Chapter 13

Overheads need to be shared out between the products.

  • allocation
  • apportionment
  • overhead absorption
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Apportionment

Things like factory rent cannot be allocated to one cost centre. The cost is shared between 3 cost centres and this is called apportionment. Apportionment is sharing out the costs between the cost centres in which they relate to.
cost centre - a part of the business which costs can be charged. 

Basis for apportionment can be: floor area, NBV of machinery, Machine hours and number of employees.  This is an overhead analysis sheet. It shows how things are apportioned and the total costs involved.

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Apportionment

Things like rent or insurance cannot be allocated to one cost centre. Instead it is apportioned to more than one centre.
The basis of apportionment is how the cost will be shared out. In this case, we will use floor area.
If rent is £12800 and we are going to share them between the floor plan of the factory which consist of chairs: 150msquared ,  tables: 120m squared and stored: 50 m squared.
They equal 320m squared.
Chairs: 150/320 x 12800 = £6000
Tables: 120/320 x 12800 = £4800
Store:  50/320 x 12800 = £2000

Other basis for apportionment is: number of employees, net book value of machinery and machine usage (hours) 

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Service cost centres

A service cost centre is any cost centre that is not a production cost centre. It provides a service to the business. examples: stores, canteen and admin.

If there are more than one service cost centre, how do we apportion them?

If one cost centre like stores, provides a service to another service centre like maintenance, we apportion that one first. 

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Overhead absorption rate.

Overhead absorption rate is: an amount of overhead that related to one unit of the absorption chose basis; machine hours or labour hours.

If a product takes 2 labour hours to make and costs £5 per labour hour, then 2 x 5 = £10 of overhead added to the product cost.

Overhead absorption rate = fixed costs / labour or machine hours.    all units manufactured in the year will have this amount of overhead included in the cost.

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