How are overheads allocated, apportioned and absorbed into the cost of a job so that a selling price can be set?
The allocation and apportionment of overheads to cost centres, the calculation and use of an overhead absorption rate, and the build-up of the total cost of a job from direct materials, direct labour, direct expenses and absorbed overhead.
A focused answer to the SQA Higher Accounting job and overhead costing content, covering the allocation and apportionment of overheads, the overhead absorption rate, absorbing overhead into a job, and building up total cost to set a selling price.
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What this dot point is asking
The SQA wants you to charge overheads to the products that cause them so that a full cost, and hence a selling price, can be worked out for a one-off job. This means allocating and apportioning overheads to cost centres, calculating an overhead absorption rate, and building up the total cost of a job from its direct costs plus a fair share of overhead.
Why overheads need absorbing
Direct costs, such as the materials and labour in a job, can be traced straight to it. Overheads, such as factory rent, supervision, heating and machine depreciation, cannot. Yet a price that ignored them would not cover the full cost of doing business. Overhead costing is the method for sharing these indirect costs fairly so that every job carries a reasonable portion.
Allocation and apportionment
If an overhead belongs entirely to one cost centre, it is allocated there in full, for example the salary of a supervisor who works only in one department. If an overhead is shared, it is apportioned on a basis that reflects how each centre causes the cost: floor area for rent and rates, number of employees for canteen costs, value of machinery for machine insurance. Choosing the right basis matters, because the wrong one distorts each centre's overhead and therefore the cost of every job passing through it.
The overhead absorption rate
The rate is based on budgeted figures because a price must be quoted before the actual costs are known. A labour-hour rate suits labour-intensive work; a machine-hour rate suits machine-intensive work, where the cost of running machines drives the overhead.
Total cost and the selling price
Job costing is used wherever each unit of output is unique and made to order, such as printing, construction or custom engineering. Because each job differs, its cost must be built up individually rather than averaged across identical units.
Try this
Q1. Budgeted overheads are £60,000 and budgeted labour hours 12,000. Calculate the labour-hour absorption rate. [2 marks]
- Cue. £60,000 / 12,000 = £5 per labour hour.
Q2. A job uses direct costs of £500 and 8 labour hours at the rate above. Calculate its total cost. [2 marks]
- Cue. Overhead absorbed = 8 x £5 = £40; total cost = £500 + £40 = £540.
Q3. State a suitable basis for apportioning machine insurance and explain why. [2 marks]
- Cue. The value of machinery in each centre, because insurance cost rises with the value of machines being insured.
Exam-style practice questions
Practice questions written in the style of SQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
SQA Higher style5 marksA factory budgets overheads of £120,000 and 30,000 direct labour hours for the year. A job uses direct materials of £400, direct labour of 20 hours at £15 per hour, and direct expenses of £50. Calculate the overhead absorption rate per labour hour and the total cost of the job.Show worked answer →
Overhead absorption rate = budgeted overheads / budgeted labour hours = £120,000 / 30,000 = £4 per labour hour (1 mark).
Direct labour cost = 20 hours x £15 = £300 (1 mark).
Overhead absorbed = 20 hours x £4 = £80 (1 mark).
Total cost = direct materials + direct labour + direct expenses + overhead = £400 + £300 + £50 + £80 = £830 (2 marks). Markers reward the absorption rate, the labour cost, the overhead absorbed and the total.
SQA Higher style4 marksExplain the difference between the allocation and the apportionment of overheads, and give one example of each.Show worked answer →
Allocation charges a whole overhead to a single cost centre because the cost relates entirely to that centre, for example the salary of a supervisor who works only in the assembly department (2 marks for the point and example).
Apportionment shares an overhead that relates to more than one cost centre across those centres on a fair basis, for example factory rent split between departments on floor area (2 marks). Markers reward a clear distinction and a correct example of each.
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Sources & how we know this
- SQA Higher Accounting Course Specification — SQA (2023)