Question 3.7.1: A company reapportions the costs incurred by two service cos...
A company reapportions the costs incurred by two service cost centres – materials handling and inspection – to three production cost centres – machining, finishing and assembly.
The following are the overhead costs which have been allocated and apportioned to the five cost centres:
£000
Machining 400
Finishing 200
Assembly 100
Materials handling 100
Inspection 50
Estimates of the benefits received by each cost centre are as follows:
| Machining | Finishing | Assembly | Materials handling | Inspection | |
| % | % | % | % | % | |
| Materials handling | 30 | 25 | 35 | __ | 10 |
| Inspection | 20 | 30 | 45 | 5 | __ |
These percentages indicate the use which each of the cost centres makes of the materials handling and inspection facilities. Calculate the charge for overhead to each of the three production cost centres, including the amounts reapportioned from the two service centres.
The task of allocating and apportioning the overheads to all cost centres has already been done (the primary apportionment). The problem now is to reapportion the costs of the service centres (the secondary
apportionment).
Using the repeated distribution method the service cost centre costs are apportioned backwards and forwards between the cost centres until the figures become very small. At this stage it might be necessary to round the last apportionments.
In the workings that follow we have chosen to begin the secondary apportionment by apportioning the inspection costs first. The £50,000 inspection cost is reapportioned according to the percentages provided, then the total of the materials handling department is reapportioned and so on. The final result would have been the same if we had chosen instead to begin by apportioning the materials handling costs first
| Machining | Finishing | Assembly | Materials handling | Inspection | |
| £ | £ | £ | £ | £ | |
| Initial allocation | 400,000 | 200,000 | 100,000 | 100,000 | 50,000 |
| Apportion inspection | 10,000 | 15,000 | 22,500 | 2,500 | (50,000) |
| Apportion materials | 30,750 | 25,625 | 35,875 | (102,500) | 10,250 |
| handling | |||||
| Apportion inspection | 2,050 | 3,075 | 4,612 | 513 | (10,250) |
| Apportion materials | 154 | 128 | 180 | (513) | 51 |
| handling | |||||
| Apportion inspection * | 11 | 16 | 24 | 51 | |
| Total charge for overhead | 442,965 | 243,844 | 163,191 | 0 | 0 |
*When the service department cost reduces to a small amount the final apportionment is adjusted for roundings.
The objective has been achieved and all of the overheads have been apportioned to the production cost centres, using the percentages given. A spreadsheet or similar software package would obviously be helpful here!