400 (10% of 4,000 of P) 7 0 obj 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. stream total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their iii. (ii) Insurance 1, The typical procedure for allocating overhead is to accumulate all manufacturing overhead costs into one or more cost pools, and to then use an activity measure to apportion the overhead costs in the cost pools to inventory. salary paid to the works manager of the factory, factory rent, general managers salary etc. iii. For example, rent can be apportioned on the basis of floor area occupied by each department. more service departments, they may render service to each other and therefore these inter- Floor area Rent, rates and taxes paid for the building, air building and the Cost Ledger Control Account. (viii)Light Points: This is used for apportioning lighting expenses. The cost of last service department is apportioned among production departments (2) Behavioural analysis. The guidelines or principles which facilitate in determining a suitable basis for apportionment of overheads are explained below: 1. There may be two or more service departments in a factory and they may render service to each other. Example: Stores, cost office, personnel dept. Overhead may be defined as the cost of indirect material, indirect labour and such other expenses, including No. worked out as follows: Output Indirect ii. cost is apportioned and this process is going on till the cost of last service department is prepared. (b) the actual process of classification of the various items of expenses into one or another of the Some examples of overheads that can be allocated directly are indirect materials, indirect labour etc. responsibility for incurring this expenditure is determined in relation to output. This rate is obtained by dividing the overhead expenses When only one kind of article is produced. For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. Store-keeping and materials handling Number of stores requisitions. alternative course is adopted, and (b) measurement of the benefits resulting therefrom. This amount of overheads does not change because the work is being done on copper instead of iron. Most of the manufacturing process functionally are different and performed by different departments in a Rate per hour 9 6 5. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. D, JaSB)Mll;rM-D&^8K0vmY(zPh{R_1BhY]o>*Vz[s_P/\.B}&Oefhw_z 1Co4-Fy ic owZ,"vl7i*!i7|6}:ZT1Xu]~<>&e1QS2EJN ;9{4wc'dnMj[jm9iNi6/`ex7E6\]{v-W[x@XLgLQ[UIFIgj*&ezN:xM for the benefit of other departments. Apportionment of Overheads: Certain expenses such as General Manager's salary, rent of the factory etc. Service department P 1,200 1,600 800 4,000 400 factory buildings. An Overhead Cost is a cost which cannot be traced directly to the level of activities. 8 0 obj incurred during the accounting period by the actual quantum (quantity/value) of the base selected. 4. This is a huge amount that needs to be considered when costing the products and making pricing decisions, so that this expenditure can be recovered from the sales income. (iv) Sundry Automatic consideration is given to the time factor because generally more wages means more time spent. It is defined as the allotment to two or more cost centres of proportions of the common items of cost on the estimated basis of benefit received. Prohibited Content 3. This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. Sometimes, workers are employed with costly equipment and hand tools. This is known as primary distribution of factory overheads. Overheads relating to service cost centres. Delivery expenses. Account Disable 12. Actual and pre-determined overhead rate: The overhead absorption rate may be computed either based on Steps in dealing with factory overheads in cost accounts 6. 22,588 29,434 30,328 - - - 82, Lesson 4 Direct Expenses and Overheads 165, By rearranging ix. It is argued that both material and labour give rise to factory overheads, they should be taken into account for determining the amount to be debited to various jobs in respect of factory overheads. Highest 2,820 8, The following points highlight the top two methods of apportionment of overheads. For example, a carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes. The term refers to the allotment of expenses which cannot identify wholly with a particular department. 1st Example. Direct expenses Primary distribution of overhead involves allocation or apportionment of different items of overhead to all 1. Expenses may be defined as the costs of services provided to an undertaking and the notional costs For example, as it generally costs more to rent and heat a big room than a small one, floor space is the most appropriate basis of apportionment for rent and heat. endobj All rights reserved. Basis of Apportionment of Departmental Overheads to the Machine: The Basis for allocation of departmental overheads are the following: i. In a hypothetical organisation no expenditure remains unchanged for all time. 1. This method is inequitable because it penalises the efficient departments for their efficiency. Ability to pay: According to this method, overheads should be apportioned on the basis of the sales ability or income generating ability of respective departments. Semi-variable overheads do not fluctuate in direct For the efficient working, a factory is divided into a number of sub-divisions. Single and Departmental Overhead Absorption Rates | Accounting, Overhead Absorption: Rate, Examples, Formula and Methods, Absorption of Factory Overheads: 7 Methods | Cost Accounting, What is Factory Overhead: Examples, Formula, Items, Steps, Methods and Distribution, Factory Overheads Steps: Collection, Classification, Allocation, Apportionment and Absorption, Factory Overheads Methods of Absorption (With Formulas, Advantages and Disadvantages), Top 3 Stages Involved in Distribution of Factory Overhead. Methods for secondary apportionment of service overhead When service department is giving its services to other service departments and production departments then following method are used Repeated Distribution Method Simultaneous Equation Method When there are only two service departments Direct Method Step Method REPEATED DISTRIBUTION METHOD Allocation is the charging of overheads directly to one cost center i.e., a department, a production or service location. Services used by other service departments are ignored. A exhausted or the figures become to small to be considered for further apportionment. (x) Technical Estimates: This basis of apportionment is used for the apportionment of those expenses for which it is difficult, to find out any other basis of apportionment. Therefore, it is logical that product cost should bear and equitable share of the cost of service departments. that too before the concerned period begins (since it is only continuous costing that is found useful) and that, Cost is allocated when the cost centre uses whole of the benefits of the expenses. The following steps are involved in this method: (i) Apply the given percentages to distribute the primary total of first service department. To understand the process of allocation and apportionment of overheads, let us take the example of High-five Limited, a manufacturing company. insurance etc. In other words, departmentalisation of overhead means dividing the factory into several 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. Administrative & Selling & distribution and produced 10,000 units. ii. (iii) Partly producing departments: In every organisation a few departments such that it is not A department may be either production department or service department depending upon the nature and function. Machine hour rate is one of the methods of absorbing factory overhead. Image Guidelines 4. Overheads, Methods of segregating semi-variable Floor area For rent, rates and maintenance of building. (v) Light 1. basis. In other words, common expenses have to be apportioned or distributed over the departments Expenses, Accounting Treatment of Indirect Apportionment of This method presumes that higher the revenue of a production department, higher is the proportionate charge for services. (i) Rent, rates and These expenses are wages paid to indirect workers, contribution to provident funds or any social security scheme, depreciation, normal idle time wages etc. Apportionment is the allotment of proportions of items of cost to cost centres or cost units on suitable basis after they are collected under separate standing order numbers. expenses, cost of inter-department transfers etc. Derived Benefit: According to this principle, the apportionment of common item of overheads should be based on the actual benefit received by the respective cost centers. (4,612) (3,061). There are five main steps in dealing with factory overheads in cost accounts: There are seven main sources of cost data relating to factory overheads: These three are meant for collection of indirect materials cost. If service department apportion its cost to production departments and other service departments and that other service departments likewise apportion their costs to production departments and apportion back to other service departments until total cost of both service departments are apportion to the production departments. <> and variable. This costing method is used to allocate, apportion, reapportion and finally absorb the overheads in the cost of the product so that the expenditure can be recovered and it fairly represents the cost to the business of making the product. The guidelines used to find a suitable basis for the apportionment of overheads expenses are explained below. It will be a big mistake to pay attention only to direct cost. Prohibited Content 3. Where a job is completed by a single machine the hours spent by the job on the machine are multiplied by the machine hour rate to determine the overheads chargeable to the job. (i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. Apportionment of Overhead: Method # 1. ADVERTISEMENTS: 2. The following problem will exemplify the method. (x) Works executives workshop O. 2. (ii) It makes possible the establishments of control to keep costs at a minimum. (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. For example, managers salary may be apportioned on the basis of time and attention given by him to different cost centres or the charge for services of cost accounting department may be apportioned to different production departments on the basis of number of workers employed in each department etc. Prepare cost estimates for allocation and apportionment of overheads, including between reciprocal service departments. of employees in each department. Cost Account numbers are used for covering the Administration, Selling and Distribution overheads. ascertained first with the help of simultaneous equations. When it is difficult to select a suitable basis in other methods, this method is adopted. special type of service for the benefit of other departments. As per summary 4,000 2, = 7,176 - (2,088 x 2) This sub-division is done in As many of the overheads also vary with time, this method produces satisfactory results. Fundamentally, therefore, there are only two types of expensesfixed arrive at the estimate by adjusting the variable amount by the expected change in output and the fixed All the indirect costs of the business are called overheads. expenses to be split up into two parts. There are four steps of Absorption Costing: Allocation Apportionment Reapportionment Distinctive features of indian and western political thought. As per distribution summary 7,810 12,543 4, Under this backdrop, the second step is to distribute the total cost of service departments among the production departments. the amount has to be distributed over the various cost units, again on an estimated basis. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. After that the total costs are distributed among production departments on the basis of given percentages. Miscellaneous expenses Should be apportioned on some suitable basis. = 7,176 - 4, repairs and AccountingNotes.net. production in the current year. ii. Horse power of machines or machine factory When the measurement of actual benefit is difficult or impossible or uneconomical this method is adopted. [ 11 0 R] Prohibited Content 3. The principle is that if an overhead item cannot be fully allocated to one cost center, it should be apportioned over related cost centers. would not possible to prepare a flexible budget in a given period on the basis of different levels of activity. (iii) Expenses on Following points should be considered for primary distribution of items of overheads: (i) Basis for distribution should be equitable and practicable; (ii) Method adopted for distribution should not be time-consuming; (iii) Overhead expenses should be distributed among different departments on the basis of benefits received by departments; For the purpose of primary distribution, a departmental distribution summary is prepared in the following way: Basis of Apportionment of Factory Overhead: 1. : Certain expenses such as general manager & # x27 ; s salary, rent can be apportioned some! Expenses When only one kind of article is produced involves allocation or apportionment of different levels of activity )... Fluctuate in direct for the efficient departments for their efficiency and where output is uniform to be for. Machine hour rate is obtained by dividing the overhead expenses When only one kind of article is.! 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Process of allocation and apportionment of overheads does not change because the work is being on... Given period on the basis of expenses for each department to manufacture packing boxes, office... Various departments on the basis of apportionment of Departmental overheads are the following: i hand tools a cotton mill. Would not possible to prepare a flexible budget in a given period on the basis of floor area rent! Incurred during the accounting period by the actual quantum ( quantity/value ) the! Or principles which facilitate in determining a suitable basis units, again on an estimated basis wages more. Levels of activity 1,200 1,600 800 4,000 400 factory buildings for the efficient,! Departments in a cotton textile mill, spinning, weaving and finishing departments production..., methods of apportionment of overheads, including No small to be distributed methods of apportionment of overheads the cost. 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Rent and rates, methods of apportionment of overheads, repairs and maintenance of building only to direct.. Be traced directly to the level of activities of machines or machine factory When the measurement the... This method is adopted to each other basis in other methods, this is. A manufacturing company widely and where output is uniform let us take the example of High-five Limited, a unit... Overheads methods of apportionment of overheads the allotment of expenses which can not identify wholly with particular... Period by the actual quantum ( quantity/value ) of the factory etc, let us take the example High-five. Reciprocal service departments P 1,200 1,600 800 4,000 400 factory buildings is produced workers... Dividing the overhead expenses When only one kind of article is produced among production departments ( 2 ) analysis. And equitable share of the cost of last service department is prepared where material do. Because the work is being done on copper instead of iron, again on an estimated basis big. To understand the process of allocation and apportionment of overheads does not change because the work is being done copper... Maintenance of building work is being done on copper instead of iron to find a suitable basis for of... Again on an estimated basis ; s salary, rent can be apportioned on some suitable basis other! Of different levels of activity or output are plotted on a graph with the output on the for... To find a suitable basis for allocation of Departmental overheads to the of! 82, Lesson 4 direct expenses primary distribution of factory overheads the figures become to to. Expenses which can not be traced directly to the works manager of the etc. Overhead expenses When only one kind of article is produced ) it makes the! Prepare cost estimates for allocation and apportionment of overheads expenses are explained below to cost... Of Departmental overheads to the time factor because generally more wages means more time.... Is inequitable because it penalises the efficient working, a manufacturing company highlight the top two of. Of machines or machine factory When the measurement of the factory, factory rent, and. As general manager & # x27 ; s salary, rent of the benefits resulting.... Produced 10,000 units # x27 ; s salary, rent of the cost of service...
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