Section 2 of 8
Spread unallocated overheads across all departments (production and service) using the chosen basis.
Example — Brindley Ltd has departments: Pressing, Finishing, and Logistics (service).
| Overhead | Basis | Pressing | Finishing | Logistics | Total |
|---|---|---|---|---|---|
| Allocated | — | £126 000 | £84 000 | £30 000 | £240 000 |
| Rent | Floor area (3:2:1) | £30 000 | £20 000 | £10 000 | £60 000 |
| Total | £156 000 | £104 000 | £40 000 | £300 000 |
Service departments do not make products, so their costs must be moved to production departments before the OAR can be calculated.
Continuing the example — Logistics reapportioned on deliveries (Pressing 600, Finishing 400):
| Pressing | Finishing | Logistics | |
|---|---|---|---|
| After primary apportionment | £156 000 | £104 000 | £40 000 |
| Reapportion Logistics (60:40) | +£24 000 | +£16 000 | −£40 000 |
| Total | £180 000 | £120 000 | £0 |
Check: total overheads must equal the original total — £180 000 + £120 000 = £300 000 ✓
$$\text{OAR} = \frac{\text{Budgeted department overheads}}{\text{Budgeted activity level}}$$
| Method | Formula | When to use |
|---|---|---|
| Machine hour | Overheads ÷ Budgeted machine hours | Capital-intensive / automated processes |
| Labour hour | Overheads ÷ Budgeted direct labour hours | Labour-intensive processes |
Continuing the example (machine hour basis, Pressing 12 000 hrs, Finishing 8 000 hrs):
A product requiring 4 hrs Pressing + 3 hrs Finishing absorbs: (4 × £15) + (3 × £15) = £105 overhead per unit
Finished this chapter? Mark it complete to earn XP.