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Hello,
I hope someone will be able to bring some light into this!
My main issue with this topic is trying to understand how it is possible that we have on an Income Statement by the end of the year all these service overhead costs like for example Rent and Rates or Administration related expenses etc. mentioned in an extra section if they will be all “Re- apportioned” to production cost centres and into Inventory or Cost of Sales Account. There I am clearly missing something and I can not find any explanation anywhere. Sorry to bother with this but I am having my exam next week and I would like to fully grasp the topic instead of just learning the exercises. On the one hand I have read at some point that ONLY Production overheads will be absorbed but before the overheads being absorbed non production related overheads (Service costs) will be “Re- apportioned” to Production cost centres.Probably I should ask which Overheads will “not” or never be “Re-apportioned” and included in the Production costs.
Is there a difference between the actual bookkeeping process and what we do here? Is this purely done with planned/ budgeted figures?
Sorry to bother you with this but it is bothering me that I obviously have there a knowledge hole that I just need to fill.
Thanks again and
Kind regards
You are getting confused because you seem to assuming that all overheads are re-apportioned. Only service costs that support production will be absorbed as overheads in the costs of production. So, for example, the costs of running a factory are production costs – but the factory workers use a canteen which is also used by admin and sales staff. Only a portion of the canteen costs will be allocated to the factory and the remainder allocated between sales and administration. (This apportionment might be based on number of employees.) Other service centres might for example be a machine shop to repair equipment in the factory – if all it does is support the factory, 100% will be a production overhead. If, however, it is a vehicle repair workshop to service the salesmen’s cars and the a fleet of vehicles to deliver products to customers it is NON-production; it will be a selling and distribution cost.
Excellent!!!! Thank you very much, this is really all I needed to know!!! This distinction that “Only service costs that support production will be absorbed as overheads” was missing Can I give you somehow a star or a thumbs up?
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