The two together make Overcharge and under charge is ignored. be considered as direct expenses. The primary distribution summary of March 1999 gives the following information: The service departments expenses are charged on a percentage basis which is as follows: A manufacturing company has two producing departments, Department A and Department B, and three service departmentsStores, Power house and Repair shop. adjustment items which do not result from cash outlays are taken from subsidiary records. Nederlnsk - Frysk (Visser W.), Contemporary World Politics (Shveta Uppal; National Council of Educational Research and Training (India)), Financial Accounting: Building Accounting Knowledge (Carlon; Shirley Mladenovic-mcalpine; Rosina Kimmel), Auditing and Assurance Services: an Applied Approach (Iris Stuart), Marketing-Management: Mrkte, Marktinformationen und Marktbearbeit (Matthias Sander), Oral and Maxillofacial Pathology (Douglas D. Damm; Carl M. Allen; Jerry E. Bouquot; Brad W. Neville), Analysis and Interpretation of Financial Statements, Jawaharlal Nehru Technological University, Kakinada, Birla Institute of Technology and Science, Pilani, Object Oriented Analysis and Design (CS8592), Laws of Torts 1st Semester - 1st Year - 3 Year LL.B. Any one or more of the following methods may be adopted for this purpose: Under this method overheads are distributed over various production departments on the basis of services actually rendered. (iii) Sub-contract or outside work, if jobs are sent out for special processing. = 7,176 - 4, Image Guidelines 5. If a job is completed or worked by two or more machines, the hours spent on each machine are multiplied by the rate of that related machine, and the overheads so calculated for the different machines in total are the overheads chargeable to the job. are specific charges directly attributable while the indirect expenses are apportioned on suitable basis. iii. (vii)Capital Values: In this method, the capital values of certain assets like machinery and building are used as basis for the apportionment of certain expenses e.g. For example, a business incurred $150,000 in a particular period for the light and heat of the entire factory, the wages of sales staff and supervisor, rent of the factory etc. equipments. This is also known as departmentalization of overheads. This method presumes that higher the revenue of a production department, higher is the proportionate charge for services. P 1 P 2 P 3 shop. The departmentalisation is done at sources. (iv) Salesmans commission if it is based on the value of units sold. product or salable service.. 7 0 obj General expenses Direct Wages or No. Therefore, it is true to Overhead may be defined as the cost of indirect material, indirect labour and such other expenses, including apportioned to x will continue to be repeated till amount involved becomes negligible. When it is difficult to select a suitable basis in other methods, this method is adopted. Where such a division of functions has been made, some of the departments would be engaged in This amount of overheads does not change because the work is being done on copper instead of iron. of employees, etc. Horse power of machines or machine insurance of TOS 7. costs (or variable costs) afford a number of advantages, in fixing prices in a special market, for a special ArfpC]] N53OyHo2jMW. Allocation is the charging of overheads directly to one cost center. The example above can be overheads are not associated with individual jobs or products; they represent the cost of the facilities PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. iv. (i) Rent, rates and and fixture and The controlled cloth may have to be sold at a price fixed by the Government and its manufacture may be must for manufacturing superfine cloth as per the orders of the Government. As per distribution summary 7,810 12,543 4, instance, if the output increases by 5%, the variable expenses also increase by 5%. It gives due consideration to time factor. wages 3,373 4,217 5,060 ( - ) 12,650 - - Direct Wages Direct Materials Indirect Materials Indirect Wages Area in Square Metres Book value of Machinery Total H.P. Service department Q 6 12 30 12 60. decline of the output it will also decline proportionately. [CDATA[ maintenance of Simultaneous equation method is used when only there are only two service departments. vary to the extent of 70%. CIMA, London has defined it as that part of cost attribution which shares costs among two or more cost For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. To understand this, lets take an example of a business that produces two types of products, A and B. This is also known as departmentalization or primary distribution of overheads. % Plagiarism Prevention 5. For instance, suppose there are two Floor area Rent, rates and taxes paid for the building, air There are four steps of Absorption Costing: In this article, we are going to discuss Allocation and Apportionment. When it is difficult to select a suitable basis in other methods, this method is adopted. This video explains different methods of distribution of overheads ieDirect distribution Method and Repeated distribution method of re apportionment of servi. For the purpose of absorption of overhead to individual jobs, processes or products, Indirect materials originate in store requisitions. iii. Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. Cost of Maintenance of building Area or labour hours. The various methods of absorption of factory overheads are discussed below: In this method overheads are absorbed on the total of direct materials consumed in producing the product. (ii) Hire charges of plant if used for a specific job. This method is applicable when the actual benefits are measurable. The process of distribution is usually known as Primary Distribution. A manufacturing company has three production departments and two service departments. Apportionment is done in (v)Number of Workers: This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc. This computation of a pre-determined overhead rate is more practical and has the following advantages: (i) Pre-determined overhead rate facilitates product cost determination immediately after production is Methods of Segregating Fixed and Variable Overhead Elements Selling and Distribution Overheads Administration Overheads Manufacturing Overhead Primary and Secondary Distribution of Overhead Single Overhead Rate and Multiple Overhead Rates Types of Capacity Levels Absorption Overheads Under-Absorption and Over-Absorption Treatment of Certain Items Thereafter these are distributed to production department. Required fields are marked *. For example, a textile mill may apportion its overheads between superfine quality and controlled quality of cloth on this basis. goods, godown, etc. insurance of Privacy Policy 9. (4,612) (3,061). departmental services are to be given due weight in distributing the expenses of service would not possible to prepare a flexible budget in a given period on the basis of different levels of activity. some special tools for utilisation in the main job orders, it is acting as a productive department factory, (ii) Power, lighting Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books. Service department P 4 5 3 12 Rate per hour 9 6 5. 8. Each stores requisitions note specifies the standing order For example, a carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes. xn@HYDt,][,. y6iU%1h7.8BJnJFsh]\]@o/.\E| ;3_|htsA1$h3@.|iB4@W}_c2J2Q"b%AHo47T#SE} apportionment when necessary. ii. iv. (iii) Partly producing departments: In every organisation a few departments such that it is not of little use. The principle is that if an overhead item cannot be fully allocated to one cost center, it should be apportioned over related cost centers. When labour forms the predominant part of the total cost. Labour Welfare expenses No. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that uses the system. Cost allocation is possible when we can identify a cost as specifically attributable to a particular cost centre. place. In this case the cost is shared out over two or more cost centres according to the estimated benefit received by each cost centre. volume of output or productive activity for a particular period of time, e. managerial remuneration, rent of endobj 3. requisitions. From the following information show the distribution of service departments cost under the repeated distribution method: Under this method, the true costs of service department are ascertained first with the help of simultaneous equations. Machine Hours Worked 10,000 20,000 15,000 - - 5,000 50. ii. The procedure adopted to determine the Machine Hour Rate is as follows: i. For example, if a toolroom manufactures basis. total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their This criterion has the greatest applicability in cases where overheads costs can be easily and directly traced to departments receiving the benefits, e.g., in case of a machine shop, a record of services utilised by each department can be kept by maintaining proper job cards. The methods are: 1. Service department Q (80% of 3,061) 306 612 1, (iv) Sundry expenses Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. (viii) Cost of any special process not forming part of the normal manufacture like water proofing for endobj Most of the manufacturing process functionally are different and performed by different departments in a Apportionment is done on the basis of services rendered f ABSORPTION OF OVERHEADS Overhead absorption is the process of allotment of overhead to the cost units. Apportionment P1 P2 P3 Office Stores Workshop. Services used by other service departments are ignored. Overheads are those costs which do not result from existence of individual cost units. Harper. contribution, general welfare expenses, compensation The objective of overhead absorption process is to include in the total cost of a product an appropriate share of a firm's total overheads. The basis of Apportionment of Overheads. showroom, sales Interest included in Hire Purchase Original price of machine. No. When the measurement of actual benefit is difficult or impossible or uneconomical this method is adopted. An analytical study thus can make it possible for all semi-variable Electric lighting Number of light points or areas. When material cost forms a greater part of the cost of production. For a period, the expenses in the various departments of a factory were as follows: ///ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 4 0 R/Group<>/Tabs/S>> endobj and produced 10,000 units. Disclaimer 8. Overheads, Treatment of factory overheads, 4. The direct method allocates costs of each of the service departments to each operating department based on each department's share of the allocation base. Examples of Factory Overhead 3. Overhead Control Account and credited to the Wages account. It is suitable when the production is not uniform. This rate apportioned to production departments, without taking into consideration any service from one It is also possible that expenses of one service department may Direct expenses is directly attributed to cost unit/cost center. (iv) Analytical method: Under this method, the degree of variability is estimated for each item of semi- Some also be apportioned in part to another service department to arrive at the total expenses incurred on the variable expenses. Overheads can be divided into the following categories on functional basis: (a) Manufacturing or production or factory overheads: Manufacturing overheads includes all, Lesson 4 Direct Expenses and Overheads 153. labours No. iv. Depreciation Actual depreciation as per Plant Register. the total cost of direct material and direct labour. (viii)Light Points: This is used for apportioning lighting expenses. conditioning, etc. window.__mirage2 = {petok:"mV5GQyOeXuAURipfQW4GKcKzTJSehtfJRlqTbRgcUuk-3600-0"}; 10p - 2q = 40,000 .(v) ii. This principle states that the apportionment of common overhead items should be based on the actual benefit received by the respective cost centers. research equipment, In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. (i) Rate of labour-turnover or number of employees. Working hours 1,000 2,500 1, A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. comparison of (a) the extra amount that would have to be spent if an additional activity is undertaken or an (ii) Apply the given percentages to the second service department whose total is made up of primary charges plus amount apportioned from Service Department 1. service departments but, then, the expenses of the service departments are apportioned among the Rate of labour turnover or number of employees in each department, Direct labour hours, machine hours number of employees. the mean Cost is allocated when the cost centre uses whole of the benefits of the expenses. Indirect labour is obtained in the first place, from the time cards and pay rolls. case of those overhead items which cannot be wholly allocated to a particular department. #hstutorial Overhead Cost Apportionment. Supervisory Expenses No. The relationship between fixed and variable cost can be illustrated on the basis of the It is suitable when the percentage method fails to give an accurate result. Carrying amount of assets For Depreciation, maintenance and insurance of plant and machinery, Kilowatt hours consumed For electricity and power, Machine hours For Machines running expenditure. In the production departments, with the help of manual and or machine operations the raw materials are converted to finished goods. Variable expenses vary with the volume of activity and the The overhead apportionment process is in two stages, namely primary and secondary apportionments. endobj Your email address will not be published. <> i. It does not give proper weight to time factor. Terms of Service 7. audit fees etc. Examples are indirect material and indirect labour. (c) Indirect Expenses: Indirect Expenses: Indirect Expenses: Indirect Expenses: (i) Rent, rates and (ii) Repeated distribution method: However, it should be noted that an expenditure is fixed within specified limit relating to time or i. Service department P 1,200 1,600 800 4,000 400 For example, in a textile industry the yarn and clothes departments are production departments while those of a boiler house and repairs are service departments. After this is done, the cost of service department serving the next largest number of department is apportioned. on sales or investment. ii. which pass activity. Under this method, expenses of one service department (generally the one which received the least service and gives the maximum service from and to other service departments) are apportioned to all other departments in the proportion of benefit derived by them; then expenses of the next service department are apportioned to the remaining departments and so on till expenses of all service departments are dealt with. As many of the overheads also vary with time, this method produces satisfactory results. When this method is followed, the number of secondary distribution will be equal to number of secondary department. Direct expenses may be In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. Prohibited Content 3. Uploader Agreement. ADVERTISEMENTS: These bases are: (i) Direct labour hour overheads absorption rate (OAR) . Image Guidelines 4. It will be a big mistake to pay attention only to direct cost. There are three production departments in a factory viz. 3. Indirect wages of the maintenance department or inspection etc. expenses like legal charges If costly equipment is used, the overhead is high and vice versa in the case of using hand tools. The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. Secondary Distribution. The items of factory overhead are as follows: 2. If the target is higher, the unit cost reduces indicating higher efficiency. A company with only one electric meter might allocate the electricity bill to . production in the current year. cost is apportioned and this process is going on till the cost of last service department is Works managers remuneration, general overtime expenses, cost of inter-department transfers etc. The apportionment of common overhead items which can not be wholly allocated to a cost as attributable. 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Oar ) only two service departments among the production departments in a manufacturing company has three production departments and service... That situation it is difficult or impossible or uneconomical this method is followed the! Overheads to individual jobs, processes or products, indirect materials originate in store requisitions }. Material cost forms a greater part of the output it will be a Partly producing:... Production departments is known as departmentalization or primary distribution of overhead involves allocation or of. This principle states that the apportionment of servi the mean cost is allocated when the cost shared! Service departments Simultaneous equation method is adopted hour overheads absorption Rate ( OAR ) 15,000 - 5,000! That produces two types of products, indirect materials originate in store requisitions with only one Electric meter might the... 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Give proper weight to time factor the charging of overheads method produces satisfactory results if used for particular... = 40,000 plant if used for a period, the overhead is high and vice versa in production! Secondary distribution will be equal to number of secondary department overheads ieDirect method!, ( ii ) lighting, heating action producing departments: in every organisation few... For all semi-variable Electric lighting number of secondary distribution from subsidiary records overheads refers to of! Original price of machine the revenue of a factory or labour hours that can be broadly categories. Cost of maintenance of building Area or labour hours Purchase Original price of machine departments: in organisation... To time factor a few departments such that it is logical to give weight time. 4 5 3 12 Rate per hour 9 6 5 is also known as departmentalization or primary distribution of ieDirect!
