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CA Intermediate · Cost and Management Accounting · Overheads - Absorption Costing Method

Which of the following is the correct basis of apportioning 'Depreciation of factory machinery' among production and service departments in a factory using the absorption costing method?

Depreciation of factory machinery is apportioned on the value or cost of machinery in each department, because the expense is caused by the asset held. Floor area suits rent, and employee numbers suit welfare costs, so they are not appropriate for depreciation.

  1. AFloor area occupied by each department
  2. BNumber of employees in each department
  3. CValue (cost) of machinery in each departmentCorrect
  4. DDirect labour hours worked in each department

Explanation

Depreciation arises from the machinery itself, so the cost or book value of machinery in each department is the logical basis. Floor area is used for rent, and number of employees is used for items like canteen or ESI. Direct labour hours is an absorption basis, not an apportionment basis for depreciation.

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