The document provides information about the overhead costs of various production and service departments of ABC Co. Ltd. It allocates the overhead costs of indirect labor, supervision, power, rent, insurance and depreciation to each department. It then reallocates the overhead costs of three service departments S1, S2 and S3 to the four production departments P1, P2, P3 and P4 using different allocation bases. Finally, it calculates the appropriate overhead absorption rate for each production department.

1. Example
ABC Co. Ltd has four production departments
P1, P2, P3 and P4 and three service departments
S1, S2 and S3.
S1 –stores
S2 –production control section
S3 –maintenance department
Calculate for each production department an
appropriate overhead absorption rate per machine
hour.
Calculate the total cost of each department.
The annual overheads are as follows:

2. Information
Cost Total (Rs.’000)
Indirect labour 2,000
Supervision 200
Power 600
Rent 80
Insurance -Building 160
Insurance -Plant 100
Depreciation -Building 240
Depreciation -Plant 120

3. Information
Indirect Labour Costs
Cost centres Actual costs
Rs.’000
P1 300
P2 200
P3 500
P4 100
S1 200
S2 300
S3 400

4. Information
P1 P2 P3 P4 S1 S2 S3 Total
No. of employee 400 400 500 600 30 20 50 2,000
Floor Area (Sq.M) 3,000 9,000 8,000 8,000 1,000 1,000 2,000 32,000
Power (KWHrs) 7,000 5,000 3,000 2,000 1,500 500 1,000 20,000
Pro.Cntrl Hours 4,000 5,000 5,000 3,000 - - 1,000 18,000
Stores Requisitions 600 300 250 150 - 400 300 2,000
Maint. Dept Hours 6,000 8,000 5,000 6,000 - - - 25,000
Plant Hrs (‘000) 120 80 200 100 - - - 500
Book value of plant 300 200 100 80 120 50 150 1,000
(Rs.’000)

5. Allocation of costs to Production and Service Departments
Item Basis Total P1 P2 P3 P4 S1 S2 S3
Ind. Labour Actual 2000 300 200 500 100 200 300 400
Supervision No. of 200 40 40 50 60 3 2 5
employee
Power KWHr 600 210 150 90 60 45 15 30
Rent & Floor area 80 7.5 22.5 20 20 2.5 2.5 5
Rates
Insurance Floor area 160 15 45 40 40 5 5 10
Building
Insurance Book value 100 30 20 10 8 12 2 15
Plant
Depreciation Floor area 240 22.5 67.5 60 60 7.5 7.5 15
Building
Depreciation Book value 120 36 24 12 9.6 14.4 6 18
Plant
Total 3500 661 569 782 357. 289.4 343 498
6

6. Calculation
Item Basis Total P1
Ind. Labour Actual 2000 300.0
Supervision No. of 200 (200/2,000)*400 = 40.0
Employee
Power KWHr 600 (600/20,000)*7000 = 210.0
Rent & rates Floor area 80 (80/32,000)*3000 = 7.5
Insurance -B Floor area 160 (160/32,000)*3000 = 15.0
Insurance-P Book value 100 (100/1,000)*300 = 30.0
Depreciation-B Floor area 240 (240/32,000)*3000 = 22.5
Depreciation-P Book value 120 (120/1,000)*300 = 36.0
Total 3500 661.0

7. Reallocation of Service Department Overheads to
Production Departments
Item Basis Total P1 P2 P3 P4 S1 S2 S3
Total 3500 661.0 569.0 782.0 357.6 289.4 343.0 498.0
costs
S1- Store - 86.8 43.4 36.2 21.7 - 57.9 43.4
stores req 289.4
S2-Pro Prodn 3500 748.8 612.4 818.2 379.3 - 400.9 541.4
Control control 89.1 111.35 111.35 66.8 - -400.9 22.3
S3- Main 3500 837.9 723.75 929.55 446.1 - - 563.7
Maint Hrs 135.3 180.4 112.7 135.3 - - -
563.7
Total 3500 973.2 904.15 1042.25 581.4 - - -

8. S1- Store - 87.8 43.4 36.2 21.7 (289.4) 57.9 43.4
stores req
• S1 P1 (289.4/2000)*600 = 86.82 ≈ 86.8
P2 (289.4/2000)*300 = 43.41 ≈ 43.4
P3 (289.4/2000)*250 = 36.18 ≈ 36.2
P4 (289.4/2000)*150 = 21.71 ≈ 21.7
S2 (289.4/2000)*400 = 57.88 ≈ 57.9
S3 (289.4/2000)*300 = 43.41 ≈ 43.4
Total 289.4

9. S2-Pro Prodn 3500 748.8 612.4 818.2 379.3 - 400.9 541.4
Control control 89.1 111.35 111.35 66.8 - (400.9) 22.3
• S2 P1 (400.9/18,000)* 4000= 89.08 ≈ 89.1
P2 (400.9/18,000)* 5000=111.35
P3 (400.9/18,000)* 5000=111.35
P4 (400.9/18,000)* 3000=66.81 ≈ 66.8
S3 (400.9/18,000)* 1000=22.27 ≈ 22.3

10. S3- Plant 3500 837.9 723.75 929.55 446.1 - - 563.7
Maint Hrs 135.3 180.4 112.7 135.3 - - (563.7)
S3 P1 (563.7/25,000)*6000 =135.288 ≈ 135.3
P2(563.7/25,000)*8000 =180.384 ≈ 180.4
P3(563.7/25,000)*5000 =112.74 ≈ 112.7
P4 (563.7/25,000)*6000 =135.288 ≈ 135.3
Total 563.7

11. Calculation of appropriate departmental
overhead rates
• Based on machine hours
P1 = 973.3/120 = 8.11 per M/C hour
P2 = 904.15/80 = 11.30 per M/C hour
P3 =1042.25/200 = 5.21 per M/C hour
P4 = 581.4/100 = 5.81 per M/C hour

12. Charging Overhead Rates to Products
Overhead costs in each cost centre should be
absorbed by the products, at an absorption rate
of each product.
Pro.Dep. Job1(hours) Job2(hours) Job3(hours)
P1 3 12 1.5
P2 2.5 0 4
P3 0 5 10
P4 5 0 3

13. • Then, based on the production hours the
overhead costs chargeable are as follows:
• Job 1 = 3*8.11+2.5*11.3+5*5.81 = 81.63
• Job 2 = 12*8.11+5*5.21 = 123.37
• Job 3 = 1.5*8.11+4*11.3+10*5.21+3*5.81 =

14. Allocation service department costs
Example
A manufacturing firm has three production
departments, P1, P2 and P3, and two service
departments, S1and S2. the following costs are
shown in the overhead distribution sheet.
production dep. P1 = Rs. 5000
production dep. P2 = Rs. 8000
production dep. P3 = Rs. 6000
service dep. S1 = Rs. 1280
service dep. S2 = Rs. 3000
Total = Rs.23,280

15. • The costs of the two service departments S1
and S2 are to be re-apportioned to production
departments using the following basis.
S1 S2
P1 20% 30%
P2 40% 30%
P3 10% 20%
S1 - 20%
S2 30% -
Total 100% 100%

16. • There are 3 basic methods of allocating
service department costs.
1. Continuous Allotment
2. Simultaneous Equation method
3. Specified order of Re-Allocation

17. Continuous Allotment
Costs of service departments are re-allocated to other
departments repeatedly until the amount remaining is too
insignificant.
s1 s2
P1 20% 30%
P2 40% 30%
P3 10% 20%
S1 - 20%
S2 30% -
Total 100% 100%

18. Total P1 P2 P3 S1 S2
Cost before 23280 5000 8000 6000 1280 3000
re-allocation
Dept S1 256 512 128 (1280) 384
Dept. S2 1015 1015 677 677 (3384)
135 271 68 (677) 203
61 62 40 40 (203)
8 16 4 (40) 12
3.6 3.6 2.4 2.4 (12)
4 4 3 - -
Total 2380 6479 9880 6920

19. Simultaneous equation method
X=total cost of S1 after receiving 20% cost of S2
Y=total cost of S2 after receiving 30% cost of S1
X=1280+0.2Y
Y=3000+0.3X
By solving two equation above,
X=2000 and Y=3600

20. As above Total P1 P2 P3
Cost before 19000 5000 8000 6000
re-allocation
Dept S1 2000 1400* 400* 800* 200*
Dept S2 3600 2880 1080 1080 720
Total 23280 6480 9880 6920
(2000/100)*70 (1400/70)*20 (1400/70)*40 (1400/70)*10
=1400 =400 =800 =200

21. Specified order of Re-allocation
• Assume that service dept. costs are first allocated to S1 and then to
S2.
S1 S2
30*(100/80)
P1 20% 37.5%
P2 40% 37.5% 30*(100/80)
P3 10% 25.0% 20*(100/80)
S1 - -
S2 30% -
Total 100% 100%

22. Total P1 P2 P3 S1 S2
Cost before 23280 5000 8000 6000 1280 3000
re-allocation
Dept S1 256 512 128 (1280) 384
Dept. S2 1269 1269 846 - (3384)
Total 2380 6525 9781 6974 - -
(1280/100)*20 (1280/100)*40 (1280/100)*10 (1280) (1280/100)*30
=256 =512 =128 =384