164 ACCOUNTING FOR MANAGERS
Of the five departments, two are service departments. Their costs can be allocated
as follows (stage 3):
Service cost centre Method of allocation
Canteen Number of employees
Scheduling Number of production ordersTable 11.2 shows the figures produced to support the allocation process.
Once the costs have been allocated, a reasonable measure of activity is deter-
mined for each cost centre. While this is often direct labour hours (the most
common measure of capacity), the unit of activity can be different for each cost
centre (e.g. machine hours, material volume, number of units produced etc. For
non-manufacturing businesses the unit of activity may be hotel rooms, airline
seats, consultancy hours etc.) Using the above example and given the number of
labour hours in each cost centre, we can now calculate a cost centre overhead rate,
i.e. a budgeted overhead rate for each cost centre, as shown in Table 11.3.
The most simplistic form of overhead allocation uses a single overhead rate
for the whole business. As we previously calculated, thebusiness-wide budgeted
overheadrate is £25.00per direct labour hour(£100,000/4,000). This rate would apply
irrespective of whether the hours were worked in stages of production that had
Table 11.2 Overhead allocations
Expense Total cost Dept 1 Dept 2 Dept 3 Canteen Scheduling Allocation
calculation
Indirect wages £36,000 £18,000 £9,000 £2,000 £2,000 £5,000 from payroll
Factory rental £23,000
Area (sqm) 10,000 5,000 2,500 1,500 500 500 £2.30/sqm
Allocation £11,500 £5,750 £3,450 £1,150 £1,150
Depreciation £14,000
Asset value 140,000 40,000 60,000 30,000 7,000 3,000
Allocation £4,000 £6,000 £3,000 £700 £300 10% of asset
value
Electricity £27,000
Machine 9,000 3,000 2,000 4,000
hours
Allocation £9,000 £6,000 £12,000 £3 per machine
hour
Total £100,000 £42,500 £26,750 £20,450 £3,850 £6,450
Reallocate
service cost
centres
Canteen
No. 60 202515
employees
Allocation £1,283 £1,604 £963 −£3,850 £64.16/employee
scheduling
No. prod. 250 100 70 80
orders
Allocation £2,580 £1,806 £2,064 −£6,450 £25.80/order
Total cost £100,000 £46,363 £30,160 £23,477 £0 £0