Denim Blue Ltd makes jeans. It has two cost centres: the cutting department where the denim is cut out by machine, and the stitching department where the jeans are sewn and finished. Some of the production overheads have been allocated to the two cost centres from information available within the business, but the remainder must be apportioned in some way. The following information should help you decide a fair way of sharing them between the two departments.

First, you need to decide the basis on which to apportion the production overheads, and then calculate the portion that will be borne by each cost centre. The indirect materials and indirect labour used in production have already been allocated and entered on the pro forma below. The rent has also been apportioned to show you the method. Rent is best apportioned on the basis of the area occupied.
The total area is 250 + 150 = 400 sq metres and the rent is £12,000. Therefore, the rent can be apportioned as follows:

Transcribed Image Text:

Total Cutting department Stitching department Production area 400 sq metres 250 sq metres 150 sq metres Number of employees 20 5 15 Value of machinery 120,000 100,000 20,0000 Value of inventory 120,000 40,000 80,0000