AFM 31130
Cost Assignment and
Costing Systems
1
By
Isuru Manawadu
B.Sc in Accounting Sp. (USJP), ACA
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What is overhead?
The total cost of indirect
materials, indirect labor and
indirect expenses
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By Isuru Mananwadu
Overhead Allocation
Systems
Traditional Costing System
 Activity Based Costing
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By Isuru Mananwadu
Overhead cost/ common cost would be
allocated to each unit of production
through;
(1) Allocation
(2) Apportionment
(3) Absorption
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By Isuru Mananwadu
Overhead Allocation
Cost allocation is the assigning of a
common cost to several cost objects.
For example, a company might allocate or assign
the cost of an expensive computer system to the
three main areas of the company that use the
system. A company with only one electric meter
might allocate the electricity bill to several
departments in the company.
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By Isuru Mananwadu
Cost centre is a responsibility
centre
where
managers
are
accountable for the expenses that are
under their control.
Cost centers classification:
 Production cost centres
 Service cost centres
 Process cost centres
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By Isuru Mananwadu
Cost allocation and cost apportionment are the two
procedures which describe the identification and
allotment of costs to cost centers or cost units.
Cost allocation refers to the allotment of all the
items of cost to cost centers or cost units.
Cost apportionment refers to the allotment of
proportions of items of cost to cost centers or cost
units.
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By Isuru Mananwadu
Basis of Allocation
Rent, Rates & Taxes, Lighting & Heating
Insurance & depreciation of Building,
Cost of repairs & maintenance of
Building, Air Conditioning
Insurance & Depreciation on Plant &
Machinery (PM), maintenance of PM,
Insurance on building, etc
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(Source: Paramjit Sharma – www.scribd.com)
Floor Area
Occupied
Capital
Value
Basis of Allocation
Welfare Expenses, time-Keeping ,pay-roll
Office, Canteen, Recreation, Supervision
Medical Expenses
No.Of
Employees
Machine
Hours
Repairs & Maintenance of Plant &
Machinery
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(Source: Paramjit Sharma – www.scribd.com)
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Basis of Allocation
Value or
Weight of
Materials
Truck Mileage
Tonnage
Truck Hours
No.Of Pakages
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Store Keeping Expenses
Transport Service Expenses
(Source: Paramjit Sharma – www.scribd.com)
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Factory
Overheads
Allocation &
Apportionment
P1
P2
P3
Prod Departments
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S1
S1
Service Dept.
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Service Department Cost
Re-Apportionment
Production
Departments
Carry out the
central purposes
of an organization.
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By Isuru Mananwadu
Service
Departments
Provide support
that facilitates the
activities of production
departments.
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Service cost centre cost apportionment
Service Cost centre
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Basis of apportionment
Stores
No. of material requisitions
Maintenance
Hours of maintenance work
done for each cost centre
By Isuru Mananwadu
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The Need for Cost Apportionment
Service
Department
(Cafeteria)
Service
Department
(Accounting)
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Service
Department
(Personnel)
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First Stage Apportionment
Service department costs are
apportioned to operating
departments.
Operating
Department
(Machining)
The
Products
Operating
Department
(Assembly)
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There are several methods of reapportioning the service department
overheads to production departments
1. Direct Method
2. Reciprocal Method
 Repeated Distribution Method
 Simultaneous Equation Method
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Example- Direct method of reapportionment
Product.D Product.
Dept. B
ept. A
Stores
Dept.
Maintenan
ce Dept.
Overhead
costs
10030
8970
10000
8000
Cost of
material
requisitions
30000
50000
-
-
Maintenance
By Isuru Mananwadu
16hrs needed
8000
1000
-
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Algebraic approach ( Equation
Method)
Setup the overhead re-apportionment process as a
set of equations.
Let A = the total overhead apportioned to
department A
B = the total overhead apportioned to
department
B,
etc
By Isuru Mananwadu
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Re- apportionment Basis
Purchase
Department
Stores
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By Isuru Mananwadu
No of Purchase Orders or value of Materials
Purchased for each Production Department
•Value or Quantity of Materials Issued
•No. of Materials Requisitions
Re- apportionment Basis
Weight & Distance
inspection
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By Isuru Mananwadu
Internal Transport
Inspection Hrs. Devoted to each
Department
Overhead Absorption
It is a systematic process of distributing the
OH,
(allocated,
apportioned
and
reapportioned to production department)
among the units produced.
Absorption rate – A rate at which
overheads are charged to the cost units.
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OVERHEAD ABSORPTION RATE
Actual rate
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Predetermined
overhead rate
Actual and predetermined OAR
The purpose of absorbing production overheads is
to ensure the full production cost of the product is
known. If actual overheads and activity levels
were to be used, it would only be known at the
end of period.
For this reason predetermined or budgeted figures
are normally used to calculate absorption rates.
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By Isuru Mananwadu
Predetermined OAR
The budgeted production overhead for each
production cost center is then divided by
the budgeted level of activity to give the
predetermined overhead absorption rate
(OAR).
This OAR can then be used for planning
and control purposes and also pricing.
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By Isuru Mananwadu
OVERHEAD ABSORPTION RATE
Actual rate
OVERHEAD ABSORPTION RATE
Actual OHEs for the period
Actual No. of the units
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By Isuru Mananwadu
OVERHEAD ABSORPTION RATE
Pre-determined Rate
Budgeted OHEs for the Period
Budgeted No. of Units
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By Isuru Mananwadu
Methods of overhead absorption
I. Production unit method
II. Percentage methods
a) % on direct labour
b) % on direct material cost
c) % on prime cost
III. Hourly rate methods
a) Direct labour hour rate
b) Machine hour rate
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By Isuru Mananwadu
Single or Blanket overhead
absorption
Blanket overhead absorption is
where the total production
overheads of the organization are
absorbed on a single absorption
basis.
Only one Rate for entire Unit/plant /Department
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By Isuru Mananwadu
I.
Production unit method
OHAR = POH for the period
No.of Units of Output
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By Isuru Mananwadu
2. Percentage on direct labour
OHAR = POH for the period x 100
Direct labour cost
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3. Percentage on direct material cost
OHAR =
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POH for the Period x 100
Direct material cost
4. Percentage on prime cost
OHAR = POH for the period x 100
Prime Cost
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5. Direct labour hour rate
OHAR =
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POH for the period
Labour hours
6. Machine hour rate
OHAR =
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By Isuru Mananwadu
POH for the period
Machine hours
THANK YOU
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