8. Overhead Apportionment/Job Costing Rooney Ltd has two production departments, X and Y and two ancillary service departments, 1 and 2 - Leaving Cert Accounting - Question 8 - 2019

Next, we transfer the service department costs to the production departments based on agreed percentages:

1. Service 1:

   • Total for Service 1 = Total Indirect Labour + Machine Maintenance + Factory Light and Heat = Need to Calculate Total
   • Production X: 60% of Service 1
   • Production Y: 40% of Service 1

2. Service 2:

   • Total for Service 2 = Total Indirect Labour + Factory Cleaning = Need to Calculate Total
   • Production X: 45% of Service 2
   • Production Y: 55% of Service 2

For each service, once we have the costs totalled, we can apply the percentages to find the costs to transfer.

To determine the overhead absorption rate for each department, divide total overheads by the appropriate measure (machine hours or labour hours):

• Production X:

$ext{Overhead Absorption Rate (X)} = \frac{\text{Total Overheads Absorbed}}{\text{Machine Hours for Production X}}$

• Production Y:

$ext{Overhead Absorption Rate (Y)} = \frac{\text{Total Overheads Absorbed}}{\text{Machine Hours for Production Y}}$

The selling price of Job No. 925 can be calculated based on total costs, including direct materials, direct labour, and applied overheads, plus the mark-up for profit. The general formula is:

$ext{Selling Price} = \text{Total Costs} \times (1 + \text{Profit Margin})$

Where:

• Total Costs = Direct Material + Direct Labour + Overhead Allocated

Transferring overheads from service departments to production departments is necessary because:

1. Cost Recovery: Service departments do not produce goods, so their costs must be allocated to production departments where the actual production occurs.
2. Accurate Product Costing: This ensures that the costs associated with making products are accurately represented in the product cost, leading to precise financial reporting and analysis.

1. Allocation: This is the process of assigning direct costs to specific departments or cost centers.
2. Apportionment: This is the allocation of indirect costs to different departments based on an equitable basis, reflecting how resources are utilized. Unlike allocation, costs are divided between departments.
3. Absorption: This refers to the process of absorbing all overhead costs into product costs, ensuring every unit produced carries a share of these costs.