9.6 Sillycon Ltd is a business engaged in the development of new products in the electronics industry. Subtotals on the spreadsheet of planned overheads reveal:

Electronics department Testing department Service department Overheads: variable (£000) 1,200 600 700 fixed (£000) 2,000 500 800 Planned activity: Direct labour hours (’000) 800 600 The three departments are cost centres.

For the purposes of reallocation of the service department’s overheads, it is agreed that variable overhead costs vary with the direct labour hours worked in each cost centre.

Fixed overheads of the service cost centre are to be reallocated on the basis of maximum practical capacity of the two product cost centres, which is the same for each. Direct labour is a variable cost.

The business has a long-standing practice of marking up full manufacturing costs by between 25 per cent and 35 per cent in order to establish selling prices.