1. **Problem Statement:** Company XYZ is preparing its production overhead budget and needs to allocate overhead costs to different cost centers: Machine Shop A, Machine Shop B, Assembly, Canteen, and Maintenance. 2. **Understanding the Data:** We have various overhead costs such as Indirect wages, Consumable materials, Rent and rates, Building insurance, Power, Heat and light, Depreciation (machinery), and related usage data like Power usage percentages, Direct labour hours, Machine usage hours, and Area in square feet. 3. **Allocation Methods:** - Some overheads are allocated based on direct labour hours. - Others are allocated based on machine hours, power usage, or area. 4. **Example Allocation Formula:** For overheads allocated by direct labour hours: $$\text{Allocated Cost} = \frac{\text{Direct Labour Hours for Cost Centre}}{\text{Total Direct Labour Hours}} \times \text{Total Overhead Cost}$$ 5. **Step-by-step Allocation for Indirect Wages:** - Total Indirect wages = 78,560 - Total direct labour hours = 35,000 - For Machine Shop A (8,000 hours): $$\frac{8,000}{35,000} \times 78,560 = 17,960.57$$ - Similarly for other centers. 6. **Allocation for Power (based on Power usage %):** - Total Power cost = 8,600 - Power usage % sum = 100% - For Machine Shop A (55%): $$\frac{55}{100} \times 8,600 = 4,730$$ 7. **Allocation for Depreciation (machinery) based on Value of Machinery:** - Total Depreciation = 40,200 - Total Value of Machinery = 402,000 - For Machine Shop A (201,000): $$\frac{201,000}{402,000} \times 40,200 = 20,100$$ 8. **Summary:** Each overhead cost is allocated to cost centers using the appropriate base (labour hours, machine hours, power usage, or area). This ensures fair distribution of overheads. **Final Note:** To complete the budget, apply these formulas to each overhead and cost center using the provided data.