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Cost and Management Accounting

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Cost & Management Accounting (MGT-402)
VU
LESSON # 15
ALLOCATION AND APPORTIONMENT OF FOH COST
Bases for apportioning costs
In selecting a basis for apportioning an overhead item, the cost of obtaining a high degree of
accuracy must be considered. For example, the charge for heat and light could be shared on the
basis of a complex formula incorporating power points, light bulbs and wattage but you should be
aware that the end result will still be open to question. When answering examination questions, you
may have to use your own judgment in relation to the information given as it is impracticable to
provide a comprehensive list of bases to cover every situation.
Practice Question
Plastic Pots & Furniture
Basis of Apportionment
Production Department
Service Department
Molding Machining Finishing Canteen Maintenance
Materials (Rs.)
300,000
130,000
45,000
40,000
75,000
Wages (Rs.)
400,000
750,000
755,000
95,000
100,000
Cost of Assets
125,000
250,000
130,000
70,000
75,000
(Rs.)
Horse Power
700
1,400
600
88
200
Hour
Area in Sq.
180
180
240
60
60
Yard
Metered Units
6,000
6,000
7,000
2,000
3,000
No. of
240
300
380
30
80
Employees
Plastic Pots & Furniture
Work Sheet
Apportionment of Factory Overhead Product Department
Production Department
Service Department
Cost Heads
Total
Machine
Molding Machining Finishing Canteen
Maintenance
Allocated
Cost
(Identified)
Materials
40,000
75,000
115,000
Labor Wages
95,000
100,000
195,000
135,000
175,000
310,000
Electricity
13,500
13,500
15,750
4,500
6,750
54,000
Bonus Pay
4,000
7,500
7,550
950
1,000
21,000
105
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Cost & Management Accounting (MGT-402)
VU
Factory Rent
60,000
60,000
80,000
20,000
20,000
240,000
Power
175,000
350,000
150,000
22,000
50,000
747,000
Depreciation
37,500
75,000
39,000
21,000
22,500
195,000
c/f
203,450
275,250
156,700
Apportionment Electricity
Basis: Metered units
Canteen
Machine
Molding
Machining
Finishing
Total
Maintenance
2,000
3,000
6,000
6,000
7,000
24,000
2
3
6
6
7
24
2/24
3/24
6/24
6/24
7/24
Molding
54,000x 6/24
13,500
Machining
54,000x 6/24
13,500
Finishing
54,000x 7/24
15,750
Canteen
54,000x 2/24
4,500
Machine
54,000x 3/24
6,750
maintenance
Apportionment Bonus Pay
Basis: Labor wages
Molding
Machining
Finishing
Canteen
Machine
Total
Maintenance
400,000
750,000
755,000
95,000
100,000  2,100,000
400
750
755
95
100
2100
400/2100
750/2100
755/2100
95/2100
100/2100
Molding
21,000/2100*400
4,000
Machining
21,000/2100*750
7,500
Finishing
21,000/2100*755
7,550
Canteen
21,000/2100*95
950
Machine maintenance
21,000/2100*100
1,000
Reciprocal costs between service centers
A particular problem arises when service centers provide reciprocal services to each
other as in the following figure.
106
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Cost & Management Accounting (MGT-402)
VU
Maintenance
Payroll
Department
Section
In this situation, a secondary allocation of costs arises. There are a number of methods of dealing
with this, of which the simplest, the repeated distribution method, is shown below.
Repeated distribution method
This method takes each service department in turn and re-allocates its costs to all departments
which benefit. The re-allocation continues until the numbers being dealt with become very small.
Problem Question
Production
Service
Department
A
B
C
P
Q
Costs Proportion
Rs.3,000
Rs.4,000
Rs. 2,000
Rs.2,500
Rs.2,700
P Proportion Q
20
30
25
-
25
25
25
30
20
-
Apportion the cost of Service department to the Production departments. To calculate the cost of
a cost unit we must include a fair share of all costs incurred in its production. If more than one
product is made. This will include allocation and apportionment.
Blanket v departmental absorption rates
Blanket rates
A blanket absorption rate is a single rate of absorption used throughout an organization's
production facility and based upon its total production costs and activity.
The use of a single blanket rate makes the apportionment of overhead costs unnecessary since
the total production costs are to be used. How ever this is not recommended for the following
reasons:
It relies on a single activity measure being appropriate for the entire production function.
It does not distinguish between the miming costs of particular activities or departments
when absorbing costs into cost units.
Departmental rates
A departmental absorption rate is a rate of absorption based upon the particular department's
overhead cost and activity level
This method allows the activity of each department to be measured using a basis which is
appropriate. It also ensures that the cost attributed to the cost unit reflects the cost of the
departmental resources used in its cost units.
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Table of Contents:
  1. COST CLASSIFICATION AND COST BEHAVIOR INTRODUCTION:COST CLASSIFICATION,
  2. IMPORTANT TERMINOLOGIES:Cost Center, Profit Centre, Differential Cost or Incremental cost
  3. FINANCIAL STATEMENTS:Inventory, Direct Material Consumed, Total Factory Cost
  4. FINANCIAL STATEMENTS:Adjustment in the Entire Production, Adjustment in the Income Statement
  5. PROBLEMS IN PREPARATION OF FINANCIAL STATEMENTS:Gross Profit Margin Rate, Net Profit Ratio
  6. MORE ABOUT PREPARATION OF FINANCIAL STATEMENTS:Conversion Cost
  7. MATERIAL:Inventory, Perpetual Inventory System, Weighted Average Method (W.Avg)
  8. CONTROL OVER MATERIAL:Order Level, Maximum Stock Level, Danger Level
  9. ECONOMIC ORDERING QUANTITY:EOQ Graph, PROBLEMS
  10. ACCOUNTING FOR LOSSES:Spoiled output, Accounting treatment, Inventory Turnover Ratio
  11. LABOR:Direct Labor Cost, Mechanical Methods, MAKING PAYMENTS TO EMPLOYEES
  12. PAYROLL AND INCENTIVES:Systems of Wages, Premium Plans
  13. PIECE RATE BASE PREMIUM PLANS:Suitability of Piece Rate System, GROUP BONUS SYSTEMS
  14. LABOR TURNOVER AND LABOR EFFICIENCY RATIOS & FACTORY OVERHEAD COST
  15. ALLOCATION AND APPORTIONMENT OF FOH COST
  16. FACTORY OVERHEAD COST:Marketing, Research and development
  17. FACTORY OVERHEAD COST:Spending Variance, Capacity/Volume Variance
  18. JOB ORDER COSTING SYSTEM:Direct Materials, Direct Labor, Factory Overhead
  19. PROCESS COSTING SYSTEM:Data Collection, Cost of Completed Output
  20. PROCESS COSTING SYSTEM:Cost of Production Report, Quantity Schedule
  21. PROCESS COSTING SYSTEM:Normal Loss at the End of Process
  22. PROCESS COSTING SYSTEM:PRACTICE QUESTION
  23. PROCESS COSTING SYSTEM:Partially-processed units, Equivalent units
  24. PROCESS COSTING SYSTEM:Weighted average method, Cost of Production Report
  25. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Accounting for joint products
  26. COSTING/VALUATION OF JOINT AND BY PRODUCTS:Problems of common costs
  27. MARGINAL AND ABSORPTION COSTING:Contribution Margin, Marginal cost per unit
  28. MARGINAL AND ABSORPTION COSTING:Contribution and profit
  29. COST VOLUME PROFIT ANALYSIS:Contribution Margin Approach & CVP Analysis
  30. COST VOLUME PROFIT ANALYSIS:Target Contribution Margin
  31. BREAK EVEN ANALYSIS MARGIN OF SAFETY:Margin of Safety (MOS), Using Budget profit
  32. BREAKEVEN ANALYSIS CHARTS AND GRAPHS:Usefulness of charts
  33. WHAT IS A BUDGET?:Budgetary control, Making a Forecast, Preparing budgets
  34. Production & Sales Budget:Rolling budget, Sales budget
  35. Production & Sales Budget:Illustration 1, Production budget
  36. FLEXIBLE BUDGET:Capacity and volume, Theoretical Capacity
  37. FLEXIBLE BUDGET:ANALYSIS OF COST BEHAVIOR, Fixed Expenses
  38. TYPES OF BUDGET:Format of Cash Budget,
  39. Complex Cash Budget & Flexible Budget:Comparing actual with original budget
  40. FLEXIBLE & ZERO BASE BUDGETING:Efficiency Ratio, Performance budgeting
  41. DECISION MAKING IN MANAGEMENT ACCOUNTING:Spare capacity costs, Sunk cost
  42. DECISION MAKING:Size of fund, Income statement
  43. DECISION MAKING:Avoidable Costs, Non-Relevant Variable Costs, Absorbed Overhead
  44. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS
  45. DECISION MAKING CHOICE OF PRODUCT (PRODUCT MIX) DECISIONS:MAKE OR BUY DECISIONS