Overhead allocation

PhilMickelson

Hey.

Just looking for some opinions on the question below.
It says to reallocate the service cost centre overhead costs using the multi-step method, starting with the cost centre with the lowest costs.

My first reaction would be to allocate the utilities....this is also in accordance with the "starting...with the lowest costs".

Then however, i probably would have allocated personnel before allocating machine maintenance. However, personnel is higher than machine maintenance.

I know it doesnt say "in ascending order" but I just want to be sure.


Any help would be greatly appreciated.

Thanks;)

hivizman

First step: reallocate the utilities cost to the four remaining cost centres, using an appropriate allocation basis.

Second step: reallocate the machine maintenance cost (increased by the allocated utilities cost) to the three remaining cost centres, using an appropriate allocation basis (which in this question will be different from the first step).

Third step: reallocate the personnel cost (increased by the reallocated utilities cost and, if any, the reallocated machine maintenance cost), using an appropriate allocation basis (which will in this question be different from the first and second steps).

This results in all overheads being allocated to the two production cost centres. Finally work out the overhead recovery rates using the specified labour hours basis.

If you choose the appropriate allocation bases, all the reallocations give round thousands of the monetary unit. For simple overhead allocation questions, this is usually a giveaway that the approach is correct.

PhilMickelson

hivizman wrote: »

First step: reallocate the utilities cost to the four remaining cost centres, using an appropriate allocation basis.

Second step: reallocate the machine maintenance cost (increased by the allocated utilities cost) to the three remaining cost centres, using an appropriate allocation basis (which in this question will be different from the first step).

Third step: reallocate the personnel cost (increased by the reallocated utilities cost and, if any, the reallocated machine maintenance cost), using an appropriate allocation basis (which will in this question be different from the first and second steps).

This results in all overheads being allocated to the two production cost centres. Finally work out the overhead recovery rates using the specified labour hours basis.

If you choose the appropriate allocation bases, all the reallocations give round thousands of the monetary unit. For simple overhead allocation questions, this is usually a giveaway that the approach is correct.

Thanks a million:)

I hate to sound the gom now but......
Is it a general rule to allocate Machine Maintenance before personnel or is it just because it's a smaller figure?


Also....€5.02 and €1.04 per dir lab hr???
:P
Dont have 2 answer that bit if you dont want:P

hivizman

There's no specific rule telling you in what order to allocate overheads from service cost centres. It's just this question that says (or at least implies) "allocate them in ascending order of monetary value". There's a more advanced technique sometimes called "reciprocal allocation" that can be used where there are multiple service cost centres and some of them provide services to other service cost centres, but this doesn't apply in the current question. If you allocate personnel costs before machine maintenance, then the total overheads allocated to the two production cost centres are virtually the same as the allocations that you get by allocating personnel costs after machine maintenance, but this won't always be the case. So the order of allocation is often arbitrary in practice, but given that the calculations work out neatly using the ascending order of size approach, I'm sure that whoever devised the question had this answer in mind.

By the way, I also got £5.02 and £1.04, so either we are both correct or both in error.