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Specimen Question 3 Solutions

The document outlines the cost allocation and apportionment for a company with three production departments and one service department. It details the overhead absorption rates for each cost center based on direct labor hours and machine hours, as well as the total overhead cost for a product based on its resource usage. Finally, it calculates the unit cost of the product by adding direct and indirect costs.

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Ahmed Qayyum
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25 views4 pages

Specimen Question 3 Solutions

The document outlines the cost allocation and apportionment for a company with three production departments and one service department. It details the overhead absorption rates for each cost center based on direct labor hours and machine hours, as well as the total overhead cost for a product based on its resource usage. Finally, it calculates the unit cost of the product by adding direct and indirect costs.

Uploaded by

Ahmed Qayyum
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Specimen Question 3

A company has 3 production departments and one service department. They are divided into the
following cost centres: machining (M), assembly (A), finishing (F) and storage (S).
The following cost data has been extracted from the account:
Allocated costs

M (£) A (£) F (£) S (£)


Indirect materials 1,800 2,000 2,600 -
Indirect wages 1,200 1,000 2,400 3,000

Overhead requiring apportionment

£ Method of apportionment over cost


centres
Rent 3,500 Floor space occupied
Rates 2,500 Floor space occupied
Light and Heat 4,650 Floor space occupied
Building repairs 5,500 Floor space occupied
Plant depreciation 5,200 Machine hours

Additional information

M A F S
Area occupied (m²) 1,500 3,500 2,500 500
Plant cost (£) 4,800 7,300 6,700 4,250
Direct labour hours 3,000 1,250 1,750 -
Machine hours 1,000 2,000 2,000 -
No. of storage requisitions 50 100 100 -

The cost of S is apportioned to production cost centres using the number of storage requisitions as
a method of apportionment.
Determine:
1. The overhead absorption rate for:
a. Cost centre M using a direct labour hours basis
b. Cost centre A using a machine hours basis
c. Cost centre F using a direct labour hours basis

2. If one unit of product B spent 2 direct labour hours in the M department, 2 machine hours in
the A department and 3 direct labour hours in the F department, calculate the total overhead
cost for the product.

3. The unit cost of B if direct costs are £25 per unit.


Solution:

(on next page)

2
1.
Allocated costs
M A F S
(£) (£) (£) (£)
Indirect 1800 2000 2600 -‐-‐
materials
Indirect 1200 1000 2400 3000
wages
Tot. 3000 3000 5000 3000

Apportionment of common costs:


TOT. M A F S
(£) (£) (£) (£)
Rent 3500 656.25 1531.25 1093.75 218.75

Rates 2500 468.75 1093.75 781.25 156.25

Light & Heat 4650 871.88 2034.38 1453.13 290.63

Building repairs 5500 1031.25 2406.25 1718.75 343.75

Plant depreciation 5200 1040.00 2080.00 2080.00 0.00

Tot. 21350 4068.13 9145.63 7126.88 1009.38

Total overhead cost

M A F S
(£) (£) (£) (£)
Allocated 3000 3000 5000 3000
costs
Apportion 4068.13 9145.63 7126.88 1009.38
cost
Tot. 7068.13 12145.63 12126.88 4009.38
overhead

Apportionment of service centre cost to production centres

M A F S
(£) (£) (£) (£)
Tot. overhead (as
7068.13 12145.63 12126.88 4009.38
above)

3
S apportioned 801.88 1603.75 1603.75 (4009.38)
Total after
apportionment 7870.01 13749.38 13730.63 0

Overhead absorption rates:

Cost centre M:
OAR = Department Cost /Tot. labour hrs. = 7870.01 / 3000 = £2.62 per labour hour

Cost centre A:
OAR = Department Cost /Tot. machine hrs. = 13749.38 / 2000 = £6.87 per machine hour

Cost centre F:
OAR = Department Cost /Tot. labour hrs. = 13730.63 / 1750 = 7.85 per labour hour

2.
Overhead cost for B:
(2 x 2.62) + (2 x 6.87) + (3 x 7.85) = 5.24 + 13.74 + 23.55 = £42.53

3.
Unit cost for B:
(direct costs + indirect costs) = 25 + 42.53 = £67.53 per unit

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