CIMA BA2 Syllabus B. COSTING - Reapportionment of Service Cost Centres - Notes 2 / 9
Reapportion service cost centre costs to production cost centres
Inter service work done
As we know, overheads in a service department must be apportioned to the production departments so that all of the overheads can finally be absorbed into the cost unit.
2 problems arise:
One service department doing work for another service department, and production departments (Step down method)
Here, the service department which does most work for other departments is reapportioned first.
Two service departments doing work for each other.
Full recognition is given for all work done by service departments for each other.
It may be solved algebraically by simultaneous equation or through repeated distribution.
Illustration - one service department doing work for another (Step down method)
L Ltd. consists of 2 production centres (A and B) and 2 service centres (C and D)
Overheads incurred for each centre:
A $99,000
B $85,000
C $60,000
D $36,000
Work done by the service centres:
| A | B | C | D | |
|---|---|---|---|---|
| % of C | 45 | 65 | ||
| % of D | 30 | 60 | 10 |
What is the total overhead of production centre A?
Step 1: Calculate D's OH to be apportioned
D does 10% of work for C
Therefore, you have to increase C's overhead by 10% of D's overhead:
Increase C by = 10% x $36,000 = $3,600
Therefore the total C's OH = $60,000 + $3,600 = $63,600
Step 2: Share C's OH to A
$63,600 x 45% = $28,620
Step 3: Share D's OH to A
$36,000 x 30% = $10,800Step 4: Total A's OH
$99,000 + $28,630 + $10,800 = $138,630
Illustration 2 - 2 Service Departments doing work for each other (Repeated Distribution method)
A company has 2 production departments (A and B) and 2 service departments (Service and Canteen)
Overheads incurred for each centre:
A $10,000
B $20,000
Service $20,000
Canteen $5,000
What will be the total overheads finally charged to the production departments A and B?
| Production A | Production B | Service | Canteen | ||
|---|---|---|---|---|---|
| Use of services | 30% | 50% | 0 | 20% | |
| Use of canteen | 80% | 10% | 10% | 0 | |
| Solution | |||||
| Services Reapportionment | =30% x 10,000 = 3,000 | =50% x 10,000 = 5,000 | 0 | = 20% x 10,000 = 2,000 | Now Canteen is $5,000 + $2000 = $7,000 |
| Canteen Reapportionment | = 80% x 7,000 = $5,600 | = 10% x $7,000 = 700 | = 10% x $7,000 = 700 | Now Services is $700 | |
| Services Reapportionment ($700 is reapportioned in 30/50/0/20 Ratio) | 210 | 350 | 0 | 140 | Now Canteen is $140 |
| Canteen Reapportionment ($140 is reapportioned in 80/10/10/0 Ratio) | 112 | 14 | 14 | (140) | Now Services is $14 |
| Services Reapportionment ($14 is reapportioned in 30/50/0/20 Ratio) | 4 | 7 | (14) | 3 | Now Canteen is $3 and we will split without ratios |
| Canteen Reapportionment | 2 | 1 | 0 | ||
| Total | 18,928 | 26,072 | |||
Illustration - 3 service departments doing work for each other (Algebraic method)
A company has 2 production departments (A and B) and 2 service departments (C and D)
Overheads incurred for each centre:
A $70,000
B $30,000
C $20,000
D $15,000
What will be the total overheads finally charged to the production departments A and B?
| Allocated and apportioned overheads | A | B | C | D |
|---|---|---|---|---|
| Work done by C (%) | 50 | 30 | 20 | |
| Work done by D | 45 | 40 | 15 |
Solution
Let C = total cost of C's service department
Let D = total cost of D's service department
C = $20,000 + 0.15D
D = $15,000 + 0.20C
Solve simultaneously
C = $20,000 + 0.15 ($15,000 + 0.20C)
C = $20,000 + $2,250 + 0.03C
C = $22,938D = $15,000 + 0.20 ($22,938)
D = $19,588Apportion C and D to A and B, based on the % in the table
A
$70,000 + (0.5 x $22,938) + (0.45 x $19,588) = $90,284
B
$30,000 + (0.3 x $22,938) + (0.4 x $19,588) = $44,716