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Subject: cost accounting Date: 9/12/2014

Lec. No : 6
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Ch 15
Cost allocation
**If we have a production center (A)

Total cost /basis = allocation rates

** Why all previous are wrong?

Because it calculate only one allocation basis which is wrong because OH include
different types of activities

***how correction can happen?

Simply by dividing the cost of each column to:

Variable costs ------------ actual capacity

Fixed costs -------------budgeted  max capacity

or --- Absorption  actual capacity

**how the cost center approach be applied?

1 – Dividing the factory to different department & each dep to be divided into 2
columns, one of them for the variable & the 2nd 4 the fixed

2 – Allocation of the variable and fixed costs to the variable and fixed column

3 – Distribute of service center

A – Variable column dist  according to actual capacity or actual hour  go to variable of production
B – Fixed column dist  according to budgeted hour  go to fixed of the production
4 – Total of each column:
**variable to be divided over actual capacity
** fixed to be divided over max capacity
To reach at the analytical recovery rates

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Subject: cost accounting Date: 9/12/2014
Lec. No : 6
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Ex- suppose that the following data are related with a certain company

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which including a 2 production center A &B and 2 service center C&D

items A B C D
Overhead (50% variable) 20000 10000 8000 4000
Hours of using C 6000 4000
Max- hours of using C 8000 7000 -------- -----
Hours of using D 6000 7000 2000
Max- hours of using D 7000 8000 5000 ----
Actual capacity 10000 20000
Maximum capacity 15000 25000 ------------ -----
Require : calculate the analytical recovery rates in both A & B and also
calculate the unused fixed cost if you know that production dep- are only
responsible for the idle capacity of the whole firm .
Solution
Oh analysis sheet
items A (V) A (F) B(V) B(F) C (V) C (F) D(V) D(F)
OH(50% v) 10000 10000 5000 5000 4000 4000 2000 2000
Dist- of D (V) 780 910 260 (2000)
Dist- of D(F) 700 800 4260 500 ------- (2000)
Dist- of C(V) 2556 1704 4500 ------
Dist- of C (F) 2400 2100 --- ---- --- ---
Total 13336 13100 7614 7900 ----- ------ ------ -------
÷ ÷ ÷ ÷ ÷
Base 10000 15000 20000 25000
Analytical- recovery rates 1.33 0.87 0.38 0.31

Distribution of D (V) :

Dist- according to the actual hors of using D

Actual hours of using D = 6000+7000+2000=15000 hours
Per hours = 2000/ 15000= 0.13 per hour

Share of A = 0.13 X 6000= 780

Share of B = 0.13 X 7000= 910
Share of C = 0.13 X2000= 260

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Subject: cost accounting Date: 9/12/2014
Lec. No : 6
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Distribution of D (F):

According the maximum hours of using D

Max- hours = 7000+8000+5000=20000 hours
Per hours = 2000/ 20000= 0.1 per hour

Share of A = 0.1 X 7000= 700

Share of B = 0.1 X 8000= 800
Share of C = 0.1 X 5000= 500

Distribution of C (V) :

According to the actual hours of using C

Actual hours = 6000+4000=10000 hours
Per hour = 4260 / 10000 = .426 per h

Share of A = 0.426 X6000= 2556

Share of B = 0.426 X 4000= 1704

Distribution of C (F):

According to maximum hours of using C

Max- hours = 8000 + 7000 = 15000 hours
Per hour = 4500 / 15000 = 0.3 per hour

Share of A = 8000 X 0.3 =2400

Share of B = 7000 X 0.3 = 2100

(A) (B)
Maximum hours 15000 25000
(-) actual hours 10000 20000

= idle hours 5000 5000

X analytical recovery rates X 0.87 X 0.31
= unused fixed cost 4350 1550
Total unused fixed costs of the firm = 5900

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Lec. No : 6
Subject: cost accounting

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The end of lecture 6
Date: 9/12/2014

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