Question 1: Denton Ltd
Denton Ltd is a clothing manufacturer. Three overheads incurred by Denton
Ltd are:
Heating
£10000
Supervisors wages
£40000
Equipment Insurance
£20000
The business is divided into four cost centres.
Cutting and assembly
– Production cost centres
Canteen and Maintenance
– Service cost centres
Additional information:
Floor area
Staff employed
Book value of equipment
Cutting
25m2
15
£50000
Assembly
200m2
30
£135000
Canteen
100m2
2
£10000
Maintenance
75m2
3
£5000
Task: Using the template in answer book (check the question number!)
Apportion the overheads fairly to the production and service cost centres.
Question 2: Castle
Castle’s is a small department store in Lancaster. It has five departments and
each department is operated as a cost centre to help monitor the costs of
running the business.
Cost centre information:
Food Hall
Women’s
wear
8
400m2
Men’s
wear
4
200m2
Electrical
Toys
Staff employed
12
6
10
2
2
Floor space
800m
400m
200m2
Overheads:
Rent and rates
£200000
Use the template
Electricity
£100000
in the answer
Administration
£200000
book
Total
£500000
Tasks:
1. Suggest equitable bases of apportionment for the three overheads.
Explain your reasoning
2. Use the bases for apportionment chosen in (1) to calculate the share of
overheads that would be charged to each cost centre if the overheads
were apportioned accordingly.
Question 3: Petra Windows Ltd
Petra Windows Ltd owns a factory and an office. It rents warehouse storage
for its completed products. There are two cost centres in the factory
(Production and Admin office), the warehouse is a third cost centre,
On 20 September, several invoices were received for overheads. For each one,
you are required to decide:
a) Whether the cost would be allocated or apportioned
b) The cost centre to be charged
c) If required, a suitable basis of apportionment
Question 3(a): Denton Ltd - Step-down method of apportionment
Using the information from Denton Ltd and the template in answer book (check
the question number!) reapportion overheads from its service cost centres to
its production cost centres
Additional information:
Staff employed
Maintenance: No. of hours as a %
of total
Cutting
15
50%
Assembly Canteen
30
2
50%
Maintenance
3
Question 3(b): Denton Ltd - Direct method of apportionment
Using the template in the answer book use the information from Denton Ltd to
reapportion overheads from its service cost centres to its production cost
centres.
Additional information:
 The canteen department does not provide catering facilities for the
maintenance department.
 The cutting department employs 15 staff and the Assembly department
employs 30 staff which the canteen department cater for.
 The maintenance department spends 50% of its time in each of the
production departments.
Question 4: Nichol’s Plastics Ltd – Step-down apportionment
Nichol’s Plastics Ltd is based in Slough. The company produces a wide variety of
plastic products such as downpipes, gutters and storage bins. In order to
ensure that all overheads are absorbed into production, the company operates
five cost centres. There are three production departments (planning, moulding
and finishing) and two service departments (stores and maintenance). The
stores department provides services to the maintenance department in addition
to the production departments. The maintenance department only provides
services to the production departments. The overheads have already been
allocated and apportioned to the cost centres.
Additional information
No. requisitions from
stores dept.
Maintenance: book value
of assets
Planning
1000
Moulding
6000
Finishing
4000
£40000
£100000
£60000
Stores
Maint.
1000
Tasks: (Use the template in the answer book)
a) Apportion the stores overheads to the other cost centres
b) Apportion the maintenance overheads to the production cost centres
c) Explain why it is necessary for Nichol’s Plastics to apportion the
overheads incurred by service departments.
Question 5: Fire Bases Ltd – Direct apportionment
Fire Bases Ltd has incurred the following overhead costs
Depreciation of factory
Factory repairs and maintenance
Factory office costs (treat as a production overhead)
Depreciation of equipment
Insurance of equipment
Heating
Lighting
Canteen
The following information is also available:
Department
NBV/ carrying Number of
amount of
employees
equipment
Production cost centres:
A
30,000
30
B
20,000
30
X
10,000
15
Support cost centre
Y
20,000
15
Total
80,000
90
1,000
600
1,500
800
200
390
100
900
5,490
Volume
(cubic
metres)
Floor space
(square
metres)
3,000
6,000
2,400
1,200
1,600
800
1,600
13,000
400
4,000
a) Overheads are allocated or apportioned on the most appropriate basis.
b) The total overheads for the support cost centres are then reapportioned
to the 3 production centres, using the direct method.
c) 50% of Service Y time is spent in Production A; 30% is spent in
Production B and 20% is spent in Production X.
Required: Use the information above (and the template in the answer book) to
allocate and apportion the budgeted overheads for the next financial year.
Question 6: Wyvern Private Hospital
Wyvern Private Hospital has two patient wards – a day care ward for minor
operations where the patients go home at the end of the day, and a surgical
ward for patients who remain in the hospital for several days. There are two
service departments – the operating theatre and administration. The overheads
of each department for last month were as follows:
£
Day care ward
28,750
Surgical ward
42,110
Operating theatre
32,260
Administration
9,075
The basis for re-apportioning the overheads of the service departments is:
 Operating theatre, on the number of operations carried out – day care
ward, 160; surgical ward, 120
 Administration, on the number of staff in each department – Day care
ward, 10; Surgical ward, 25; Operating theatre, 20
Required: You are to use the step-down method to re-apportion the two service
department overheads to the two patient wards.
Question 7: Frampton Holdings
Frampton Holdings manufactures boilers for heating systems. The company
operates three production cost centres – Cutting, Welding and Finishing.
Production
department
Cutting
Welding
Finishing
Overheads
£
60000
180000
40000
Budgeted
number of
machine hours
16000
3000
2000
Budgeted
number of
labour hours
2000
20000
8000
Overhead
absorption rate
method
Machine hours
Direct labour hours
Direct labour hours
Required:
a) Calculate the overhead absorption rates in each production department
b) Suppose that Frampton Holdings receives an order for 100 boilers. The
amount of time it takes to make a single boiler is 3 hours in the cutting
department, 6 hours in the welding department, and 2 hours in the
finishing department. Calculate the overhead charge for the order.
c) Suggest why Frampton Holdings might use the machine hours OAR in the
cutting department
Question 8: Mereford College
Mereford College is a private College that has two teaching departments –
Accountancy and Management.
The College charges overheads on the basis of lecturer hours. The following
overhead analysis information is available to you (note that support service
overheads, such as the administration office, reprographics department and
learning resources, have already been apportioned to the teaching
departments):
Overhead analysis sheet for January
Budgeted total overheads (£)
Budgeted lecturer hours
Budgeted overhead absorption rate (£)
Accountancy
Department
22143
1525
Management
Department
17251
1300
Details of a particular course – ‘Finance for Managers’ – that is taught in both
the Accountancy and Management departments are as follows:
Accountancy
Management
Department
Department
Lecturer hours
45
20
Budgeted overhead absorption rate (£)
Overhead absorbed by course (£)
Required:
a) Calculate the overhead absorption rate for each of the two departments
and complete the overhead analysis sheet
b) Calculate the overhead absorbed by the Finance for Managers course and
complete the course overhead analysis sheet.
Question 9: Osborne Engineering Ltd
Osborne Engineering Ltd offers specialist engineering services to the car
industry. It has two production departments (machinery and finishing) and a
service department, which maintains the machinery of both departments.
Budgeted overheads for the forthcoming year are:
£
£
Rent and rates
2760
Buildings insurance
660
Insurance of machinery
825
Lighting and heating
1860
Depreciation of machinery
5500
Indirect labour costs:
Supervisors’ salaries
15000
Maintenance department salary
8000
Factory cleaning
2400
Totals
23000
14005
The following information is available:
Department
Floor area
Number of
Value of
(square metres) employees machinery
Machinery
300
6
£20000
Finishing
200
3
£7500
Maintenance
100
1
0
Total
600
10
£27500
The factory works a 40 hour week for 47 weeks each year
Required:
1) Prepare an analysis of overheads showing the basis of apportionment and
allocation to the three departments of the business
2) Re-allocate the service department overheads to production departments
on the basis of value of machinery
3) Calculate an overhead absorption rate based on direct labour hours for
each of the two production departments.
Question 10: Beesmore Ltd
Beesmore Ltd has two production departments, for which the following
budgeted information is available:
Dept A
Dept B
Total
Estimated overheads
£360000
£200000
£560000
Budgeted direct labour hours 200000 hours
40000 hours 240000 hours
Budgeted machine hours
50000 hours
80000 hours 130000 hours
Required:
a)
If a single factory overhead absorption rate per direct labour hour is
applied, calculate the overhead absorption rate (rate of recovery).
b)
If separate departmental overhead absorption rates are to be calculated,
what would be the most appropriate basis to absorb overheads in each
department; why have you chosen your basis of OAR; what would the OAR
be (state this to two decimal places)?
OAR basis
Department A
Department B
Why?
OAR £
Draw this table in your notebook
c) You have been given the following information relating to two jobs:
 Job X has a total direct cost of £100, takes 30 machine hours in
Department B and does not involve any work in Department A.
 Job Y has a total direct cost of £100, takes 28 labour hours in
Department A and 2 machine hours in Department B.
What would be the factory cost of each job, using the OAR calculated in
(b) above? (Hint: You need to calculate direct costs + overheads
absorbed).
Question 11:
Suppose that the estimated overhead in a production department is £80000
and the estimated activity is 40000 direct labour hours. The overhead
recovery rate (using direct labour hours) would be £2 per direct labour hour.
Actual overheads in the period are £84000 and 45000 direct labour hours are
worked.
Required:
a) Calculate the over- or under- absorption.
b) Will this be a debit/credit entry in the Statement of Profit or Loss
(Income statement)?
c) Will the adjustment result in an increase/decrease in profit?
d) Produce a Statement of Profit or Loss using the above data and you have
also been told that sales were £245000 and the Prime Cost totalled
£138000.
Question 12:
Only Estimates Ltd has a budgeted production overhead of £50000 and a
budgeted activity of 25000 direct labour hours and therefore a recovery rate
of £2 per direct labour hour.
Actual overheads incurred were £50000 and 23500 direct labour hours were
actually worked.
Required:
a) Calculate the under-/over- absorption.
b) Will this be a debit/credit entry in the Statement of Profit or Loss (Income
statement)?
c) If sales were £250,000 and direct costs were £100,000, produce a Profit
statement showing clearly the treatment of overheads.
Question 13:
Cost data for the company for the year to 30 November 2013 for overheads
shows:
£
Budgeted overheads
2,135,000
Actual overheads
2,240,000
Absorbed overheads
2,170,000
a) Calculate the under / over recovery of overheads for the period
b) In the Statement of Profit or Loss (Income statement) would this
be a debit or credit entry?
c) Would the entry in the Statement of Profit or Loss (Income
statement), result in an increase or decrease in profit?
Question 14
A Manufacturing business absorbs production overheads into work in progress
at a rate of £3.20 per direct labour hour. In the month of August the
overheads incurred totalled £4,720 and the direct labour hours worked were
1,400.
a) Write up the Production Overhead Control ‘T’ Account.
b) Have the overheads been under or over absorbed?
Question 15: Entries in the production overhead control account
For each sentence, decide whether it is true or false.
a
b
c
d
e
f
g
h
i
j
The Production overhead control account:
Has a debit entry for direct labour costs
Has a debit entry for indirect expenses costs
Has a debit entry for indirect labour costs
Has a debit entry for actual amounts paid out of the bank for overheads incurred
Has a debit entry for overhead absorbed
Has a credit entry for overheads absorbed
Has a debit entry to work in progress
Has a credit entry to work in progress
Has a debit balancing figure which represents overheads under-absorbed
Has a credit entry balancing figure which represents overheads over-absorbed
Question 16: Boxit Ltd
Boxit manufactures and sells cardboard boxes which are used for packaging and
storage. The boxes pass through two departments – cutting and assembly.
Details of overheads for the departments for the four weeks ended 24 March
are as follows:
Cutting Department
 Overhead absorption rate is £10.00 per machine hour
 Machine hours worked were 1,000
 Actual cost of production overhead was £11,000
Assembly Department
 Overhead absorption rate is £4.00 per direct labour hour
 Direct labour hours worked were 2,000
 Actual cost of production overhead was £7,500
The following cost accounting codes are in use to record overheads:
Code number Description
2200
Work in Progress (Production)
2500
Production overheads: cutting department
2600
Production overheads: assembly department
5500
Income statement
As an accounts assistant at Boxit Limited, you are asked to fill in the table in
the answer book to record the journal entries for the overheads and for the
over- and under-absorption of overheads.
Practice Question 1: Wright Ltd
Wright Ltd is a manufacturer of sailing boat kits. The company manufactures
some parts of the boats and buys in a variety of other components that are
used to make up the rest of the kits. The business is divided into four cost
centres:
1) Body shop: Produces the fibre glass parts that are needed to construct
the boat shell
2) Sub-assembly: Assembles the bought in components
3) Packing and dispatch: Packs and dispatches the kits to customers
4) Quality control: Oversees quality control in the three production cost
centres. This is a service cost centre.
A machine hour Overhead absorption rate (OAR) is used in the body shop to
charge overheads and a direct labour hours OAR is used in the other two
production departments.
Overheads and additional information for Wright Ltd
Floor space
Book value of assets
Number of employees
Quality control hours
Body
SubPacking &
shop
assembly Dispatch
8000m2
4000m2
2000m2
£600000 £200000 £200000
10
40
20
2000
8000
4000
Overheads
Rent
Heat and light
Depreciation
Administration
Quality
Control
2000m2
10
-
Total
16000m2
£1000000
80
14000
£
1600000
Use the template
400000
in the answer
200000
book
800000
3000000
Annual budgeted machine hours in body shop:
50000
Annual budgeted direct labour hours in the sub-assembly dept:
40000
Annual budgeted direct labour hours in the packing and dispatch dept: 20000
Cost of direct materials per boat:
£500
Cost of direct labour per boat:
£2500
Time taken to produce one boat kit in each department:
Body shop
10 hours
Sub-assembly
15 hours
Packing and dispatch
8 hours
Tasks:
1) Prepare an analysis of overheads showing the basis of apportionment and
allocation to the four cost centres of the business
2) Reapportion the service department overheads to the production
departments
3) Calculate the overhead absorption rates for each department using an
appropriate OAR method for each department
4) Calculate the overheads that are to be charged to each cost unit i.e. the
boat
Practice Question 2: Design Ltd
Design Ltd’s operations are organised by departments, as follows:
Production cost centres:
Warehouse
Manufacturing
Support Cost Centres
Sales
Administration
The actual fixed overheads of the company for November 2013 were as follows:
£
£
Depreciation
14600
Rent
48000
Other property overheads
12800
Administration overheads
28800
Indirect Labour costs:
Warehouse
4800
Indirect manufacturing
14340
Sales
12250
Administration
8410
Totals
39800 104200
The following information is also relevant:
Department
Warehouse
Manufacturing
Sales
Administration
% of floor space
occupied
20
65
5
10
100
Net book value of fixed
assets
160000
560000
40000
40000
800000
Overheads are allocated and apportioned between departments using the most
appropriate basis.
Overheads are reapportioned from the support cost centres to production cost
centres by direct allocation. There is no reciprocal servicing between the two
support cost centres.
75% of the sales cost centre time is spent selling warehouse goods.
Administration supports the two production centres equally.
The following data relates to the manufacturing department for November
2013.
Number of hours
Budgeted direct labour hours
4650
Actual direct labour hours worked
4100
Fixed overheads are absorbed using budgeted direct labour hours.
Tasks:
a) Complete the table in the answer book showing the allocation and
apportionment of actual fixed overheads between the four departments and the
re-apportionment of service cost centres
b) Calculate for the manufacturing department for November 2013 the
budgeted fixed overhead absorption rate.
c) Explain the reasons for any under or over absorption of fixed overhead in
November 2013
Practice Question 3:
Y Limited is a manufacturing business with three cost centres: Departments J,
K and L. The following are the expected factory overheads for the next year:
Rent and rates
Depreciation of machinery
Supervisor’s salary
Insurance of machinery
£7210
£10800
£12750
£750
Use the template
in the answer
book
Department information is:
Floor space (sqm)
Value of machinery
Number of production-line employees
Dept J
300
£25000
8
Dept K
150
£15000
4
Dept L
250
£10000
3
You are required to:
a) Apportion the overheads to the cost centres, stating the basis of
apportionment
b) Calculate the overhead absorption rate (to two decimal places) of each
department, based on direct labour hours. Note that the factory works a 37
hour week for 48 weeks in a year.
Practice Question 4:
Cost data for the company for the year to 31 January 2014 for overheads
shows:
Budgeted overheads
£2,750,000
Actual overheads
£2,500,000
Absorbed overheads
£2,650,000
i) What is the under / over recovery of overheads for the period?
ii) In the Income Statement would this be a debit or credit entry?
Practice Question 5
Roman and Greek is a firm of chartered accountants, with two partners.
Overhead costs for next year are estimated to be:
£
Office rent
10000
Office salaries
30000
Rates
4800
Heating and lighting
2400
Stationery
2000
Postage and telephone
5100
Car expenses
5600
The two partners plan to work for 47 weeks next year. They will each be in the
office for 40 hours a week, but will be working on behalf of their clients for 35
hours per week.
a) What is the overhead absorption rate per partner hour (to two decimal
places)?
b) If each partner wishes to earn a salary of £30000 per year, what is the
combined hourly rate per partner, which includes overheads and their salaries
(to two decimal places)?
c) If both partners actually work on their clients’ behalf for 37 hours per week,
what will be the total over-absorption of overheads for the year (to two decimal
places)?
Practice Question 6
A manufacturing business has the following transactions for the week ending 7
September:
£
Materials purchased on credit
14,365
Materials requisitions from the factory
11,632
Total payroll costs
- Direct factory labour
18,375
- Indirect factory labour
2,682
Production overheads incurred
6,243
Production overheads to be absorbed
1,530 hours @ £5.20 per hour
Transfer of production to finished goods
36,540
Write up the following ledger accounts in an integrated Cost Bookkeeping
system to reflect these transactions.
 Materials Control Account
Draw the ‘T’
 Wages Control Account
accounts in your
 Production Overhead Control Account
notebook
 Work in Progress Account (Production)
Practice Question 7
A manufacturing business absorbs production overheads at a rate of £6.45 per
direct labour hour. In the month of July, a total of 940 direct labour hours
were worked and the production overhead incurred was £5,840.
a) Write up the Production Overhead Control Account and explain the
accounting treatment of any balance on the account.
b) Does the balancing figure in the production overhead control accounts
represent an under or over absorption of overheads?
c) Does the balancing figure from your production overhead control account,
when entered into an Income Statement result in an increase or decrease in
profits?