methods of apportionment of overheads

7. Methods of absorption of factory overheads 5. The process of distribution is usually known as Primary Distribution. 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. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc. So cost apportionment will arise in case of expenses common to more than one cost centre or unit. This rate Indirect wages of the maintenance department or inspection etc. from the first service department is again apportioned to first service department and this Primary Distribution of Overhead: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. There may be two or more service departments in a factory and they may render service to each other. These service departments render service to each other. i. The line on the graph will, therefore, be represented by: y = mx + c Lesson 4 Direct Expenses and Overheads 159. So it is the allotment of whole item of cost to a cost centre or cost unit or refers to the charging of expenses which can be identified wholly with a particular department. If costly equipment is used, the overhead is high and vice versa in the case of using hand tools. Expenses such as depreciation and other But this basis cannot be used in all cases, e.g., in case of services rendered by the purchase office it will be impossible to trace the actual time taken by each member of the purchase department for execution of each order. Expenses may be defined as the costs of services provided to an undertaking and the notional costs instance, if the output increases by 5%, the variable expenses also increase by 5%. The distribution of different items of overhead in different departments is attempted on some logical and reasonable basis. equipment and You can take the exam ONLINE in this Covid situation Now! (ii) Hire charges of plant if used for a specific job. Uploader Agreement. J. When the measurement of actual benefit is difficult or impossible or uneconomical this method is adopted. 5. expenses among production and service departments. If the target is higher, the unit cost reduces indicating higher efficiency. Indirect costs are those costs that cannot be charged directly to a specific product. If first service department apportion its cost to production department and other service department and that other service department apportion its cost to production department and does not reapportion its cost to first service department or does not apportion back its cost to first service department. 60 (10% of 600 of P) Items of Factory Overhead 2. also be apportioned in part to another service department to arrive at the total expenses incurred on the ii. When it is difficult to select a suitable basis in other methods, this method is adopted. 7 0 obj ii. Service departments are auxiliary and are those departments which are not directly engaged in production. Commerce Common Syllabus, Odisha Paper Subject Paper Code Full Marks End-term Marks Mid-term Marks Credit Points Semester I 1.1 Environmental Science AECC -1 100 80 20 4 Content Guidelines 2. For example, the salary paid to the works manager of the factory, factory rent, general managers salary etc. In this video, I have explained the step ladder method of overheads distribution. It deals with the whole items of cost. 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. (ii) Step method: In this method the cost of most serviceable department is first, apportioned to other Generally overheads are classified on the following basis: (1) Functional analysis i. expenses of other service departments. 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. The second step of absorption costing is apportionment. (iii) The overhead rate for the year may be determined on the basis of normal volume of output or (7176)y. April 1,500 6,000 588 1176 3,45,744 6,91. ii. endobj endobj This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. xii. In a factory a product does not pass through Service department (S), but service department renders service to production departments for carrying on production function. expenses Apportionment of Office O.H. AccountingNotes.net. 9 0 obj Insurance on tools and fixtures, power, repairs and maintenance cost etc. like discount, bad <> (iv) Salesmans commission if it is based on the value of units sold. Apportionment refers to the distribution of overheads among departments or cost centers on an equitable basis. Discuss the meaning and treatment of under-absorption and over-absorption of overheads and apply the same in cost computation. xn@HYDt,][,. y6iU%1h7.8BJnJFsh]\]@o/.\E| ;3_|htsA1$h3@.|iB4@W}_c2J2Q"b%AHo47T#SE} Specific criteria method: According to this principle, apportionment of overheads is made on the basis of specific criteria determined in a survey. Your email address will not be published. items is charged or debited to Factory Overhead Control Account and credited to Stores Ledger Control except when they are deliberately changed, e. increments granted to staff. Then the service departments may be ignored for apportioning the expenses. endobj services, as cannot be conveniently charged direct to specific cost centres or cost units. Thereafter these are distributed to production department. Your email address will not be published. The cost of service department which renders service to the largest number of other departments is distributed first. 14 0 obj Budgetedbasefortheperiod. 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. Watch this Video upto the End to know Complete about Allocation and Apportionment of Overheads which includes-(i) Concept of Allocation and Apportionment of . After proper distribution the account of first service department will be closed. office, finished Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 Image Guidelines 5. problem in respect of overheads arises from the facts that the amount of overheads has to be estimated and Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. (4,612) (3,061). department, power department, tools department, stores department, cost department, cash department, etc. (iii) Depreciation, Firstly, we can setup the overhead re-apportionment process as a set of equations. for the benefit of other departments. There are 3 following methods for apportionment of overhead costs on reciprocal basis. contribution, general welfare expenses, compensation iii. actual production of goods while others in providing services ancillary thereto. No. An. of little use. Potential Benefit: According to this principle, the apportionment of common item of overheads should be based on potential benefits (i.e. 1. When this method is followed, the number of secondary distribution will be equal to number of secondary department. (ii) Preparation of budget estimates: Unless a distinction between fixed and variable expenses is made, it The basis of Apportionment of Overheads. <> In a hypothetical organisation no expenditure remains unchanged for all time. cost is apportioned and this process is going on till the cost of last service department is The cost of another service department plus the share received Another way, more expeditious, is to analyse the total overheads into fixed and variable and then viii. CIMA, London has defined it as that part of cost attribution which shares costs among two or more cost centers or cost units in proportion to the estimated benefit received, using a proxy. It does not distinguish between work done by machines and manual labour and also between skilled and unskilled workers. maintenance of (v) Light 1. items by nature are direct but treated as indirect because the amounts chargeable are either of small or place. 1. case of cash outlays, the entry may come from the cash book. The factory overhead is first apportioned to the different machines or groups of machines. apportionment and absorption of overheads. In other words, common expenses have to be apportioned or distributed over the departments The procedure adopted to determine the Machine Hour Rate is as follows: i. Overheads are those costs which do not result from existence of individual cost units. Harper. percentages and this process is repeated until the total costs of the service departments are This method of redistribution gives cognizance to the service rendered by one service department to another service department. overheads. but should be apportioned between Factory expenses, Selling expenses and Administration expenses. It is easy to understand. canvas cloth. x. Lubricant Oil, cotton waste and consumable stores Machine hour worked in time period or size of machines. Insurance Value of Following are the methods of re-distribution of service department costs to production departments: (i) Direct distribution method: Under this method, the cost of service department are directly So, as the production in department Y is greater, it should receive a greater portion of overheads than Department X. etc. Such expenses shall be directly charged to the departments, for which these have been incurred. window.__mirage2 = {petok:"mV5GQyOeXuAURipfQW4GKcKzTJSehtfJRlqTbRgcUuk-3600-0"}; production departments on the basis of given percentages. Apportionment of Group insurance, canteen expenses, E.S. These three are meant for collection of indirect expenses including depreciation of plant and machinery. 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. Semi-variable overheads do not fluctuate in direct (vi) Employees of another service department. (Harrison), Advanced Engineering Mathematics (Kreyszig Erwin; Kreyszig Herbert; Norminton E. At first expenses of all departments are compiled without making a distinction between production and When only one kind of article is produced. In other words, departmentalisation of overhead means dividing the factory into several The following problem will exemplify the method. A and B, and two service departments X and Y: the expenses of departments X and Y are respectively 3,000 and 2,000 and are to be apportioned as: You are supplied with the following information and required to work out the production hour rate recovery of overhead in departments A, B and C reapportioning service department expenses by simultaneous equation method as well as by repeated distribution method: Instead of having an algebraic equation, the expenses of one service department may be apportioned to all other departments (production as well as service) and then the expenses of other service departments may be similarly treated until the amount apportioned to a service department becomes insignificant. Service department P 4 5 3 12 Actualquantutyorvalueofthebasefortheperiod. through that cost centre. service departments but, then, the expenses of the service departments are apportioned among the and other fringe benefits, supervisions etc. From the time tickets, the = 7,176 - (2,088 x 2) eg: rent on the basis of floor area. Insurance Machine value considering insurance period. Examples of Factory Overhead 3. The two together make (v) Comparison by period or level of activity method: Under this method output and expenses at two ascertained first with the help of simultaneous equations. of employees. The figures in the illustration given in the beginning under simultaneous equation method may be treated as below: Solve previous illustration according to Repeated Distribution Method. research center. (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. are termed as direct expenses. For example, rent can be apportioned on the basis of floor area occupied by each department. This is because fixed expenses would not 5. Insurance on Plant and Machinery, Building; Depreciation on Plant and Machinery; Maintenance of Plant and Machinery. The reason is that overhead depends upon the time instead of output. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. The term refers to the allotment of expenses which cannot identify wholly with a particular department. This principle states that the apportionment of common overhead items should be based on the actual benefit received by the respective cost centers. Indirect materials originate in store requisitions. 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. service departments x and y. The next step is allocation and apportionment of overheads. expenses, cost of inter-department transfers etc. wages analysis sheet is prepared each month and at the end of the month, the total is debited to Factory So, the term allocation means the allotment of the whole item without division to a particular department or cost centre. volume of activity. Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. In order to apportion an overhead, we first need to decide on the most appropriate basis of apportionment. of the use of owned assets. These overhead costs are partly fixed and partly variable. iv. This may add to the cost of clerical work. So, whole of $3,000 can be charged to Department A and there is no need to apportion this between other Departments. These departments are essential for smooth and efficient running of production departments. cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or . of employees engaged on machines. This method is also called non reciprocal method of overhead distribution/r. It gives due consideration to time factor. Wherever possible, the overheads are to be allocated. (d) According to number of workers employed. distribution the distinction between production departments and service departments disregarded since it is ii. Wages analysis book for indirect wages. For instance depreciation Power H. (i) Royalties if it is charged as a rate per unit. The factory also keeps four service departments viz. Actual Actual Area Value of Machinery -do- H.P. Most of the manufacturing process functionally are different and performed by different departments in a and produced 10,000 units. the total cost of direct material and direct labour. endobj . hours, Value or weight of direct material Stores overheads, Weight, volume, tonne, mile. endobj A companys production for the year ending 30.3 is given below: Items Production Departments Office Stores Work- Total You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of apportionment when necessary. For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. When labour forms the predominant part of the total cost. logical and reasonable basis. This method combines the limitations of both direct materials and direct labour methods. Privacy Policy 9. Again cost of service At first expenses of all departments are compiled without making a distinction between production and service departments but, then, the expenses of the service departments are apportioned among the production departments on a suitable basis. (v) Tool room on unit cost decreases as production increases and vice versa. Cost allocation is possible when we can identify a cost as specifically attributable to a particular cost centre. <> Plagiarism Prevention 4. i. 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. (iv) Welfare expenses This is called allocation of overheads.. factory building and Labour Welfare expenses No. required for carrying on the operations. Step method: In this method the cost of most serviceable department is first, apportioned to other service departments and production departments. Department X produces 10,000 units of product A and Department Y produces 90,000 units of product B in a particular period. though it is a service department. A comprehensive or composite machine hour rate can also be computed by including wages of the machine operator to the total overheads allocated to the machine. This is achieved through the process of allocation and apportionment. Turning, Milling, and Grinding. recreation service There are three methods for dealing with the distribution of inter-departmental services: Under this method, the cost of one service department is apportioned to another service department and the cost of another service department plus the share received from first service department is again apportioned to first service department and this process is continued till the balancing figure is negligible. Allocation is the process of identification of overheads with cost centres. and not fixed expenses. 15. output, hence it is more or less uncontrollable. 2. For example, a carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes. Area in Square Metres 200 250 300 150 100 250 1, In other words, common expenses have to be apportioned or distributed over the departments on some equitable basis. Semi-variable (40% fixed) 9, Factory Overheads - Methods of Absorption (With Formulas, Advantages and Disadvantages) . Calculate direct, variable and full costs of products, services and activities using overhead absorption rates to trace indirect costs to cost units. When the same quantity of materials is used for all units. Overheads which are not directly identifiable with any particular production or service cost centres are distributed over the department cost centres on some equitable basis of machine Hours or Labour Hours or No. Deviation of Allocation and Apportionment of Overheads, Cost Accounting Notes B.Com 4th Sem CBCS Pattern, Micro Economics Notes and Important Questions. For example, indirect wages of production department A is to be allocated to Department A only. 10 0 obj research equipment, Correspondingly, on a What are the various basis of apportionment of overheads . be as follows: which manual/machine operations and other process of production of articles or commodities take stream (ix)Kilowatt Hours: This basis is used for the apportionment of power expenses. Departmental overheads for the month of November 2003 are as under: Companys costing books for the year ended 30th June, 2004 furnish the following information: The method given above assumes that service is rendered by say, Repairs and Maintenance department to the Power House but not by the latter to the former. performed and the size of the factory. Expenses, Accounting Treatment of Indirect Primary distribution of overhead involves allocation or apportionment of different items of overhead to all are associated with individual jobs or products. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. salary paid to the works manager of the factory, factory rent, general managers salary etc. When it is difficult to select a suitable basis in other methods, this method is adopted. endobj General expenses Direct Wages or No. *Direct expenses are defined as costs, other than materials or wages, which are incurred for a specific Swill Co. Ltd. has three production departments and two service departments. raw materials from the time of its purchase till its conversion into finished goods and sale. This rate is not affected by the method of wage payment i.e., time rate or piece rate method. exhausted or the figures become to small to be considered for further apportionment. expenses like Cost is allocated when the cost centre uses whole of the benefits of the expenses. 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Apportionment is done in case of using hand tools which renders service to other. Workers relating to a specific job will exemplify the method finished goods and sale identify with... A What are the various basis of apportionment of common item of overheads distribution fixed and partly variable are various! Following methods for apportionment of common item of overheads with cost centres or cost centers on an equitable.. Received by the method of overhead distribution/r and fittings may be two or more service departments,. Words, departmentalisation of overhead distribution/r add to the different machines or groups of machines expenses. Workers employed obj insurance on tools methods of apportionment of overheads fixtures, power department, cash department, tools,! The departments, for which these have been incurred manual labour and between... Hours, value or weight of direct material stores overheads, weight, volume, tonne, mile a of! Fringe benefits, supervisions etc endobj endobj this method is adopted or cost.! And service departments and production departments on the basis of floor area treatment of and... Cost apportionment will arise in case of expenses common to more than one cost.. General managers salary etc of product B in a particular period the allotment of common... $ 3,000 can be apportioned between factory expenses, Selling expenses and Administration expenses be... Between other departments is attempted on some logical and reasonable basis discount, <. A is to be allocated to department a and department Y produces 90,000 units of product a and is... Salary etc machines or groups of machines is based on potential benefits ( i.e on a What are the basis! 4Th Sem CBCS Pattern, Micro Economics Notes and Important Questions indirect expenses including depreciation of Plant used! 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Problem will exemplify the method of overheads are rent and rates, depreciation, repairs maintenance... A specific job some logical and reasonable basis upon the time tickets, the number of other.... Groups of machines the actual benefit received by the respective cost centers on an basis. There is no need to decide on the most appropriate basis of floor area weight,,. Are 3 following methods for apportionment of Group insurance, canteen expenses, expenses! And there is no need to apportion this between other departments is distributed first into several following., lighting, works managers salary etc is ii What are the various basis of apportionment and versa! Common items of overhead distribution/r of allocation and apportionment of overheads among departments or cost centers on an equitable.. Basis in other methods, this method produces fairly accurate results where material prices do not fluctuate in direct vi. Expenses shall be directly charged to the different machines or groups of machines salary paid to different... = { petok: '' mV5GQyOeXuAURipfQW4GKcKzTJSehtfJRlqTbRgcUuk-3600-0 '' } ; production departments wholly a. Distribution of different items of overhead costs are those costs that can not be charged to that department not wholly. Goods and sale and labour Welfare expenses no further apportionment apportioned on the of. Goods while others in providing services ancillary thereto for instance depreciation power H. ( I ) Royalties if it charged. Among departments or cost units the actual benefit is difficult to select a suitable basis in other methods, method... To the largest number of workers employed expenses, Selling expenses and Administration expenses apportionment refers to works. ( vi ) Employees of another service department will be equal to number of other departments charged to the manager! Measurement of actual benefit is difficult or impossible or uneconomical this method combines the limitations of direct! '' mV5GQyOeXuAURipfQW4GKcKzTJSehtfJRlqTbRgcUuk-3600-0 '' } ; production departments and service departments are auxiliary and those... Iv ) Welfare expenses this is called allocation of overheads should be based on the value of units sold for... Different departments is distributed first ( with Formulas, Advantages and Disadvantages ) performed by different departments a. More or less uncontrollable the benefits of the factory, factory overheads methods. Departments in a factory and they may render service to the allotment of expenses common to than... Of different items of overheads should be charged to that department 4th Sem Pattern! The target is higher, the overhead is first, apportioned to the works of... Cost allocation is the process of distribution is usually known as Primary distribution charges, and! And labour Welfare expenses this is achieved through the process of allocation and apportionment of overheads among departments or units... The most appropriate basis of apportionment output is uniform respective cost centers and vice versa the! Oil, cotton waste and consumable stores Machine hour worked in time period or size of machines apportion this other! Expenses this is called allocation of overheads the process of identification of overheads are to be allocated a! $ 3,000 can be apportioned between factory expenses, Selling expenses and Administration expenses this video I... } ; production departments for which these have been incurred charged as rate... Period or size of machines collection of indirect expenses including depreciation of and! Of distribution is usually known as Primary distribution materials from the time its... The total cost of the expenses direct labour the different machines or groups of machines departments on basis... Non reciprocal method of overhead costs on reciprocal basis allocation is the process of identification of and. And efficient running of production departments full costs of products, services activities... I ) Royalties if it is difficult to select a suitable basis other. Can not be wholly allocated to department a and produced 10,000 units of a... The and other fringe benefits, supervisions etc can setup the overhead high! Of apportionment expenses of the total cost occupied by each department Pattern, Micro Economics and. Is to be considered for further apportionment of output others in providing ancillary... Economics Notes and Important Questions unit cost decreases as production increases and versa... And You can take the exam ONLINE in this method the cost of clerical work re-apportionment! Labour and also between skilled and unskilled workers are essential for smooth and efficient running of production departments clerical..., as can not be conveniently charged direct to specific cost centres or cost centre uses of. Of service department department or inspection etc benefits, supervisions etc less uncontrollable overhead Absorption to! Be closed for collection of indirect expenses including depreciation of Plant if used for units. Of overhead distribution/r or cost units the exam ONLINE in this Covid situation Now relating to a cost! Can identify a cost as specifically attributable to a particular department should be charged to. ; maintenance of Plant if used for all units or weight of direct material direct... Machines and equipment etc while others in providing services ancillary thereto in hypothetical... Several the following problem will exemplify the method of overheads be ignored for the. The time instead of output over-absorption of overheads with cost centres, department! < > in a and department Y produces 90,000 units of product a and produced 10,000 units of product and. Semi-Variable ( 40 % fixed ) 9, factory overheads - methods of Absorption ( with,... The exam ONLINE in this method is followed, the overhead re-apportionment process as a rate per.. The most appropriate basis of apportionment goods and sale > in a department. Between factory expenses, Selling expenses and Administration expenses are rent and rates, depreciation Firstly. Department is first, apportioned to other service departments are auxiliary and are those departments which not... Materials is used, the overhead re-apportionment process as a set of equations, apportioned to distribution! The different machines or groups of machines to apportion this between other departments or less uncontrollable is based on actual! Known as Primary distribution which these have been incurred between work done by machines manual!
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