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FOH Allocation
(FOH cost Allocation to different department like production and service. The term
allocation is refer to distribution of FOH cost in different Departments while using
different basis)

Question NO 1
Case # 01
A Company Production for the year ending 31st march 2009 is given below

Production Service
ITEM Department Department Total
P2 P3
P1 (Rs) (Rs) (Rs) office stores workshop
Direct wages 20,000 25,000 30,000 ……. ……. ………. 75,000
Direct Material 30,000 35,000 45,000 …… ……. ……… 1,10,000
Indirect Material 2,000 3,000 3,000 1,000 2,000 2,000 13,000
Indirect Wages 3,000 250 4,000 10,000 10,000 5,000 35,000
Area in square Meters 200 35,000 300 150 100 250 1,250
Book value of
Machinery 30,000 35,000 25,000 ……… ……… 15,000 1,05,000
Total Production Hour 15 20 25 ……… ……… 5 65
Machine hours 10,000 20,000 15,000 ……. …….. 5,000 50,000

General
Expenses: Total (Rs)
Rent 12500
Insurance 1050
Depreciation 15% of value of machinery
Power 3800
Light 1250
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Required
You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of
apportionment where necessary

Apportinate the Cost of service department to production department on the basis of Machine hour, direct
material cost, direct wages and calculate FOH Blanket absorption/applied Rate and FOH departmental
absorption/applied Rate. Note: FOH rate will be based on Machine Hour.

Solution:
Production Service
ITEM Basis of Department Department Total
P2
Apportionment P1 (Rs) (Rs) P3 (Rs) office stores workshop
Indirect
Material Actual 2,000 3,000 3,000 1,000 2,000 2,000 13,000
Indirect Wages Actual 3,000 250 4,000 10,000 10,000 5,000 35,000
Area in square
Rent meter 2,000 2500 3,000 1,500 1,000 2,500 12,500
Book value of
Insurance Machines 300 350 250 …… …. 150 1,050
15%value of
Depreciation Machinery 4,500 5250 3,750 ……. …… 2,250 15,750
Horse power of
Power Machinery 877 1169 1,462 …….. …… 292 3,800
Area per square
Light meter 200 250 300 150 100 250 1,250
Total 12,877 15519 15,762 12,650 13,100 12,442 82,350

Indirect material
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Allocated at actual basis in different department up to used extend in different department

Indirect Wages

Allocated at actual basis in different department up to used extend in different department

Rent

On the basis of area in square feet. Total area was in question given 1,250.actual rent was Rs.12,500 now
allocate that cost on the basis of area in square feet in different department, like in production department

P-1 area occupied is 200 square feet now allocate cost in this department would be =2,00 x 12,500/1,250=
Rs.2,000.same with P-2, area in this department occupied is 250 square feet now cost allocate to this
department is = 250 x 12500/1,250= Rs.2500 and so on with other production and service department.

Insurance

That cost is allocate to production and service department is on Book value of the Machinery, like machine
book value was total Rs. 1,05,000 but in Production department 1 it was Rs.30,000 and Production
department-2 was Rs,35000 and production department-3 was Rs. 25,000 and so on service department
.now we know that insurance expense was Rs.1,050.

Production department-1= Rs.1, 050 x 30,000/1, 05,000= Rs.300

Production department-2= Rs.1, 050 x 35,000/1, 05,000=Rs.350

Production department-3= Rs.1, 050 x 25,000/1, 05,000=Rs.250

Same we will find out with other service department.

Depreciation.

It is given in general expense the value of depreciation can be calculated 15% of book value of machinery

Which become 1, 05,000@15%=Rs.15,750?

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Now distribute/allocate it in different department on the basis of book value of machinery in different
departments.

Production department-1= Rs.15, 750 x 30,000/1, 05,000= Rs.4500

Production department-2= Rs.15, 750 x 35,000/1, 05, 000=Rs.5250

Production department-3= Rs.15, 750 x 25,000/1, 05,000=Rs.3750

Same we will find out with other service department.

Power

The cost of power has been distributed on the basis of horse power of machinery. Power cost was Rs.38,
00. Now distribute/allocate it in different department on the basis of Horse power used/consumed in
different departments.

Production department-1= Rs.3800x 15/65= Rs.877

Production department-2= Rs.3800 x 20/65=Rs.1169

Production department-3= Rs.3800 x 25/65=Rs.1462

Same we will find out with other service department.

Light

In this question total light expense was Rs.1, 250. Now distribute/allocate it in different department on the
basis of Are per square feet used/consumed in different departments.

Production department-1= Rs.1, 250x 200/1250= Rs.200

Production department-2= Rs.1, 250x 250/1250=Rs.250

Production department-3= Rs.1, 250x 300/1250=Rs.300

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Same we will find out with other service department.

FOH Apportionment.
The Term apportionment is simple refer to the cost of service department allocate or distribute to the
production department, because service department do not keep their cost in own department rather
distribute or allocate it in production department by using different method. After doing this a firm is
enabling to learn their total cost of FOH which will be used in determining the FOH rate. (Total FOH in
Rs/labor, machine hour or out put in units=FOH rate)

Production Service
ITEM Basis of Department Department Total
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P2 P3
Apportionment P1 (Rs) (Rs) (Rs) office stores workshop
Indirect
Material Actual 2,000 3,000 3,000 1,000 2,000 2,000 13,000
Indirect Wages Actual 3,000 250 4,000 10,000 10,000 5,000 35,000
Area in square
Rent meter 2,000 2500 3,000 1,500 1,000 2,500 12,500
Book value of
Insurance Machines 300 350 250 …… …. 150 1,050
15%value of
Depreciation Machinery 4,500 5250 3,750 ……. …… 2,250 15,750
Horse power
Power of Machinery 877 1169 1,462 …….. …… 292 3,800
Area per
Light square meter 200 250 300 150 100 250 1,250
Total 12,877 15,519 15,762 12,650 13,100 12,442 82,350
Apportionment
Of work shop
Over heads Machine Hour 2,765 5,530 4,147 ------------ --------- (12,442)
Apportionment
Of stores Direct
Over heads Materials 3,573 4,168 5,359 …………. (13,100)
Apportionment
Of Office
Over heads Direct wages 3,373 4,217 5,060 (12,560)
Total Cost of
production/FOH
cost ……………. 22,588 29,434 30,328 …………….. …………… ……….. 82,350

FOH blanket absorption/applied Rate:

A blanket absorption rate is a single rate of absorption used throughout an organization’s
Production facility and based upon its total production costs and activity.
The use of a single blanket rate makes the apportionment of overhead costs unnecessary since
the total production costs are to be used. How ever this is not recommended for the following
Reasons:
• It relies on a single activity measure being appropriate for the entire production function.
• It does not distinguish between the miming costs of particular activities or departments
When absorbing costs into cost units.

Total FOH Cost / Total Machine Hour

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(We have recently calculated the value of total production/FOH cost. Total Machine hours given in the
question)

82,350 / 50,000 =Rs: 1.647 is FOH blanket absorption/applied Rate.

FOH Departmental absorption/applied Rate:

A departmental absorption rate is a rate of absorption based upon the particular departments Overhead
cost and activity level .this method allows the activity of each department to be measured using a basis
which is appropriate. It also ensures that the cost attributed to the cost unit reflects the cost of the
Departmental resources used in its cost units.

(We have recently calculated the value of each individual production department’s FOH / production cost.
Machine hours of each individual Production department are given in the question)

Production Department -1 Production Department -2 Production Department -3

FOH cost of production department-1 FOH cost of production department-2 FOH cost of production department-3
Machine hours consumed/used dep-1 Machine hours consumed/used dep-2 Machine hours consumed/used dep-3

22,588 / 10,000= Rs.2.2588 per 29,434 / 20,000= Rs.1.4717 per 30,328 / 15,000= Rs.2.0219 per machine hour
machine hour machine hour

Methods of Apportionment:
There are two methods used for Service department cost apportioned to production department.

1. Repeated distribution method

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2. Algebraic method

Case # 2
In a Factory there are two service department P and Q and Three production department A,B,and C.In
April

1997 the departmental expenses were:

Departments Rs.
A 6,50,000
B 600000
C 500000
P 1,20,000
Q 100,000

The service department’s expenses are allotted on a percentage basis as follow:

Service Production Service

Departments Departments Departments
A B C P Q
P 30 40 15 ………. 15
Q 40 30 25 5 …………..

Prepare statement showing the distributaries of the two service department’s expenses to the three
producing departments by

1. Repeated distribution method

2. Algebraic method
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Solution:
Repeated distribution method
Under this method, the total of overhead costs of the service departments are distributed to other
Service and production department according to the given percentage till the expense of all service
A department is exhausted or remains insignificant.

Production Service
Detail Departments Departments
A (Rs) B (Rs) C (Rs) P (Rs) Q (Rs)
Expense as per
Summery 6,50,000 600,000 500,000 120,000 100,000
Apportionment Of P
EXP 36,000 48,000 18,000 (120,000) 18,000
Apportionment Of Q
EXP 47,200 35,400 29,500 5,900 (1,18,000)
Apportionment Of P
EXP 1,770 2,360 885 (5,900) 885
Apportionment Of Q
EXP 354 266 221 44 (885)
Apportionment Of P
EXP 13 17 7 (44) 7
Apportionment Of Q
EXP 3 2 2 ………. (7)
Total Production/FOH
Cost 7,35,340 6,86,045 5,48,615

We have Total FOH cost for all three production departments is = 19, 70,000.suppose we have total
production departmental hours is 500,000 hours. So FOH applied rate would be 19, 70,000/500,000=3.94
per machine hour. Actually in this question we have assumed that FOH will be based on machine hour.
One thing remembers FOH can be based on labor hour and out basis, actual production. Its all
management decision what base it used for FOH.usually those bases uses which are consuming more
Cost, it might be machine / Labor hour or out basis

Same we can calculate departmental FOH rate if we have each individual departmental machine hours.
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Algebraic method
1- P = 120,000 + 5% Q

2- Q = 10,000 + 15% P

By putting the value of Q in equation (1)

P = 120,000 + 5% (100,000 + 15% P)

P = 120,000 + 5,000 + 0.0075P

P (1-0.0075)

P= 0.9925P= 125,000

P = 125,000 / 0.9925 = 125945 Approx

By putting the value of P in equation (2)

Q = 100,000 +15 %( 125945)

Q= 100,000 + 18892= 118892 Approx

Production Service
Detail Departments Departments
A B C P Q
Departmental Expenses 650,000 600,000 500,000 120,000 100,000
P department cost
apportion 37,783 50,378 18,892 (125,945) 18,892
Q department cost
apportion 40,557 35,667 29,723 5,945 (1,18,892)
Total production FOH Cost 7,35,340 6,86,045 5,48,615 ……… ……….
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