CIMA BA2 Syllabus B. COSTING - Allocation and Apportionment - Notes ^{1 / 9}

Allocation and Apportionment

Cost Card

Direct Materials	These specifically go into making the product
Direct Labour
Direct Expenses
Prime cost	The total of Direct costs
Production Overheads (e.g. Factory Electricity and Rent)	These must be allocated, apportioned and absorbed
Total Production Cost

Absorption Costing

Basically absorbs the fixed production overheads into the product cost

Absorption costing involves 3 stages:

Allocation and Apportionment of overheads
Reapportionment of service (non-production) cost centre overheads to production cost centres
Absorption of Overheads (after allocation and apportionment)

Stage 1: Allocation and apportionment of overheads

Allocation means charging overheads directly to specific departments

Eg. Supervisor salary of the packaging department will be entirely allocated to the packaging department

Apportionment
If the overheads relate to more than one department, then they must be apportioned / shared between these departments using a fair basis.

Eg. Factory rent apportioned between all departments that use the factory (using a suitable basis of apportionment)

Possible bases of apportionment include:

Floor Area
for overheads such as rent, rates, heat and light overheads
Cost or NBV of non-current assets
for overheads such as depreciation and insurance
Number of Employees
for overheads such as canteen costs; personnel office, welfare, wages, first aid

Illustration

Which basis should factory rent be apportioned on?

a) Area
b) Number of employees

Solution

Area

Let us go further and try this with numbers
Rental cost $600
There are 2 factories in the department:
Factory 1 occupies 100m² of space
Factory 2 occupies 200m² of space
How much of the rental cost should be apportioned to Factory 1 and Factory 2?
Solution
Factory 1 = $600 x 100²/300² = $200
Factory 2 $600 x 200²/300² = $400

Illustration - Apportionment and Allocation

General overhead
	$
Rent	100,000
Machinery Insurance	40,000
Stores wages	20,000
Heating costs	60,000
Total	220,000
	Mixing Department	Storing Department	Stores Department	Canteen	Total
Floor Space	10,000	3,000	1,000	6,000	20,000
Machinery NBV	2,000	1,000	600	400	4,000


Rent apportionment	=10,000/20,000 x 100,000 = 50,000	15,000	5,000	30,000	100,000
Machine insurance apportionment	=2,000/4,000 x 40,000 = 20,000	10,000	6,000	4,000	40,000
Stores wages - allocation			60,000		20,000
Heating cost apportionment	=10,000/20,000 x 60,000 = 30,000	9,000	3,000	18,000	60,000
Total for each department	100,000	34,000	34,000	52,000

Stage 2: Reapportionment of service cost centre overheads to production cost centres

Since service cost centres/departments are not directly involved in making the products, the fixed production overheads of these service cost centres must be shared out between the production departments.
Examples of service cost centres include: stores, canteen, maintenance and payroll departments.

Illustration

A factory consists of 2 production centres ( A and B ) and one service centre ( C )

The overheads of each centre are:

A $71,000
B $69,000
C $42,000

The overheads of the service centre are re-apportioned to the production centres on the basis of number of employees.

Number of employees:

A - 40
B - 32
C - 17

What is the total overhead for production centre A?

Solution

40/(40+32) x $42,000+$71,000= $94,333

Note that when apportioning the overheads on the basis of employees, we did not add the service centre employees, this is because we want all of the overheads apportioned between the production centres.

Now that all of the overheads are correctly allocated and apportioned into the production departments, they can be absorbed into the cost of a product being produced.