- This topic has 7 replies, 2 voices, and was last updated 1 year ago by
.
- Posts
Hello
The 2 qns below are from the bpp revision kit.7a.21 Consider the following statements, regarding the reapportionment of service cost centre overheads to production cost centres, where reciprocal services exist.
Which TWO statements are correct?
The direct method results in costs being reapportioned between service cost centres
If the direct method is used, the order in which the service cost centre overheads are reapportioned is irrelevant
The step down method results in costs being reapportioned between service cost centres
If the step down method is used, the order in which the service cost centre overheads are reapportioned is irrelevant
7a.25 A company uses a blanket overhead absorption rate of $5 per direct labour hour. Actual overhead expenditure in a period was as budgeted.
The under/over absorbed overhead account for the period have the following entries:
Production overhead 4,000 (on the debit side of the account)
Profit or loss account 4,000 (on the credit side of the account)Which of the following statements is true?
Actual direct labour hours were 800 less than budgeted
Actual direct labour hours were 800 more than budgeted
Actual direct labour hours were 4,000 less than budgeted
Production overhead was over absorbed by $4,000
From the first question, (the correct answers are the 2nd and 3rd statement) I don’t understand what does it mean by the 4th statement (the ORDER in which service cost centre overheads are reapportioned, i.e do we first begin with the service cost centre with a greater amount of overhead?)
And from the second question, the correct answer is, “Actual direct labour hours were 800 less than budgeted” but I don’t understand how that would indicate an under absorption as shown by the entries in the production overheads account. If actual hours are less than budget, isn’t that going to result into an over-absorption? (Actual overheads would be lower than the absorbed overheads)
Please help me understand the above more clearly, I will really appreciate your explanation
The first question is not very well worded by BPP.
When we use the reciprocal method of reapportioning the service centre costs then it does not matter which one is apportioned first (as I explain in my lectures). The final result will be the same.
If (and much less likely in the exam) then we do not do reciprocal apportionment, and just reallocate them once, then we should apportion the biggest one first.
For your second question, if they are crediting the account with 4,000 then they will be debiting the P&L with 4,000 which means that they are charging extra in the P&L.
Initially the amount in the P&L will be the actual hours multiplied by the standard absorption rate (as I explain in my free lectures) – this is the total amount absorbed. If they they need to charge an additional amount then it means that the initial amount was under-absorbed.
Therefore, for the first question the order would be to begin first with the cost centre with largest overheads right?
For the second qn, the problem is not about why is there going to be an under-absorption. The confusion I had was relating to why the actual hours would be LESS than the budget, as stated in the answer, for there to be an under-absorption. Please explain how exactly.
I apologise for the late response, I’m looking forward to your explanation
Your first sentence is correct.
The 4,000 credited to the account will have been debited to the profit and loss account. Debiting the profit and loss means it is an expense, and when there is an additional expense it is because the overheads must have been initially under-absorbed. We are charging an extra 4,000 to ensure that the correct total overheads end up being charged.The amount initially absorbed will be the number of hours at the absorption rate. If this is an under absorption then it must mean that the number of hours was less than budgeted.
- The topic ‘Overheads’ is closed to new replies.