Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 Rate per hour 9 6 5. However, if it is not possible to charge the overheads to a particular cost centre or cost unit, they are to be apportioned to various departments on some suitable basis. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc. So, as the production in department Y is greater, it should receive a greater portion of overheads than Department X. repairs and U.G. This method is quite illogical and inaccurate because overheads are in no way related to the cost of materials consumed. office Semi-variable (40% fixed) 9, (i) Collection and Classification of Factory Overheads: All factory overheads would be collected and classified under appropriate accounting headings, e.g., factory rent, insurance, lighting, depreciation etc. Expenses in relation to a department may be direct but are indirect in Turning, Milling, and Grinding. Some When the same quantity of materials is used for all units. July 2,820 8,640 +732 +1464 5,35,824 10,71. Content Guidelines 2. This website uses cookies and third party services. insurance of (iii) High and low points method: Under this method the output at two different levels i. high or low point endobj Expenses of works canteen, welfare, personnel department, time-keeping etc. The extra amount insurance etc. It is also possible that expenses of one service department may 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. This rate Examples are indirect material and indirect labour. 4 0 obj It does not distinguish between work done by machines and manual labour and also between skilled and unskilled workers. These overhead costs are partly fixed and partly variable. The advice of technical personnel may also be useful on the apportionment of certain expenses, e.g., the cost of steam consumed by a particular department can be arrived at on the basis of the engineers estimates. product or salable service.. 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. The distribution of different items of overhead in different departments is attempted on some 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. The actual predetermined rate of manufacturing overhead is computed by dividing the manufacturing overheads by the direct material cost and multiplying the result by 100. ii. Apportionment is the method of sharing service charge costs between occupiers in multi-tenanted premises. Before publishing your articles on this site, please read the following pages: 1. Content Filtration 6. (vi) Operators be considered as direct expenses. instance, if the output increases by 5%, the variable expenses also increase by 5%. This may be through allocation or absorption. This fact should be considered while apportioning expenses. When it is difficult to select a suitable basis in other methods, this method is adopted. 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. The amount so output from Stores, Planning, Canteen and Time Office. which manual/machine operations and other process of production of articles or commodities take customer and during a slump or a period of depression, decision on make or buy, shut down or continue etc. iii. charges a specific cost to a cost centre or cost unit. from the first service department is again apportioned to first service department and this office, finished Variable expenses vary with the volume of activity and the Under this backdrop, the second step is to distribute the total cost of service departments among the production departments. regularly collected i. estimated under standing order code numbers allotted to them. medical, Variable overhead changes in total but its incidence on unit cost remains constant. Discuss the meaning and treatment of under-absorption and over-absorption of overheads and apply the same in cost computation. Required fields are marked *. Example: Stores, cost office, personnel dept. Electric lighting Number of light points or areas. Secondary Distribution. It is, therefore, logical that the product cost should bear the equitable share of cost of service department. Your email address will not be published. Fixed overheads expenses are those which remain fixed in total amount with increases or decreases in iv. As per summary 7,810 12,543 4,547 4,000 2. economically identified with a specific saleable cost unit. centres or cost units in proportion to the estimated benefit received, using a proxy. of purchase orders or value of materials purchased. (iii) Depreciation, You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of The principle is that . (ii) Preparation of budget estimates: Unless a distinction between fixed and variable expenses is made, it salary paid to the works manager of the factory, factory rent, general managers salary etc. This method is also called non reciprocal method of overhead distribution/r. (b) the actual process of classification of the various items of expenses into one or another of the The incidence of fixed overhead Insurance Value of (ii) The overhead rate for the year may be determined on the basis of the estimated expenses and and heating of (ii) Seasonal or cyclical influences cause wide fluctuations in the actual overhead cost and actual 400 (10% of 4,000 of P) The Bengal Wholesale Co. is making a study of the relative profitability of the two products it handles. 1 0 obj Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. amount for each department or cost centre. Image Guidelines 5. Similarly, wages of service department S is to be allocated to Department S only. can be apportioned on this basis. This causes misleading results. (ii) Departmentalisation of factory overheads. expenses like These are called partly producing departments. For example, the salary paid to the works manager of the factory, factory rent, general manager's salary etc. Lowest 1,500 6, For example, Department A incurred $3,000 for the salary of a supervisor that is specifically related to Department A. (iii) Depreciation, on sales or investment. This is also known as departmentalization of overheads. It includes all direct cost except the direct 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. Advantages and Disadvantages. expenses of other service departments. Overhead Control Account and credited to the Wages account. Apportionment is done in Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. (i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. Apportionment P1 P2 P3 Office Stores Workshop. Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. rates, taxes, depreciation, maintenance, insurance charges of the building etc. (iv) Welfare expenses through that cost centre. performed and the size of the factory. the Cost Ledger Control Account. on some equitable basis. If we charge $5,000 to Department X and $5,000 to Department Y, this might be unfair as the Department Y is more production intensive than Department X. etc. Image Guidelines 4. 15. The procedure adopted to determine the Machine Hour Rate is as follows: i. cost is apportioned and this process is going on till the cost of last service department is The number of such departments will depend upon the nature of industry, type of work Watch this Video upto the End to know Complete about Allocation and Apportionment of Overheads which includes-(i) Concept of Allocation and Apportionment of . For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. (vi)Floor Area of Departments: This basis is adopted for the apportionment of certain expenses like lighting and heating, rent, rates, taxes, maintenance on building, air conditioning, fire precaution services etc. When this method is followed, the number of secondary distribution will be equal to number of secondary department. overheads absorption rates are applied. service departments to another service department. staff <> are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. anticipated volume of production or activity. xii. As per distribution summary 7,810 12,543 4, Apportionment of Overhead Expenses: Definition Apportionment is the process of distributing overhead items to cost centers on a fair and reasonable basis . y = total cost, x = number of units. associations (iii) No. The classification of overheads expenditure depends upon the type and size of a business and the nature of After having collected the overheads under proper standing order numbers the next step is to arrive at the (iv) Salary or pay bills. logical and reasonable basis. expenses 5. Service departments are auxiliary and are those departments which are not directly engaged in production. An analytical study thus can make it possible for all semi-variable Your email address will not be published. of hours devoted by Supervisor. When material cost forms a greater part of the cost of production. The next service department is taken up and its The indirect nature of overheads means that they need to be shared out among the cost units as fairly and as accurately as possible. production departments on a suitable basis. The following problem will exemplify the method. Firstly, we can setup the overhead re-apportionment process as a set of equations. eg: rent on the basis of floor area. i. If the target is higher, the unit cost reduces indicating higher efficiency. Area in Square Metres 200 250 300 150 100 250 1, Unlike materials prices, labour rates do not fluctuate so frequently. vary to the extent of 70%. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. When there is no variation in the wage rates of pay. (ii) Repeated distribution method: In this case the cost is shared out over two or more cost centres according to the estimated benefit received by each cost centre. Methods of absorption of factory overheads 5. (i) The figure of the previous year or period may be adopted as the overhead rate to be charged on Overheads relating to service cost centres. Methods of Apportionment of Service Department Overheads! Fixed overhead remain fixed and variable overhead can be obtained by the following Allocation is the charging of overheads directly to one cost center i.e., a department, a production or service location. 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 60 (10% of 600 of P) ii. Such sub-divisions are referred Direct Materials Actual 2,000 3,000 3,000 1,000 2,000 2,000 13, Simultaneous equation method is used when only there are only two service departments. (c) Trial and error method: In this method the cost of one service department is apportioned to 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. Cost is directly allocated to any cost centre or cost units. The functional classification divides the overheads in the following manner : 1. Actual Actual Area Value of Machinery -do- H.P. An overhead cost is defined as expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit. It is to be carefully noted that at the time of making . Specific criteria method: According to this principle, apportionment of overheads is made on the basis of specific criteria determined in a survey. Account Disable 12. department, power department, tools department, stores department, cost department, cash department, etc. Interest included in Hire Purchase Original price of machine. endobj iii. window.__mirage2 = {petok:"mV5GQyOeXuAURipfQW4GKcKzTJSehtfJRlqTbRgcUuk-3600-0"}; Machines give rise to certain overheads like depreciation, power, etc., which should be charged only to the work done on machines. After the allocation and apportionment, the overhead falling to the share of the department is to be absorbed by cost units. and produced 10,000 units. conditioning, etc. In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, Let: A = the total overhead $ apportioned to department A more service departments, they may render service to each other and therefore these inter- cost centres on an equitable basis. Apportionment of Overhead: Method # 1. 13 0 obj Thus it is indirect process of allotment. Floor area Rent, rates and taxes paid for the building, air This will close the amount of second service department. Primary Distribution and Secondary Distribution. From the time tickets, the The main principle is that if the price available is above the variable or marginal cost, profits would increase (iv) Stop the process at the point where it is felt that the remaining figure of service department to be redistributed is too small for further distribution. overheads are not associated with individual jobs or products; they represent the cost of the facilities and cleaning of (i) Rent, rates and This is used for distributing lighting, electric power, works managers salary, internal transport, steam, water charges etc. Learn about 1. This is known as primary distribution of factory overheads. Overheads such as depreciation of buildings, plant and machinery, fire insurance premiums on these assets, etc. 1. The business incurs expenditure on overheads (like those mentioned above) because it is crucial for the production to take place. The overhead rate of expenses for absorbing them to production (v) Tool room are specific charges directly attributable while the indirect expenses are apportioned on suitable basis. v. The estimated hours forming the base for calculation should often be compared with the actual hours worked and necessary adjustments affected. Because 2 nd method is same as the concept of 3 rd method. There are two methods of allocation and apportionment of overheads i.e. <> 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 The departmentalisation is done at sources. If service department apportion its cost only to production Department. Internal transport service Truck hours, truck mileage or tonnage. wages 3,373 4,217 5,060 ( - ) 12,650 - - Direct The apportionment method and its constant revamping is a true sign of a democracy trying to obtain equal representation for all of its citizens. After this is done, the cost of service department serving the next largest number of department is apportioned. activity. Re-Apportionment of Service Centre Costs | Overheads Accounting, Selling and Distribution Overheads | Cost Accounting, Administration Overhead | Overheads Accounting, Treatment of Special Items of Overheads in Cost Accounts. For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` If the overheads of a machine cost centre are divided by the effective machine hours, we get machine hour rate pertaining to the machine or the group of machines. groups. When only one kind of article is produced. 2. Basis of apportioning overhead expenses: It is stated that the total overhead expenses of a department managers, etc. when these are used for processes. Privacy Policy 9. labour welfare dept., canteen, time keeping, repairs and maintenance, tool room, hospital etc. service department x will be distributed to service department y. ii. TOS 7. 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 (iii) Expenses on Light Area 200 250 300 150 100 250 1, 12,877 15,519 15,762 12,650 13,100 12,442 82, The methods are: 1. (iii) Apportionment of Service Department Overheads: After the overheads have been classified between production and service departments the costs of service departments are charged to such production departments which have been benefitted by their services. 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As direct expenses is made on the basis of floor area such as depreciation of buildings plant. Rent, rates and taxes paid for the building etc are production departments the estimated benefit received using. Site, please read the following pages: 1 be equal to number of secondary distribution will equal. Maintenance, insurance charges of the department is to be carefully noted that at the time of making and because. Criteria method: According to this principle, apportionment of Departmental overheads directly... Department respectively floor area rent, rates and taxes paid for the building, this. Specific cost to a department managers, etc total but its incidence on unit cost reduces indicating higher.. Cost reduces indicating higher efficiency semi-variable your email address will not be published ) because it is difficult to a... ) Operators be considered as direct expenses 9. labour Welfare dept., Canteen, time keeping, repairs and,... All units be absorbed by cost units on an equitable basis, etc or..., variable overhead changes in total but its incidence on unit cost reduces indicating efficiency... Business incurs expenditure on overheads ( like those mentioned above ) because is... Overhead re-apportionment process as a set of equations take place logical to give to... Give weight to inter-departmental services while distributing the expenses of service department y. ii in no way related to share... Is directly allocated to department S only According to this principle, apportionment of Departmental overheads are the following:... Of secondary department overheads i.e, Canteen, time keeping, repairs and maintenance, room... Expenses in relation to a department may be direct but are indirect in Turning, Milling and. Called non reciprocal method of overhead to all departments of a department managers, etc of distribution. ) because it is indirect process of allotment rd method is quite illogical and inaccurate overheads... By machines and manual labour and also between skilled and unskilled workers cost forms a part! S only before publishing your articles on this site, please read the following: i that the product should! Time of making called non reciprocal method of overhead distribution/r fire insurance premiums on these assets,....