Overhead Absorption Rates

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi,

I know this might be a silly question, but it's driving me insane! I'm working away on the BPP Unit 6 Mock (+ even with the use of my textbooks and exercises it's tough!) and one of the questions asks me to reapportion costs of the Prod & Serv Depts and then calculate the overhead absorption rate. The next question asks me to reallocate the service dept costs to the Prod dept and then work out the o'head absorption rate again.

I'm then asked to comment on the effects of these methods and my problem is I don't really understand what my answers mean. Using apportionment method my o'head rates come out lower than the results I got when reapportioning the Serv Depts, but I don't know whether it is better to get a higher rate or a lower rate.

I know I should really know this by now! (starting to wonder how I got through Unit 6 & 7)

All help is much appreciated, cause I just want to get this mock out of the way and marked, so I know what I understand and what I don't and can fix it. I also want to get started on the ECR past papers and this mock is just holding me up!

mi|kshake~

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Overhead Absorption Rates

    Hi, what you are trying to do is find the fairest way of splitting overhead costs between departments. So those who have higher costs should have it reflected in the OAR.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Overhead Absorption Rates

    but how do you do that?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Overhead Absorption Rates

    In apportioning costs all you are doing is estimating how much each department is costing you to run in overheads, ie light, heat, hours worked.

    Well say you had 3 departments Manufacturing Assembly and the Canteen. You could share the overheads out equally between them and leave it at that, but would this be the fairest way as manufacturing and assembly staff use the canteen but nobody from the canteen uses the other two departments. So a fairer way might be to redivide the canteens overheads between the two other departments before calculating an OAR rate, which is the rate at which those overheads are absorbed. This then shows a true picture as assembly and manufacturing need to absorb higher costs in reality, ie they should "pay more" because they use more. Their overall costs are higher.

    Therefore when you compare the actual overheads absorbed with the budgeted ones it is more accurate.

    Nothing is written in stone however, and the question you were working on Milkshake is asking you to look a the fairest way of dividing costs, so if you reapportioned the stores and each department came out with a higher overheads figure and therefore OAR, it might be worth changing as it obviously makes a difference but if you reapportioned it and the figures were very similar then you would have to make a judgement on whether it was worth the hassle of changing.

    Hope this helps
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Overhead Absorption Rates

    Thanks for you help!

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