Question

Question 4 Tenaga Engineering Sdn Bhd is a medium size engineering company which undertakes contract Jobs for construction companies. All jobs pass through its three production departments: fabrication, assembly and finishing. The Company has two service departments: stores & maintenance. The typical annual cost and other data for the production and service department is shown in the table below: Tenaga Engineering Sdn Bhd - Cost and Other data Production Departments Cost Items (RM) Fabrication Assembly Direct labour 60,000 45,000 Indirect Labour 20,000 15,000 Repairs 10,000 8,000 Indirect supplies 20,000 10,000 Employee Welfare 9,000 7,000 Service Departments Finishing Stores Maintenance 30,000 15,000 25,000 15,000 1,500 3,000 6,000 8,000 10,000 2,200 4,000 1,500 1,800 Total 119,000 85,000 65.000 18,000 40,000 Electricity (kw) Asset value (RM) Area (Sq, yds) No. of employee Machine Hours 600 60,000 150 30 6,000 Other Data 450 50,000 250 20 5,000 300 40,000 100 15 4.000 100 20.000 50 5 150 30.000 50 5 The Company incurs the following costs for production and service departments during the year. Cost Items Power Maintenance Rent Depreciation Employees' insurance Supervision Total RM 5,000 15,000 12.000 25,000 7,500 12,000 76,500 Basis of cost Allocation

Answer 1

The first step is to construct an overhead analysis sheet having separate columns for each cost centre, together with a column for the total costs, a description of the cost item, and the basis upon which the cost has been apportioned between the cost centres if applicable.
The first stage in the analysis of production overheads is the selection of appropriate cost
centres. The selection will depend on a number of factors, including the level of control
required and the availability of information.
Having selected suitable cost centres, the next stage in the analysis is to determine the
overhead cost for each cost centre. This is achieved through the process of allocation and
apportionment.
Cost allocation is possible when we can identify a cost as specifically attributable to a
particular cost centre. For example the salary of the manager of the packing department
can be allocated to the packing department cost centre. It is not necessary to share the
salary cost over several different cost centres.
Cost apportionment is necessary when it is not possible to allocate a cost to a specific
cost centre. In this case the cost is shared out over two or more cost centres according
to the estimated benefit received by each cost centre. As far as possible the basis of
apportionment is selected to reflect this benefit received. For example, the cost of rent
and rates might be apportioned according to the floor space occupied by each cost
centre.
The following example illustrates the allocation and apportionment of production overhead costs.

The information given below relates to a four-week accounting period of WHW Ltd. Machining Assembly Finishing Stores Area occupied (square metres) 24,000 36,000 16,000 4,000 Plant and equipment at cost (£000) 1,400 200 60 10 Number of employees 400 800 200 20 Direct labour hours 16,000 32,000 4,000 Direct wages (£) 32,600 67,200 7,200 Machine hours 32,000 4,000 200 Number of requisitions on stores 310 1,112 100 Allocated costs £ £ £ £ Indirect wages 9,000 15,000 4,000 6,000 Indirect materials 394 1,400 600 Maintenance 1,400 600 100 Power 1,600 400 200 Other costs (in total) £ Rent 2,000 Business rates 600 Insurance on building 200 Lighting and heating 400 Depreciation on plant and equipment 16,700 Wage-related costs 28,200 Factory administration and personnel 7,100 Insurance on plant and equipment 1,670 Cleaning of factory premises 800 57,670.

Appropriate Absorption should be calculated as below.
It is calculated by dividing the average number of sales per month by the total number of available homes. This equation can also be reversed to identify the number of months it would take for supply to be sold. A variation of absorption rates may also be used in corporate finance to allocate costs.