SingaporeAccountingSyllabus dot point

How is production overhead allocated and apportioned to cost centres and then absorbed into products?

Allocate and apportion overheads to cost centres and calculate overhead absorption rates

A focused answer to the H2 Principles of Accounting outcome on overheads. Allocation versus apportionment, choosing apportionment bases, reapportioning service centres, and calculating absorption rates per labour or machine hour.

Generated by Claude Opus 4.810 min answerUpdated 2026-06-06

Reviewed by: AI editorial process; not yet individually human-reviewed

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What this dot point is asking

SEAB wants you to allocate and apportion overheads to cost centres and then calculate overhead absorption rates to charge them to products. This is the machinery behind absorption costing: before overhead can be absorbed into a unit, it must first be gathered into the departments that incur it. The central insight is that overheads are shared out in stages, allocated where they belong wholly, apportioned where they are shared, then absorbed into products on a basis that reflects how the overhead is consumed.

The answer

Allocation versus apportionment

The first stage assigns overhead to cost centres (departments):

Allocation assigns a whole overhead to a single cost centre that caused it (for example a supervisor's salary to the department they run).
Apportionment shares an overhead that benefits several centres across them on a fair basis (for example rent split by floor area).

Choosing an apportionment basis

The basis should reflect how the cost is incurred:

Overhead	Fair apportionment basis
Rent, heating, lighting	Floor area
Machine depreciation, machine insurance	Machine value or machine hours
Supervision	Number of employees
Canteen, welfare	Number of employees

Reapportioning service centres

Some cost centres (stores, maintenance, canteen) serve the production departments rather than making products. Their costs are reapportioned to the production departments on a sensible basis (for example maintenance by machine hours), so that all overhead ends up in the production departments that will absorb it into units.

Calculating the absorption rate

Once all overhead sits in a production department, it is absorbed into products using a predetermined rate:

\text{Absorption rate} = \frac{\text{department overhead}}{\text{activity base}}

The activity base is usually labour hours (in labour-intensive departments) or machine hours (in machine-intensive departments). The overhead charged to a job is the rate times the hours the job uses, completing the path from total overhead to the cost of a single unit.

Worked example

A factory has overheads of: rent $\$ 40,000 $(by area) and indirect labour$ \ $30\,000$ (by employees). Department X has $300\,\text{m}^2$ and $20$ employees; Department Y has $100\,\text{m}^2$ and $10$ employees. Department X then absorbs its overhead over $8\,000$ machine hours. Find X's absorption rate.

Step 1: Apportion rent by floor area

Total area $= 300 + 100 = 400\,\text{m}^2$ . X's rent $= \dfrac{300}{400} \times 40\,000 = \$ 30,000 $; Y's rent$ = \ $10\,000$ .

Step 2: Apportion indirect labour by employees

Total employees $= 20 + 10 = 30$ . X's share $= \dfrac{20}{30} \times 30\,000 = \$ 20,000 $; Y's share$ = \ $10\,000$ .

Step 3: Total Department X's overhead

\text{X overhead} = 30\,000 + 20\,000 = \$50\,000

Step 4: Calculate X's absorption rate

\text{Rate} = \frac{50\,000}{8\,000 \text{ machine hours}} = \$6.25 \text{ per machine hour}

A job using $4$ machine hours in Department X would absorb $4 \times 6.25 = \$ 25$ of overhead. The two-stage process, apportion to the department, then absorb into the job, is exactly what examiners want to see laid out clearly.

Examples in context

Example 1. A factory-wide rate that misleads. A factory with one labour-intensive assembly department and one highly automated machining department uses a single factory-wide labour-hour rate. The automated department's heavy machine costs are then wrongly charged to labour-heavy products. Using separate departmental rates, machine hours for machining and labour hours for assembly, charges each product fairly, which is why departmental absorption beats a blanket rate.

Example 2. Reapportioning the maintenance department. A maintenance department costs $\$ 40,000 $and spends$ 70% $of its time on Department A's machines and$ 30% $on Department B's. Its cost is reapportioned$ \ $28\,000$ to A and $\$ 12,000$ to B before either department sets its absorption rate. This ensures the cost of supporting production reaches the products through the departments that actually used the maintenance.

Try this

Q1. Distinguish allocation from apportionment. [2 marks]

Cue. Allocation assigns a whole overhead to the single cost centre that caused it; apportionment shares a common overhead across several centres on a fair basis.

Q2. A department's overhead is $\$ 90,000 $over$ 15,000 $labour hours. Find the absorption rate and the overhead on a job of$ 5$ labour hours. [3 marks]

Cue. Rate $= \dfrac{90\,000}{15\,000} = \$ 6 $per labour hour; job overhead$ = 5 \times 6 = \ $30$ .

Q3. Explain why a machine-intensive department should absorb overhead on machine hours. [2 marks]

Cue. Most of its overhead (power, depreciation, maintenance) is driven by running machines, so machine hours best reflect how the overhead is incurred and charge products fairly.

Exam-style practice questions

Practice questions written in the style of SEAB exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

Original7 marksTwo production departments share these overheads: rent

\

60\,000

(apportion by floor area) and machine depreciation

40\,000

(apportion by machine value). Department A has

600\,\text{m}^2

and machines worth

\

300\,000

; Department B has

400\,\text{m}^2

and machines worth

100\,000

. (a) Apportion each overhead. (b) Find each department's total overhead.

Show worked answer →

Apportion each overhead on the stated basis.

**Rent ( $\$ 60,000 $, by floor area$ 600:400 $, total$ 1,000,\text{m}^2 $):** A$ = \dfrac{600}{1,000} \times 60,000 = \ $36\,000$ ; B $= \dfrac{400}{1\,000} \times 60\,000 = \$ 24,000$.

Machine depreciation ( $\$ 40,000 $, by machine value$ 300,000:100,000 $, total$ \ $400\,000$ ): A $= \dfrac{300\,000}{400\,000} \times 40\,000 = \$ 30,000 $; B$ = \dfrac{100,000}{400,000} \times 40,000 = \ $10\,000$ .

Total overhead: A $= 36\,000 + 30\,000 = \$ 66,000 $; B$ = 24,000 + 10,000 = \ $34\,000$ .

Markers reward apportioning rent by area and depreciation by machine value, the correct fractions, and department totals of $\$ 66,000 $(A) and$ \ $34\,000$ (B).

Original6 marksA department has overheads of

\

120\,000

. It can absorb them on

30\,000

labour hours or

20\,000

machine hours. (a) Calculate the absorption rate under each basis. (b) Explain how to choose the more appropriate basis, and find the overhead charged to a job using

labour hours and

3$ machine hours under the machine-hour basis.

Show worked answer →

(a) Labour-hour rate $= \dfrac{120\,000}{30\,000} = \$ 4 \text{ per labour hour}$.

Machine-hour rate $= \dfrac{120\,000}{20\,000} = \$ 6 \text{ per machine hour}$.

(b) Choose the basis that best reflects how the overhead is incurred. In a machine-intensive department, where overhead is driven by running machines (power, depreciation, maintenance), the machine-hour basis is more appropriate; in a labour-intensive department, the labour-hour basis fits better.

Overhead charged to the job under the machine-hour basis $= 3 \text{ machine hours} \times \$ 6 = \ $18$ . (The labour hours are not used under this basis.)

Markers reward both rates, the principle of matching the basis to the cost driver, and the $\$ 18$ overhead charged using the machine-hour rate.