Marsden Bakery: Splitting Shared Costs Across Cost Centres
Marsden Bakery has one production site with two departments - bread and pastry - plus a small shop and a delivery van. The owner, Priya, wants a cost recording system in place before applying for a bank loan. She has gathered April costs: flour and butter £4,200 (bread £3,000, pastry £1,200); pastry chef wages £3,100; the supervisor's salary £2,800, his time split 60% bread and 40% pastry; rent £1,800, apportioned by floor area (bread 900 m², pastry 500 m², shop 200 m²); van fuel £640; shop assistant £1,500; oven depreciation £900 (bread ovens £600, pastry ovens £300); insurance £480, also apportioned by floor area. Priya says the supervisor 'is a production cost, so put all of it in bread where he spends most of his day', and asks whether van fuel counts as a production cost.
1. Allocate and apportion each of the eight costs to the four cost centres, stating whether each cost is direct or indirect and the basis used. Show the total for each cost centre.
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Rule applied: a direct cost can be traced wholly to one cost centre; an indirect cost is shared and must be apportioned on a fair, measurable basis.
| Cost | £ | Type | Basis | Bread | Pastry | Shop | Van |
|---|---|---|---|---|---|---|---|
| Flour & butter | 4,200 | Direct | Given usage | 3,000.00 | 1,200.00 | – | – |
| Pastry chef wages | 3,100 | Direct | Worked on pastry | – | 3,100.00 | – | – |
| Supervisor salary | 2,800 | Indirect | Time 60:40 | 1,680.00 | 1,120.00 | – | – |
| Rent | 1,800 | Indirect | Floor area | 1,012.50 | 562.50 | 225.00 | – |
| Insurance | 480 | Indirect | Floor area | 270.00 | 150.00 | 60.00 | – |
| Oven depreciation | 900 | Direct | Given by oven | 600.00 | 300.00 | – | – |
| Shop assistant | 1,500 | Direct | Works in shop | – | – | 1,500.00 | – |
| Van fuel | 640 | Direct | Van cost centre | – | – | – | 640.00 |
| Total | 15,420 | 6,562.50 | 6,432.50 | 1,785.00 | 640.00 |
Workings
- Total floor area = 900 + 500 + 200 = 1,600 m²
- Rent, bread = £1,800 × 900/1,600 = £1,012.50; pastry = £1,800 × 500/1,600 = £562.50; shop = £1,800 × 200/1,600 = £225.00
- Insurance, bread = £480 × 900/1,600 = £270.00; pastry = £150.00; shop = £60.00
- Supervisor, bread = £2,800 × 60% = £1,680.00; pastry = £1,120.00
Check: 6,562.50 + 6,432.50 + 1,785.00 + 640.00 = £15,420, which equals the total of the eight costs. No cost has been lost or double-counted.
2. Critically evaluate Priya's instruction to charge the whole supervisor's salary to bread, and advise her on how the van fuel should be classified.
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Supervisor's salary - Priya's treatment is wrong. The supervisor works for both production departments, so his salary is a shared (indirect) production overhead, not a direct cost of bread. If the full £2,800 is charged to bread:
- Bread would carry £1,120 more than it should, and pastry £1,120 less.
- Bread would look unprofitable and might be mis-priced or dropped, while pastry would look cheaper than it really is and be over-produced.
- The loan application would rest on distorted figures, and the bank may ask how the cost per loaf was built up.
Apportioning 60:40 is defensible because it is measurable (time records/timesheets) and reflects benefit received. Priya should keep timesheets or a diary record to support the 60:40 split - 'where he spends most of his day' is not evidence.
Van fuel The van does not make the product; it moves finished goods to customers or to the shop. It is therefore a selling and distribution (non-production) cost, held in its own cost centre, not part of production cost or the value of stock. It would only be a production cost if the van moved ingredients between production stages, which is not the case here.
Consequence: production cost per loaf is built only from bread's £6,562.50; van running costs are deducted later as a period cost.
3. Priya has given you the figures verbally from memory. Identify the source records she should hold for three of these costs and one weakness in her current approach.
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Records to support the figures
- Flour and butter £4,200: suppliers' purchase invoices and delivery notes, supporting the split between bread and pastry; a stores/requisition record shows what was actually used rather than bought.
- Wages £3,100 and salary £2,800: payroll records, contracts of employment and timesheets showing hours worked and the 60:40 split.
- Rent £1,800 and insurance £480: the lease/rental agreement and the insurance policy schedule, which also support the floor areas used for apportionment.
- Oven depreciation £900: the fixed asset register showing cost, date of purchase and depreciation policy.
Weakness in the current approach Everything is based on one person's recollection. Verbal, unrecorded figures cannot be audited, are easily misremembered, and cannot be compared month to month on a consistent basis. Priya should move to source documents filed monthly, with a simple stores record for ingredients and timesheets for staff, so each figure in the cost report can be traced back to evidence.