MA Management Accounting

Allocation and Apportionment of Overheads

Allocation and Apportionment of Overheads
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Allocation of overheads (OH)

Apportionment of overheads (OH)

 

  • Charging to overhead to specific department

 

 

 

 

 

 

 

 

 

 

 

  • If OH relate to more than one department then they are apportioned on suitable basis
  • Apportionment is made on reasonable basis like area, number of employees

 

SECONDARY APPORTIONMENT

  • Service departments like canteens offer services but do not have production
  • Cost of these services center is charged to production centers
  • Secondary apportionment can be made by three ways: elimination, repeated distribution, algebraic methods

 

 

 

 

 

Methods for secondary apportionment of service overhead

When service department is giving its services to other service departments and production departments then following method are used

  • Repeated Distribution Method
  • Simultaneous Equation Method → When there are only two service departments
  • Direct Method
  • Step Method

REPEATED DISTRIBUTION METHOD

If service department apportion its cost to production departments and other service departments and that other service departments likewise apportion their costs to production departments and apportion back to other service departments until total cost of both service departments are apportion to the production departments.

ParticularsProduction department 1Production department 2Service department  S1Service department  S2
BUDGETED OVERHEADXXXXXXXXXXXXXXXX
Allocation of S1XXXXXXXX(XXXX)XXXX
Allocation of S2XXXXXXXXXXXX(XXXX)
Reallocation of S1XXXXXXXX(XXXX)−−−−−
Total Budgeted OverheadXXXXXXXX−−−−−−−−−−

 

 

ALGEBRIC METHOD (SIMULTANEOUS EQUATION METHOD)

 

Simultaneous equation method is used when only there are only two service departments

In this method we use equation to allocate the service departments’ expenses to production departments.

For Example

ParticularsProduction DepartmentService Department
ABXY
X Allocation50%30%20%
Y Allocation40%50%10%
EXPENSES500,000400,000100,00060,000

 

Equation for service Departments

X = 100,000 + 0.1 Y

Y = 60,000 + 0.2 X

 

DIRECT METHOD

If service department apportion its cost only to production Department.

Recognition of Direct Method (When Statement is used)

Service department apportion their cost only to production departments

 

Step method

If first service department apportion its cost to production department and other service department and that other service department apportion its cost to production department and does not reapportion its cost to first service department or does not apportion back its cost to first service department.

 

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