - REQUIREMENTS
a) Identify the most suitable basis of apportionment for the overhead costs
below:
• Rent and rates of office
• Power expenses
• Insurance on factory
• Supervisor’s salaries
b) Prepare an overhead analysis sheet, showing clearly the basis of
apportionment and reapportionment. (Round up your answers to the
nearest RM).
c) Calculate the overhead absorption rate (OAR) for each production
department by using the appropriate basis of absorption. (Round up your
answer up to two decimal places).
DECEMBER 2019 - REQUIREMENTS
d) The actual information regarding the overhead cost and activities are
provided below:

Measuring Cutting Assembling

Total overheads (RM) 190,500 160,000 135,000
Direct labour hours 5,200 1,650 1,550
Machine hours 2,250 3,100 2,900

Required:
Calculate the over- or under-absorption of overheads for each
production department. (Round up your answer to the nearest RM).
SUGGESTED SOLUTIONS
a) Identify the most suitable basis of apportionment for the overhead costs
below:
• Rent and rates of office – FLOOR AREA
• Power expenses – HORSE POWER
• Insurance on factory – FLOOR AREA or COST OF FACTORY
• Supervisor’s salaries – NUMBER OF EMPLOYEES
SUGGESTED SOLUTIONS
b) Prepare an overhead analysis sheet, showing clearly the basis of
apportionment and reapportionment. (Round up your answers to the nearest
RM).

To answer this requirement, you need to draw a table. Look at the questions.
Determine how many departments does the company have? In this question,
Cannon Creek Sdn has a total of 5 departments (3 production departments
and 2 service departments). So, in order to determine how many columns the
table should have is by taking the number of departments + 3 columns = 5 +
3 = 8 columns. So, for this question, you should have 8 columns table.
 OVERHEAD ANALYSIS SHEET
Overheads Basis Total Measuring Cutting Assemblying Store Canteen

This will be roughly how your table should look like.

The next thing that you need to do is to perform the allocation of
overheads process. In order for you to do this, you need to identify the
overheads which are already allocated specifically to individual
departments.
OVERHEAD ANALYSIS SHEET

In this question, indirect material and indirect labour are the allocated
overheads as the amounts are already allocated to individual
departments.
 OVERHEAD ANALYSIS SHEET
Overhead Total Measuring Cutting Assembling Store Canteen
Basis (RM) (RM) (RM) (RM) (RM)
costs (RM)
Indirect Direct
material allocation
250,000 90,000 65,000 55,000 40,000 -

Indirect Direct
labour allocation
180,000 80,000 30,000 30,000 30,000 10,000

When you are filling in the table, write the name of the overhead
costs that are directly allocated in each row (Indirect material and
indirect labour). In the BASIS column, please state as DIRECT
ALLOCATION for both overhead costs. The rest of the figures can
be just copied directly from the question given.
 APPORTIONMENT OF OVERHEADS
The next step is to the APPORTIONMENT OF OVERHEADS. The
apportionment of overheads are required for the overhead costs that are
given in total instead of individual figures (highlighted in grey below).
 APPORTIONMENT OF OVERHEADS
• To perform the apportionment of overheads, you need to identify the most suitable
basis for each of the overhead items that you want to apportion (apportion simply
means that you need to distribute the overheads to the different department on a
suitable basis).
• For example in this question you have 4 overheads that you need to apportion:
equipment depreciation, factory insurance, supervision and utilities.
• The best basis of apportionment for each overhead is identified as follows:
1. Equipment depreciation – Book value of equipment
2. Factory insurance – floor area (square foot)
3. Supervision – number of employees
4. Utilities – floor area (square foot)
* The choice of the basis must be chosen from the options given in the question.
APPORTIONMENT OF OVERHEADS

The choice of apportionment basis can be chosen from this table in the
question.
APPORTIONMENT OF OVERHEADS

• When the basis of apportionment has been identified for each

overhead costs, the next step that you need to do is to
calculate the apportioned amount of overheads for each
relevant department. In the following slides, there will be a
complete calculations of each apportioned overheads before
transferring them to the overhead analysis sheet
APPORTIONMENT OF OVERHEADS -
EQUIPMENT DEPRECIATION
Equipment depreciation = RM30,000
Basis of apportionment = book value of equipment

Measuring = 30,000/150,000 X RM30,000 = RM6,000

Cutting = 65,000/150,000 X RM30,000 = RM13,000
Assembling = 45,000/150,000 X RM30,000 = RM9,000
Store = 8,000/150,000 X RM30,000 = RM1,600
Canteen = 2,000/150,000 X RM30,000 = RM400
APPORTIONMENT OF OVERHEADS –
FACTORY INSURANCE
Factory insurance = RM15,000
Basis of apportionment = Floor area

Measuring = 2,000/6,000 X RM15,000 = RM5,000

Cutting = 1,200/6,000 X RM15,000 = RM3,000
Assembling = 1,200/6,000 X RM15,000 = RM3,000
Store = 1,000/6,000 X RM15,000 = RM2,500
Canteen = 600/6,000 X RM15,000 = RM1,500
APPORTIONMENT OF OVERHEADS –
SUPERVISION
Supervision = RM40,000
Basis of apportionment = Number of employees

Measuring = 8/25 X RM40,000 = RM12,800

Cutting = 7/25 X RM40,000 = RM11,200
Assembling = 5/25 X RM40,000 = RM8,000
Store = 2/25 X RM40,000 = RM3,200
Canteen = 3/25 X RM40,000 = RM4,800
APPORTIONMENT OF OVERHEADS –
UTILITIES
Utilities = RM50,000
Basis of apportionment = Floor area

Measuring = 2,000/6,000 X RM50,000 = RM16,667

Cutting = 1,200/6,000 X RM50,000 = RM10,000
Assembling = 1,200/6,000 X RM50,000 = RM10,000
Store = 1,000/6,000 X RM50,000 = RM8,333
Canteen = 600/6,000 X RM50,000 = RM5,000
 OVERHEAD ANALYSIS SHEET
• So, once you have calculated the apportioned overheads, you can
transfer the figures to the table, after the allocated overheads.
Overhead Total Measuring Cutting Assembling Store Canteen
Basis (RM) (RM) (RM) (RM) (RM)
costs (RM)
Indirect Direct
material allocation
250,000 90,000 65,000 55,000 40,000 -

Indirect Direct
labour allocation
180,000 80,000 30,000 30,000 30,000 10,000

Equipment Book value

depreciation of equipment
30,000 6,000 13,000 9,000 1,600 400

Factory
insurance
Floor area 15,000 5,000 3,000 3,000 2,500 1,500

Number of
Supervision
employees
40,000 12,800 11,200 8,000 3,200 4,800

Utilities Floor area 50,000 16,667 10,000 10,000 8,333 5,000

 OVERHEAD ANALYSIS SHEET
• The next step is to calculate the total allocated and apportioned overheads
before proceeding to the next part.
Overhead Total Measuring Cutting Assembling Store Canteen
Basis (RM) (RM) (RM) (RM) (RM)
costs (RM)
Indirect Direct
material allocation
250,000 90,000 65,000 55,000 40,000 -

Indirect Direct
labour allocation
180,000 80,000 30,000 30,000 30,000 10,000

Equipment Book value

depreciation of equipment
30,000 6,000 13,000 9,000 1,600 400

Factory
insurance
Floor area 15,000 5,000 3,000 3,000 2,500 1,500

Number of
Supervision
employees
40,000 12,800 11,200 8,000 3,200 4,800

Utilities Floor area 50,000 16,667 10,000 10,000 8,333 5,000

Total
allocated and
565,000 210,467 132,200 115,000 85,633 21,700
apportioned
OH
REAPPORTIONMENT OF OVERHEADS
• The next part of the Overhead Analysis Sheet is to do the reapportionment
of the service department overheads. This part is about redistributing the
overheads in the Service Departments to the Production Departments.
• At the end of the calculation, there should not be any overheads left for
the Service Departments. Why? This is because, only the Production
Departments are producing goods. The Service Departments are only
providing service to them.
• So, in order to pass the overheads cost to the goods produced, they must
first be redistributed to the Production Departments.
• How to do it? The process is similar to the Apportionment of Overheads.
Basis of reapportionment must be determined.
 REAPPORTIONMENT OF OVERHEADS
• To perform the reapportionment of overheads, you need to identify the most suitable
basis for each of the overhead items that you want to reapportion (reapportion simply
means that you need to distribute the overheads from the Service Departments to
the Production Departments on a suitable basis).
• For example in this question you have 2 Service Departments (Store and Canteen).
• The best basis of reapportionment for each Service Departments are as follows:
1. Store – Material handling (%)
2. Canteen – Number of employees

* The choice of the basis must be chosen from the options given in the question.
REAPPORTIONMENT OF OVERHEADS

The choice of reapportionment basis can be chosen from this table in the
question.
REAPPORTIONMENT OF OVERHEADS

• When the basis of reapportionment has been identified for each Service
Departments, the next step that you need to do is to calculate the
reapportioned amount of overheads for each Production Department. In
the following slides, there will be a complete calculations of each
reapportioned overheads before transferring them to the overhead
analysis sheet
REAPPORTIONMENT OF OVERHEADS –
STORE
Store = RM85,633 (this figure is derived from the Overhead Analysis Sheet)
Basis of apportionment = Material handling (%)
Measuring = 30/80 X RM85,633 = RM32,112
Cutting = 20/80 X RM85,633 = RM21,408
Assembling = 30/80 X RM85,633 = RM32,112
Store = Not applicable
Canteen = 0/80 X RM85,633 = RM0
* The total material handling percentage is 100%. Since there is a 20% portion for Store
Department itself, it must be deducted from the total material handling % (100% - 20% = 80%). You
cannot reapportioned Store’s overhead to Store Department itself)
 OVERHEAD ANALYSIS SHEET
• The next step is to update the total reapportioned overheads of Store
Department’s overhead.
Overhead Total Measuring Cutting Assembling Store (RM) Canteen
Basis (RM) (RM) (RM) (RM)
costs (RM)

Total allocated
and
565,000 210,467 132,200 115,000 85,633 21,700
apportioned
OH

Reapportioned
overheads

Store 32,112 21,408 32,112 (85,633) 0

The reapportioned overheads must be

deducted from it’s own department
APPORTIONMENT OF OVERHEADS –
CANTEEN
Canteen = RM21,700 (figures are as of previous table. If there is amount of
reapportioned overheads from Store Department, it should be added before
being reapportioned to the rest of the departments)
Basis of apportionment = Number of employees
Measuring = 8/22 X RM21,700 = RM7,891
Cutting = 7/22 X RM21,700 = RM6,905
Assembling = 5/22 X RM21,700 = RM4,932
Store = 2/22 X RM21,700 = RM1,973
Canteen = not applicable
* The total number of employees are 25. Since there are 3 employees in the Canteen Department itself,
it must be deducted from the total number of employees (25 - 3 = 22). You cannot reapportioned
Canteen’s overhead to Canteen Department itself)
 OVERHEAD ANALYSIS SHEET
• The next step is to update the total reapportioned overheads of Canteen
Department’s overhead.
Overhead Total Measuring Cutting Assembling Store (RM) Canteen
Basis (RM) (RM) (RM) (RM)
costs (RM)

Total allocated
and
565,000 210,467 132,200 115,000 85,633 21,700
apportioned
OH

Reapportioned
overheads

Store 32,112 21,408 32,112 (85,633) 0

Canteen 7,891 6,905 4,932 1,973 (21,700)

The reapportioned overheads must be

deducted from it’s own department
REAPPORTIONMENT OF OVERHEADS –
STORE
Store = RM1,973 (this step is being done again as there is an amount of
reapportioned overheads from the Canteen Department)
Basis of apportionment = Material handling (%)
Measuring = 30/80 X RM1,973 = RM740
Cutting = 20/80 X RM1,973 = RM493
Assembling = 30/80 X RM1,973 = RM740
Store = Not applicable
Canteen = 0/80 X RM1,973 = RM0
* The total material handling percentage is 100%. Since there is a 20% portion for Store
Department itself, it must be deducted from the total material handling % (100% - 20% = 80%). You
cannot reapportioned Store’s overhead to Store Department itself)
 OVERHEAD ANALYSIS SHEET
• The next step is to update the total reapportioned overheads of Store
Department’s overhead after the reapportionment from Canteen Department.
Overhead Total Measuring Cutting Assembling Store Canteen
Basis (RM) (RM) (RM) (RM) (RM)
costs (RM)

Total allocated
and
565,000 210,467 132,200 115,000 85,633 21,700
apportioned
OH

Reapportioned
overheads

Store 32,112 21,408 32,112 (85,633) 0

Canteen 7,891 6,905 4,932 1,973 (21,700)

Store 740 493 740 (1,973) 0

The reapportioned overheads

must be deducted from it’s own
department
 OVERHEAD ANALYSIS SHEET
• The final step in the Overhead Analysis Sheet is to make add up the Total Overheads for the
Production Departments. Make sure that the overheads in the Service Departments are
already ZERO.
Overhead Total Measuring Cutting Assembling Store (RM) Canteen
Basis (RM) (RM) (RM) (RM)
costs (RM)

Total allocated
and
565,000 210,467 132,200 115,000 85,633 21,700
apportioned
OH

Reapportioned
overheads

Store 32,112 21,408 32,112 (85,633) 0

Canteen 7,891 6,905 4,932 1,973 (21,700)

Store 740 493 740 (1,973) 0

Total
565,000 251,210 161,006 152,784 0 0
Budgeted OH
SUGGESTED SOLUTIONS

c) Calculate the overhead absorption rate (OAR) for each

production department by using the appropriate basis of
absorption. (Round up your answer up to two decimal
places).
OVERHEAD ABSORPTION RATE (OAR)
Overhead absorption rate is a pre-determined rate (estimation rate)
used to know how much overhead has been absorbed during the year.

OAR = Total Budgeted Production Overhead

Total Budgeted Basis

OAR must be calculated for every Production Department. The basis that
will be used to calculate OAR will be identified in the question. Normally, it
is either using direct labour hours or machine hours as the basis.
OVERHEAD ABSORPTION RATE (OAR)

The highlighted statements mentioned about the Production Departments

and its working orientation. The Measuring department is using direct
labour, which means you need to use direct labour hours as the basis
when calculating its OAR. For the Cutting and Assembling departments,
they are said to be machine-oriented. So, you need to use machine hours
as the basis when calculating their OARs.
OVERHEAD ABSORPTION RATE (OAR)

The highlighted two items above are the basis to be used for the
calculation of OAR. Take note of the individual basis for each
department.
 OVERHEAD ABSORPTION RATE (OAR)
Measuring Cutting Assembling
Total budgeted
251,210 161,006 152,784
overheads (RM)
Basis Direct labour Machine Machine
hours hours hours
Budgeted basis 6,500 3,200 3,300
OAR
= Total budgeted RM251,210 RM161,006 RM152,784
overheads ÷ 6,500 3,200 3,300
budgeted basis
= RM38.65 per = RM50.31 per = RM46.30 per
OAR
direct labour hour machine hour machine hour
 OVER – OR UNDER-ABSORPTION OF
OVERHEADS
d) The actual information regarding the overhead cost and activities are
provided below:
Measuring Cutting Assembling
Total overheads (RM) 190,500 160,000 135,000
Direct labour hours 5,200 1,650 1,550
Machine hours 2,250 3,100 2,900

Required:
Calculate the over- or under-absorption of overheads for each
production department. (Round up your answer to the nearest RM).
OVER – OR UNDER-ABSORPTION OF
OVERHEADS
• Because OAR is based on estimation rate, there will be a difference
between the overhead absorbed & actual overhead incurred at the end
of costing period.
Under Absorption Actual Overhead > Absorbed Overhead

Over Absorption Absorbed > Actual Overhead

Absorbed Overhead = OAR X Actual Activity

OVER – OR UNDER-ABSORPTION OF
OVERHEADS
• In order to calculate whether there is an over-absorbed or
under-absorbed of overhead for each department, you need
to compare the absorbed overheads with the actual overhead
for every department.
 OVER – OR UNDER-ABSORPTION OF
OVERHEADS
Measuring Cutting Assembling
Absorbed RM38.65 X 5,200 RM50.31 X 3,100 RM46.30 X 2,900 =
overheads (RM) = 200,980 = 155,961 134,270
Actual overheads
(RM) 190,500 160,000 135,000

Difference 10,480 (4,039) (730)

Over- or under-
absorbed Over-absorbed Under-absorbed Under-absorbed

When the difference is in positive figure, it will be over-absorbed. If the

difference is in negative figure, it will be under-absorbed.