ACCOUNTANCY @ UJ

Department Of Accountancy

B Accounting (B Acc)

Learning guide: Unit 4

Accounting for and calculation of overheads
This unit is concerned with the treatment of overhead costs in management accounting.

Financial Management 200

(FMA200) 2024

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QUESTION 4.1 (35 MARKS)

PART A (11 MARKS)

PTS Limited is a manufacturing company which uses three production departments to make its product.
The following factory costs are expected to be incurred in the year ending
31 December:

Direct wages Machining 234 980

Assembly 345 900
Finishing 134 525

Indirect wages and salaries Machining 120 354

Assembly 238 970
Finishing 89 700

Factory rent 12 685 500

Business rates 3 450 900
Heat and lighting 985 350
Machinery power 2 890 600
Depreciation 600 000
Canteen subsidy 256 000

Other information is available as follows:

Machining Assembly Finishing

Number of employees 50 60 18
Floor space occupied 1 800 1 400 800
(m2)
Horse power of 13 000 500 6 500
machinery
Value of machinery 250 30 120
(R000)
Number of labour hours 100 000 140 000 35 000
Number of machine 200 000 36 000 90 000
hours

REQUIRED:

a) Prepare the company’s overhead analysis sheet for the year to 31 December. (8)

b) Calculate appropriate overhead absorption rates (to two decimal places) for each
department. (3)

2
PART B (14 MARKS)

A company makes a range of products with total budgeted manufacturing overheads of R973 560
incurred in three production departments (A, B and C) and one service department.

Department A has 10 direct employees, who each work 37 hours per week. Department B has five
machines, each or which is operated for 24 hours per week. Department C is expected to produce
148 000 units of final product in the budget period.

The company will operate for 48 weeks in the budget period.

Budgeted overheads incurred directly by each department are:

Production department A R261 745

Production department B R226 120
Production department C R93 890
Service department R53 305

The balance of budgeted overheads are apportioned to departments as follows:

Production department A 40%

Production department B 35%
Production department C 20%
Service department 5%

Service department overheads are apportioned equally to each production department.

REQUIRED:

a) Calculate an appropriate predetermined overhead absorption rate in each production

department. (10)

b) Calculate the manufacturing overhead cost per unit of finished product in a batch of 100
units which take 9 direct labour hours in department A and three machine hours in
department B to produce. (4)

PART C (4 MARKS)

Reapportioning service cost centre costs is generally worthwhile and suggests an alternative treatment
for such costs.

REQUIRED:

Comment on the above statement (4)

PART D (6 MARKS)

Critically consider the purpose of calculating production overhead absorption rates. State clearly why
actual overhead rates should not be used. (6)

3
QUESTION 4.1 (SUGGESTED SOLUTION)
(35 MARKS)

PART A (11 MARKS)

a)
Overhead analysis sheet

Expense Apportionment Machining Assembly Finishing Total

basis (R) (R) (R) (R)

Indirect Allocated✓ 120 354 238 970 89 700 449 024

wages/salaries
Rent Area✓ 5 708 475 4 439 925 2 537 100 12 685 500
Business rates Area✓ 1 552 905 1 207 815 690 180 3 450 900
Heat/light Area✓ 443 408 344 872 197 070 985 350
Machine power Horsepower✓ 1 878 890 72 265 939 445 2 890 600
Plant depreciation Value of plant✓ 375 000 45 000 180 000 600 000
Canteen subsidy No. of employees✓ 100 000 120 000 36 000 256 000
Total 10 179 032 6 468 847 4 669 495 21 317 374

✓ = for not using direct wages. (8)

b) Most of the overheads in the machine department are likely to be machine related and
therefore it is appropriate to use a machine hour rate. The machine hour cost rate is
also used for the finishing department, because machine hours are the predominant
activity. Similar arguments can be used to justify the use of a direct labour hour overhead
rate in the assembly department. The overhead rates are as follows:

R10 179 032

Machining = R50,90 per machine hour✓
200 000

R6 468 847
Assembly = R46,21 per direct labour hour✓
140 000

R 4 669 847
Finishing = R51,88 per machine hour✓
90 000
(3)

4
QUESTION 4.1 (SUGGESTED SOLUTION - CONTINUED)

PART B (14 MARKS)

a)
Production department Service Total
department
A B C
(R) (R) (R) (R) (R)

Direct 261 745 ½ 226 120 ½ 93 890 ½ 53 305 ½ 635 060

Indirect 135 400 (40%) 118 475 (35%) 67 700 (20%) 16 925 (5%) 338 500 ✓
½ ½ ½ ½

Service dept
appointment 23 410 (1/3) ½ 23 410 (1/3) ½ 23 410 (1/3) ½ (70 230) ½
420 555 368 005 185 000 - 973 560

Allocation base 17 760 ✓ 5 760 ✓ 148 000 ✓

(C1)
= R23,68 = R63,89 = R1,25
per direct per m/c hour per hour
labour hour
(10)

Calculations:

C1. Dept. A direct labour hours

= 10 x 37 x 48
= 17 760

Dept. B machine hours

= 5 x 24 x 48
= 5 760

Dept. C units
= 148 000

R
b) Dept A
9 direct labour hours at R23,68 213,12 ✓

Dept B
3 m/c hours at R63,89 191,67 ✓

Dept C
100 units at R1,25 125,00 ✓
529,79

Cost per unit = R5,30 (R529,79/100)✓

(4)

5
QUESTION 4.1 (SUGGESTED SOLUTION - CONTINUED)

PART C (4 MARKS)

Reapportioning production service department costs is necessary to compute product costs for stock
valuation purposes.✓✓ However, it is questionable whether arbitrary apportionment of fixed overhead
costs provides useful information for decision making. Such apportionments are made to meet stock
valuation requirements, and they are inappropriate for decision-making, cost control and
performance reporting.✓✓

An alternative treatment would be to adopt a variable costing system and treat fixed overheads as
period costs.✓✓ This would eliminate the need to reapportion service department fixed costs. A more
recent suggestion is to trace support/service department costs to products using an activity-based
costing system.✓✓
Any 2 x 2 = (4)

PART D (6 MARKS)

Actual overhead rates are not used because of:

(1) Delay in product costs if actual annual rates are used.✓

Information on product costs is needed timeously to enable calculation of

▪ monthly profit
▪ inventory calculations
▪ selling prices✓

(2) Fluctuating overhead rates that will occur if actual monthly rates are used.✓
An estimated normal product cost based on average long-run activity is required rather than an
actual product cost (which is affected by month-to-month fluctuations in activity).✓

Overhead expenditure is fixed in short term but

▪ monthly activity varies

And thus large fluctuations in overhead rates can occur.

(3) Expenses like repairs, maintenance and heating are not incurred evenly.✓
If budgeted overheads are not used, but actual overheads are used products produced in winter
will be more expensive.✓

Production overhead absorption rates are calculated in order to

▪ ascertain cost per unit of output for
 stock valuation and✓
 profit measurement purposes✓

Such costs are inappropriate for

▪ decision-making and✓
▪ cost control✓

6
QUESTION 4.2 (15 MARKS)

The Motsomotso Engineering Company operates a job order costing system that includes the use of
predetermined overhead absorption rates. The company has two service cost centres and two
production cost centres. The production cost centre overheads are charged to jobs via direct labour
hour rates which are currently R2,85 per hour in production cost centre A and R10,50 per hour in
production cost centre B. The calculations involved in determining these rates have excluded any
consideration of the services that are provided by each service cost centre to the other; the company
thus ignores reciprocal charges between service departments.

The basis used to charge general factory overhead and service cost centre expenses to the production
cost centres are as follows:

(i) general factory overhead is apportioned on the basis of the floor area used by each of the
production and service cost centres;

(ii) the expenses of service cost centre 1 are charged out on the basis of the number of factory
personnel in each production cost centre;

(iii) the expenses of service cost centre 2 are charged out on the basis of the usage of its services
by each production cost centre.

The company’s overhead absorption rates are revised annually prior to the beginning of each year,
using an analysis of the outcome of the current year and the draft plans and forecasts for the forthcoming
year. The revised rates for next year are to be based on the following data:

General
factory Service cost centres Production cost centres
overhead
1 2 A B
Budgeted overhead for next R315 000 R88 550 R28 100 R167 050 R51 300
year (before any reallocation)
% of factory floor area - 5 10 15 70
Number of factory personnel - 10 18 63 9
Estimated usage of services - 1 000 hrs - 4 000 hrs 25 000 hrs
of service cost centre 2 in
forthcoming year
Budgeted direct labour hours - - - 120 000 hrs 20 000 hrs
for next year (to be used to
calculate next year’s
absorption rates)
Budgeted direct labour hours - - - 100 000 hrs 30 000 hrs
for current year (these figures
were used in the calculation
of this year’s absorption
rates)

7
QUESTION 4.2

REQUIRED:
(a) Ignoring the question of reciprocal charges between the service cost centres, (9)
calculate the revised overhead absorption rates for the two production cost centres.
Use the company’s established procedures.
(b) Comment, and show the calculations to get the extent of the differences between the (3)
current overhead absorption rates and those you have calculated in your answer to
(a) for production department A. Set out the likely reasons for these differences.
(c) Assume that:

(i) General factory overhead is a fixed cost.

(ii) Production cost centre B is highly mechanized with its budgeted overhead
(before any reallocations) being 20% fixed and 80% variable.

In the light of these assumptions, comment on the absorption rate calculations made
in part (a) and suggest any improvements that you would consider appropriate. (2)

(d) Explain the term blanket overhead rate. (1)

8
QUESTION 4.2 (SUGGESTED SOLUTION)

(9 Marks)

(a) Overhead Analysis

General Service cost centres Production cost
factory centres
overhead 1 2 A B

R R R R R

Primary allocation 315 000 88 550 28 100 167 050 51 300 (1)
Apportionment of general factory
overhead (see note 1) (315 000) 15 750 31 500 47 250 220 500 (2)
- 104 300 59 600 214 300 271 800
Charges by service cost centre 1
(see note 2) (104 300) - 91 262 13 038 (2)P
- 59 600 305 562 284 838
Charges by service cost centre 2
(see note 3) (59 600) 8 221 51 379 (2)P
- 313 783 336 217

Budgeted direct labour hours 120 000 20 000

 313 783 336 217 

Absorption rates  ;  R2,61 R16,81 (2) P
 120 000 20 000 
9
Notes:

1. General factory overhead is apportioned to service cost centres before reallocation to production
centres as indicated in note (i) of the question.

2. Because reciprocal allocations are not made the costs allocated to service cost centre 1 are
reallocated as follows:

R91 262 (63/72 x R104 300) to production cost centre A

R13 038 (9/72 x R104 300) to production cost centre B

3. Reciprocal charges are not made. Therefor the allocation is as follows:

4 000/29 000 x R59 600 = R8 221 to production cost centre A

25 000/29 000 x R59 600 = R51 379 to production cost centre B

Note to marker: Please ensure for the re-allocation of service costs, that the correct ratio was applied
by checking the calculations with a calculator if necessary.

9
QUESTION 4.2 (SUGGESTED SOLUTION – CONTINUED)

(b) The difference may be due to the following: (3 Marks)

Production Current period Next year revised

cost centre

A 100 000 x 2.85 = R285 000 (1) 120 000 x 2.61 = R 313 783 (1)

Production Cost Centre A

(i) Absorption rate decreased. (1)

(ii) Expenditure increased which did not result in an increased rate. (1)
(iii) Budgeted activity of next year is more than current year. (1)
(iv) The increase in expenditure was less than the corresponding increase in activity. (1)

Available 5; Max 3

(c) The answer should include the following points: (2 Marks)

(i) The overhead rate calculations do not distinguish between fixed and variable elements. (2)
Such an analysis is necessary for decision-making purposes. (2)

(ii) Production cost centre B is highly mechanised thus suggesting that a machine hour rate
might be preferable to the present direct labour hour rate. (2)
Available: 6; Max 2

(d) A blanket overhead rate is a single overhead rate for the company as a whole. (1) A blanket
overhead rate can only be justified when all products consume departmental overheads in
approximately the same proportions. (1) Available: 2; Max 1

10
QUESTION 4.3 (20 MARKS)

The following schedule of budgeted overheads for the 2019 financial year end is applicable for Executive
Supplies Limited.
R
Factory buildings: Rent 146 250
Electricity 36 600
Administration buildings: Insurance 38 250
Equipment in the factory: Depreciation 55 000
Other factory expenses: Employees’ protective clothing 36 450
Service departments fittings and furniture: Depreciation 45 000

The following figures are presented as the basis for the allocation of overheads:
Basis Grinding Finishing Service Service
Depart P Depart Q
Direct labour hours 2 750 1 450 265 365
Number of employees 90 80 52 48
Machine hours 350 250 150 160
Floor space 650 m2 370 m2 250 m2 230 m2
Rand value: equipment R64 000 R102 000 R17 000 R17 000
Number of power points 130 120 30 20
Rand value: materials used R40 000 R30 000 R24 000 R16 000
Additional costs per production department
Indirect factory salaries and wages R46 290 R119 483
Direct factory salaries and wages R58 745 R115 300

Additional information: The secondary apportionment of the service departments takes place on the
basis of machine hours, starting with Service Depart P. All final overhead allocation tariffs are worked
out according to labour hours.

Assumption: Service Department P and Service Department Q provide essential services to the
production departments of Executive Supplies Limited.

REQUIRED:

a) Allocate the overheads to the Grinding and Finishing Departments by using the appropriate
allocation basis and calculate the applicable final overhead allocation tariffs for both departments
(work to one decimal place, if applicable). (12)

b) Using the information as above, and assuming that the actual overheads for the Grinding
Department of Executive Supplies Limited was R262 000; the budgeted overheads was
R250 000, the actual labour hours was 2 800; and the actual machine hours was 340. Calculate,
with the use of an accounting ledger account the over or under allocation of overheads for the
Grinding Department. (5)

c) Discusss the importance of allocating service departments costs to production departments. (3)

11
QUESTION 4.3 (SUGGESTED SOLUTION)
A. (12 MARKS)
Overhead allocation tariff for Grinding and Finishing

Basis Total Grinding Finishing Depart P Depart Q

Factory buildings: Rent Floor space 146 250.0 63 375.0 ^ 36 075.0 ^ 24 375.0 22 425.0

Factory buildings: Electricity Power points 36 600.0 15 860.0 ^ 14 640.0 ^ 3 660.0 2 440.0

Admin: Insurance Floor space 38 250.0 16 575.0 ^ 9 435.0 ^ 6 375.0 5 865.0

Equipment: Depreciation Rand value 55 000.0 17 600.0 ^ 28 050.0 ^ 4 675.0 4 675.0

Fact expenses: protective clothing Employees 36 450.0 12 150.0 ^ 10 800.0 ^ 8 100.0 5 400.0

Depreciation: furniture & fittings Floor space 45 000.0 19 500.0 ^ 11 100.0 ^ 7 500.0 6 900.0

Indirect factory salaries 165 773.0 46 290.0 ^ 119 483.0 ^

Total overheads ✓P 523 323.0 191 350.0 229 583.0 54 685.0 47 705.0

Service Depart P 25 183.9 ^P 17 988.5 ^P (54 685.0) ^P 11 512.6 ^P

Service Depart Q 34 543.6 ^P 24 674.0 ^P (59 217.6)
Total overheads 251 077.5 272 245.5

Labour hours 2 750hrs 1 450hrs

Overhead allocation tariff R91.3 ^P R187.76 ^P

per hour per hour
QUESTION 4.3 (SUGGESTED SOLUTION)

B. (5 MARKS)
Grinding Overhead Account
Bank/Creditors 262 000 Work-in-Progress 254 548
✓ 250 000 ✓x 2 800 ✓
2 750
Cost of sales ✓ 7 452 ✓P
(under)
262 000 262 000

C. (3 Marks)

▪ Production departments are directly involved in the production of products, ✓ while service
departments have no direct input into the products, but instead support or ‘service’ the production
departments. ✓
▪ Service departments render essential services that support the production process, but they do
not deal directly with the products. ✓ Therefore, it is not possible to allocate service centre costs
to products passing through these centers. ✓
▪ However, the costs of providing support services are part of the total product costs and therefore
should be assigned to products, ✓ as it provides more accurate product cost information, ✓
thereby improving decision-making. ✓ (Max 3)

13
QUESTION 4.4 (15 MARKS)

Gelatio Cream produces two products namely Ice Cream and Frozen Yoghurt. It has two production
departments namely: Blending & Freezing; Packaging and two service departments namely: Distribution
and Procurement.

Kea and Josh, owners of Gelatio Cream, have asked for your assistance with determining the overhead
absorption rate for their production departments because they operate a job order costing system that
includes the use of predetermined overhead absorption rates. The service department costs, and other
indirect overheads are apportioned to the production departments based on labour hours.

You have been provided with the following indirect overheads to compile an overhead analysis
spreadsheet and determine the appropriate overhead rate for each production department.

Expenses Annual amount (R)

Repairs and maintenance 150 000

Depreciation on machinery and equipment 110 000
Rental and rates of entire premises 196 000
Salaries of Distribution department 205 000
Salaries of Procurement department 143 600
Indirect Fixed Labour of Blending & Freezing department 103 400
Other indirect overheads 634 730

Other estimates and figures are set out below:

Total Blending Pack- Distribu- Procure-

& Freezing aging tion ment
Floor area in square metres 3 500 1 250 1 000 750 500
Machine & Equipment value R954 000 R520 000 R104 000 R178 000 R152 000
Number of employees 256 105 98 38 15
Number of machine hours 105 930 73 450 32 480 - -
Number of labour hours 53 590 21 600 17 320 9 070 5 600

REQUIRED:
(a) Calculate the appropriate overhead absorption rates per hour for the two
production departments. (12)

Note: No costs are allocated between service departments; and

Round all figures to the nearest whole number, except for the absorption
rates which should be rounded to the nearest two decimal places.

(b) Briefly discuss why actual overhead rates should not be used for allocation of (3)
costs to products.

TOTAL MARKS (15)

14
QUESTION 4.4 (SUGGESTED SOLUTION)

(a)
PRODUCTION SERVICE DEPARTMENTS
DEPARTMENTS
Basis Total Blending Packagin Distribution Procuremen
& g t
Freezing
R&M Machinery 150 000 81 761 16 352 27 987 23 899 ✓
Depreciation Machinery 110 000 59 958 11 992 20 524 17 526 ✓
Rent & rates Floor area 196 000 70 000 56 000 42 000 28 000 ✓
Salaries: Given 205 000 - - 205 000 - ✓
Distribution
Salaries: Given 143 600 - - - 143 600 ✓
Procurement
Indirect Fixed Given 103 400 103 400 - - - ✓
Labour: Blending
& Freezing
Other Indirect Labour 634 730 255 834 205 141 107 427 66 327 ✓
overheads Hours
Total overheads 1 542 570 953 289 485 402 938 279 352 ✓P
730
Distribution Labour hours 223 627 179 313 (402 938) ✓P
Procurement Labour hours 155 036 124 316 (279 352) ✓P
Total overhead 1 542 949 616 593 114 - - ✓P
allocated to 730
production
departments
Machine hours 73 450 32 480 - - ✓✓
Or 17 320
Overhead R12.93 R18.26 - - ✓P
absorption rate Or
R34.24

Note to markers:
▪ In order to obtain the principle marks for the allocation to both Distribution and Procurement
departments, students should not have allocated overheads to any of the service departments but
only to production departments.
▪ In order to obtain the principle mark for the overhead absorption rate, students should only have
allocated an absorption rate for the production departments.
(14 Marks)

(b)
▪ Delay in product costs if actual annual rates are used.✓
▪ Fluctuating overhead rates that will occur if actual monthly rates are used.✓
▪ Expenses like repairs, maintenance and heating are not incurred evenly.✓
(3 Marks)

15