Allocating overheads by area
Overheads such as rent belong to no single product; they are shared out to cost centres by a fair basis.
Worked example
In the overhead analysis sheet, building costs of £17,400.00 are to be allocated to the cost centres by floor area.
| Cost centre | Area (m²) |
|---|---|
| Materials | 360 |
| Production | 160 |
| Administration | 230 |
| Selling | 120 |
Worked solution
- 1.Total area = 360 + 160 + 230 + 120 = 870 m²
- 2.Cost per m² = £17,400.00 / 870 = £20.00
- 3.Production: 160 × £20.00 = £3,200.00; administration: 230 × £20.00 = £4,600.00
Typical mistake: Splitting the costs equally instead of by the allocation key.
Your turn
Three problems of exactly this type, each time with new numbers. Amounts with or without thousands separators.
Task
In the overhead analysis sheet, building costs of £11,600.00 are to be allocated to the cost centres by floor area.
| Cost centre | Area (m²) |
|---|---|
| Materials | 260 |
| Production | 390 |
| Administration | 160 |
| Selling | 350 |
Share of production in £
Share of administration in £
Amounts like 12,500 or 12500.50; percentages as a number (12.5). Round to the penny or 2 decimal places.
Formulas for this topic
- Allocate overheads by a fair basis (area, staff, kWh …)
- Reapportion service centres by the service they provide
- Material rate = material overhead / direct materials × 100
- Administration and selling rates = overhead / production cost × 100
Typical mistake: Splitting the costs equally instead of by the allocation key.
Frequently asked questions
What is the typical mistake in "Allocating overheads by area"?
Splitting the costs equally instead of by the allocation key.
What is a service cost centre?
A centre such as the vehicle fleet or canteen that works for other centres; its costs are passed on to them.