Chapter 30 Costing principles and systems – total (or absorption) costing

Q1 (a)
(i) A cost centre is any location to which costs can be allocated or apportioned. It may be a department in
a business, a piece of plant or a machine, a job or product, or a person. Overheads are allocated when
incurred specifically for the cost centre, or apportioned in other cases. The overheads are absorbed by cost
units on the basis of overhead absorption rates.
(ii) A cost unit is a unit of production which absorbs overheads on the basis of overhead absorption rates.
The unit may be a product, a service or a period of time. Absorption rates may be calculated on machine
hours or direct labour hours.

(b) Julie and Clearly Ltd

Analysis of overheads for the year ending 30 April 2002
(i) Moulding Sanding Painting Canteen Maintenance
$ $ $ $ $
Administration 20 000 25 000 20 000 19 000 20 000
Power 28 000 32 000 3 000 3 200 3 200
Depreciation 16 200 17 500 4 000 4 300 8 000
Indirect wages 6 000 11 250 6 375 18 750 36 190
Rent 21 875 16 625 17 500 10 500 14 000
Canteen 13 117.65 16 397.06 13 117.65 (55 750) 13 117.65
Maintenance 37 151.42 28 235.08 29 721.14 (95 107.65)
142 344.07 147 007.14 93 713.79

142 344.07
(ii) Overhead recovery rates: Moulding = 7750
= $18.37 per machine hour
147 007.14
Sanding = 5625
= $26.13 per machine hour
93 713.79
Painting = 7500
= $12.50 per direct labour hour

Q2 Auckland (Manufacturers) Ltd

(a) Total Machining Assembly Maintenance Power house

$000 $000 $000 $000 $000
Indirect materials Actual 1 064 298 482 132 152
Indirect labour Actual 2 578 706 918 282 672
Rent etc. Area 1 426 465 775 155 31
Supervision Employees 660 176 352 88 44
Plant depreciation values 1 650 975 375 180 120
7 378 2 620 2 902 837 1 019

(b) Re-apportion Power 713 204 102 (1 019)

Re-apportion Maintenance
(hours) 704 235 (939)
4 037 3 341

4 037 000
(c) Machining OAR 11 080
= $364.350
3 341 000
Assembly OAR 4 800
= $696.042
Q3

(a) Overhead expenses are those expenses that cannot be directly attributed to the manufacture of an identifiable
product or to any one activity of a business. They are costs incurred for the general running of the business.

(b)
(i) Overhead expenditure is allocated to a cost centre if it has been incurred specifically for that centre and can
be identified wholly with that centre.
(ii) Expenditure is apportioned to cost centres when it is made for the business generally, or for more than one
cost centre and cannot be identified separately for the centres.

(c)
(i) Overhead absorption is the addition of overhead to cost units by the application of overhead absorption rates.
(ii) Overhead under-absorption occurs when the actual expenditure on overheads in a period is not wholly
absorbed by the production of goods or services in the period. This may happen when actual expenditure
exceeds budget, or production falls below budget.
(iii) Overhead over-absorption occurs when the total of overhead absorbed by production in a period exceeds the
actual expenditure incurred on overheads in that period. This may occur when actual expenditure is less than
budget, or production exceeds budget.

(d) A company might recover more overheads than the amount spent on overheads in a period because:
(i) the number of machine hours or direct labour hours worked was higher than budget
(ii) the actual overhead expenditure was lower than budget.

(e) Estimated figures are used to calculate overhead absorption rates because the rates must be prepared in
advance of the period to which they relate if they are to be of any use. Actual expenditure on overheads for the
period is not known, and so must be estimated.