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CIMA C1
Fundamentals of Management Accounting
Class Slides Ian Wilson
2.
3.
4.
5.
Allocation &
Apportionment
A Company will have a Total Production
Overhead spend in mind, say 500K.
If it has 2 Departments, Cutting & Finishing,
how much does it charge to each of these
Departments?.
Dividing up Overheads is a critical process
as they will drive Absorption rates as we
have already seen
We follow a 3 stage process:
Allocation &
Apportionment
1.
2.
3.
Allocation
Apportionment
Re-Apportionment
. You
Allocation &
Apportionment
Allocation:
Means:
Charging cost centres with Overheads that
are incurred solely in that centre.
Allocation &
Apportionment
Apportionment:
Means:
Some costs relate to a business as a whole
Splitting shared Overheads between cost
centres using some form of fair basis.
eg: using floor area for rent & rates
Allocation &
Apportionment
Re-Apportionment
Means:
Re-splitting Overheads from service cost
centres to production cost centres.
eg: moving service costs for say Canteen &
Maintenance centres to production cost
centres based on benefit & use of those
service centres
Allocation &
Apportionment
Exercise 1 page 36
We can complete this exercise to practice
the theory, first lets get our details right.
Indirect Wages & Materials have already
been ALLOCATED to the various cost centres
Machining - Production
Assembly - Production
Finishing - Production
Maintenance Service
Lets calculate an answer:
Secondary Apportionment
Not all departments are PRODUCTION
based.
Some departments provide Services to
production departments.
These departments are called SERVICE
departments.
Secondary apportionment is therefore
apportioning service centre costs to
production cost centres.
Reciprocal Servicing
What happens when service centres provide
services for each other?
This is service to service
There are 2 ways to deal with this issue:
1. Elimination
2. Repeated Distribution
. Examples
OAR
There are 3 common ways to achieve this:
1. A Rate per Unit (identical units)
2. A Rate per Labour Hour (human time
intensive)
3. A Rate per Machine Hour (machine time
intensive)
All of the above are set at a pre-determined
rate, using Budgets or expected estimates of
production costs (BOAR).
OAR
Rates of Overhead HAVE to be available at
the START of the production period.
The business CANNOT wait until the end of
the accounting period to see what the
ACTUAL production overhead costs were.
The BUDGET figures for Overheads are used
EXAM FOCUS
Try Exercise 6 Page 41
This is a typical exam style question.
You are given 4 answers!.
Which is correct?
In Simple Terms:
Over Absorbed:
Absorbed Overhead > Actual Overhead
Under Absorbed:
Absorbed Overhead < Actual Overhead
Actual Overhead:
xxx
Under/Over Absorption:
xx
Exercise 7
Costs
We have seen that Costs can be used for:
1. Valuing Stock
2. Planning
3. Decision making
4. Control
. What else will product/service costs be used
for?
Pricing
As a Management Accountant, you will be
asked to price products based on their cost
value. This means setting the Sales Price.
You will have to consider:
1. Mark-up (profit expressed as a % of cost)
2. Margin (profit expressed as a % of price)
Marginal Costing
What is Marginal Costing?
This takes place where Overhead Costs are
written off in full to the period in which they
occur.
Production Overheads under this method
are NOT added to Prime Cost as is the case
with Absorption Costing
Absorption Costing
template
Direct Materials
Direct Labour
Variable Costs
Direct Expenses
= Prime Cost
Production Overheads - Fixed Costs via OAR
Absorption Costing
template
Sales
Less Production Costs
= Gross Profit
Gross Profit
Less Expenses (Non-Production)
= Net Profit
Marginal Costing
The reconciliation can be made simpler by
working to a method:
Note:
This is an exam favourite topic
Learn the next slide well:
AC = Absorption Costing Profit
MC = Marginal Costing Profit
A business can have opening & closing stocks
Stock levels MAY differ
We can then tackle a second question:
MC Profit = AC Profit
Exercise 2
Sales Price 10
Direct Materials 3
Direct Labour 2
Variable overheads 1
Fixed Overheads 10,000 per month
Budgeted Production 5000 units per month
Actual Production & Sales = 4800 units
Required:
Work out Marginal & Absorption Profits
Exercise 3
Fixed overhead & Stock Effect
Re-work Exercise 2
Make the following adjustment:
Actual Production = 6,000 Units
Actual Sales = 4,800 units
Calculate the Absorption & Marginal Profit
Statements
Then, Reconcile the difference in profits: