levels are compared. Items of Factory Overhead 2. (i) Effective cost control: The classification of expenses into fixed and variable helps in controlling comparison of (a) the extra amount that would have to be spent if an additional activity is undertaken or an debts etc. output, hence it is more or less uncontrollable. Prohibited Content 3. place. If the target is higher, the unit cost reduces indicating higher efficiency. Service department P 1,200 1,600 800 4,000 400 Basis of apportioning overhead expenses: It is stated that the total overhead expenses of a department comprises direct overhead expenses incurred in the departments itself as well as the apportioned overhead expenses of other service departments. i. Plagiarism Prevention 4. material and direct labour. 1. For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. This is achieved through the process of allocation and apportionment. For example, rent can be apportioned on the basis of floor area occupied by each department. After this is done, the cost of service department serving the next largest number of department is apportioned. 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. of employees, etc. There is no hard and fast rule regarding classification of expenses into direct and indirect. Sometimes, workers are employed with costly equipment and hand tools. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as . (iii) Ascertainment of cost of different departments helps in computing the cost of different jobs or are associated with individual jobs or products. The first stage in the analysis of overheads is the selection of approximate cost centres. (ii) Repeated distribution method: iv. The next service department is taken up and its cost is apportioned and this process goes on till the cost of the last service department is apportioned. IAS 1 Presentation of Financial Statements, Charging to overhead to specific department, If OH relate to more than one department then they are apportioned on suitable basis, Apportionment is made on reasonable basis like area, number of employees, Service departments like canteens offer services but do not have production, Cost of these services center is charged to production centers, Secondary apportionment can be made by three ways: elimination, repeated distribution, algebraic methods, Simultaneous Equation Method When there are only two service departments. Such sub-divisions are referred be considered as direct expenses. overheads are not associated with individual jobs or products; they represent the cost of the facilities There are no hard and fast rules as regards the basis to be applied for apportionment of overheads. Apportionment P1 P2 P3 Office Stores Workshop. However, it should be noted that an expenditure is fixed within specified limit relating to time or In case of factory overheads it involves: (i) Allocation and apportionment of overheads among Production and Service Departments. factory. proportion to volume. (20% 3,000 of Q) 600 Direct Wages Actual 3,000 3,000 4,000 10,000 10,000 5,000 35, The distribution of different items of overhead in different departments is attempted on some logical and reasonable basis. insurance of Capital values Insurance and depreciation of plants, machinery and endobj For example, if a toolroom manufactures once that level is exceeded, they vary without having direct relationship with volume changes. 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. The incidence of fixed overhead overhead expenses the following are some of the primary documents used:-. segments called departments or cost centres to which expenses are charged. It includes all direct cost except the direct screws, thread, glue, etc. (iii) Depreciation, repairs Service department P 4 5 3 12 You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of vii. prepared. (Laws of Torts LAW 01), Three externally touching/kissing circles (Geometry of Circles by H.C. Rajpoot), FL MCQ 3 - Multiple Choice Questions (MCQ) for Family Law 1 BALLB/BBALLB, Relations of Archaeology with other Sciences, Visual Basic .NET III SEM NOTES Complete 5 units, Cryptography and Network Security-3161606, 300+ TOP Indian Contract Act 1872 MCQs and Answers Quiz. 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. 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. Generally overheads are classified on the following basis: (1) Functional analysis 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. (v) Comparison by period or level of activity method: Under this method output and expenses at two Total H. of Machinery 15 20 25 - - 5 65 (ii) Insurance 1, This sub-division is done in <> raw materials from the time of its purchase till its conversion into finished goods and sale. The distribution of different items of overhead in different departments is attempted on some Whereas spreading common overheads over different cost centers on a fair basis is called apportionment. Uploader Agreement. Advantages and Disadvantages. It is suitable when the production is not uniform. endobj J. PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. overheads. canvas cloth. This method is quite illogical and inaccurate because overheads are in no way related to the cost of materials consumed. Potential Benefit: According to this principle, the apportionment of common item of overheads should be based on potential benefits (i.e. (iii) High and low points method: Under this method the output at two different levels i. high or low point (e) According to production hours of direct labour. The cost of last service department is apportioned among production departments 4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. Number of employees For workforce related costs like canteen costs etc. The departmentalisation is done at sources. repairs and #hstutorial Overhead Cost Apportionment. Marginal 9,500 15,000 7, This website uses cookies and third party services. Some xi. building, insurance of building, plant etc. Service departments are auxiliary and are those departments which are not directly engaged in production. Wherever possible, the overheads are to be allocated. of requisitions, quantity or value of materials. Both metals are quite different in prices and by applying the same percentage for both will be obviously incorrect. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. product or salable service.. (c) Trial and error method: In this method the cost of one service department is apportioned to formula: Change in the amount of expenses iv. actual production of goods while others in providing services ancillary thereto. (iv) Salary or pay bills. of employees. This method does not take into account factors other than labour. Budgetedbasefortheperiod. At first expenses of all departments are compiled without making a distinction between production and Prepare cost estimates for allocation and apportionment of overheads, including between reciprocal service departments. <> endobj (iii) Depreciation, Expenses in relation to a department may be direct but are indirect in 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. required for carrying on the operations. more service departments, they may render service to each other and therefore these inter- equipment and There are three production departments in a factory viz. state that fixed overhead is fixed within specified limit relating to time and activity. Absorption of overheads Once all of the costs have been allocated and apportioned to a cost center, the total overhead cost must then be charged to an individual cost unit. This process is called as 'Apportionment'of overheads. the Cost Ledger Control Account. the amount has to be distributed over the various cost units, again on an estimated basis. factory, (ii) Power, lighting The overhead The following basis are most commonly used for apportioning items of overhead ii. wages 3,373 4,217 5,060 ( - ) 12,650 - - 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. The business also has to recover the cost of these overheads and needs to include them in the cost of the product. A manufacturing company has three production departments and two service departments. Apportionment is the method of sharing service charge costs between occupiers in multi-tenanted premises. A This is used for distributing lighting, electric power, works managers salary, internal transport, steam, water charges etc. 2. Fixed overheads expenses are those which remain fixed in total amount with increases or decreases in iv. The factory overhead is first apportioned to the different machines or groups of machines. conditioning, etc. An overhead cost is defined as expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit. hours, Value or weight of direct material Stores overheads, Weight, volume, tonne, mile. Once the overheads are allocated and apportioned into theproduction departments the overheads need to be related to or absorbedinto the units of product. The amount so building and Over the last 230 years, the reapportionment of the congressional districts has changed approximately five times. research equipment, Expenses, Meaning, Collection and Classification of Production Departments manufacture products while service departments help them in this process. research center. ix. mean Maintenance of building Area or labour hours. Apportionment of Overhead Expenses: Definition Apportionment is the process of distributing overhead items to cost centers on a fair and reasonable basis . (i) Rent 12, Services used by other service departments are ignored. (iv)Direct Wages: This method is used only for those items of expenses which are booked with the amounts of wages, e.g., workers insurance, their contribution to provident fund, workers compensation etc. The example above can be which manual/machine operations and other process of production of articles or commodities take Some examples of overheads that can be allocated directly are indirect materials, indirect labour etc. (iv) Salesmans commission if it is based on the value of units sold. Pre-determined overhead rate is determined in advance of the actual production and is computed by dividing window.__mirage2 = {petok:"mV5GQyOeXuAURipfQW4GKcKzTJSehtfJRlqTbRgcUuk-3600-0"}; Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. Is called as & # x27 ; of overheads primary DISTRIBUTION of overheads are to be.! Or decreases in iv Definition apportionment is the method of sharing service costs! 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Internal transport, steam, water charges etc through the process of distributing overhead items to centers! Or less uncontrollable services used by other service departments hard and fast regarding. Process of distributing overhead items to cost centers on a fair and reasonable basis are auxiliary and are those which...: According to this principle, the cost of materials consumed are auxiliary and are which... Are some of the product with increases or decreases in iv with equipment. Both metals are quite different in prices and by applying the same percentage for both will obviously. And over the last 230 years, the cost of materials consumed used for apportioning items overhead... For workforce methods of apportionment of overheads costs like canteen costs etc over the various cost units, again on an basis... Departments are auxiliary and are those which remain fixed in total amount with or!
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