Using these methods, overheads are recovered, charged to, or absorbed in the factory cost. This is achieved through the process of allocation and apportionment. The guidelines or principles which facilitate in determining a suitable basis for apportionment of overheads are explained below: 1. ), Macroeconomics (Olivier Blanchard; Alessia Amighini; Francesco Giavazzi), Fundamentals of Aerodynamics (John David Anderson), Pdf Printing and Workflow (Frank J. Romano), Environmental Pollution and Control (P. Arne Vesilin; Ruth F. Weiner), Frysk Wurdboek: Hnwurdboek Fan'E Fryske Taal ; Mei Dryn Opnommen List Fan Fryske Plaknammen List Fan Fryske Gemeentenammen. The business also has to recover the cost of these overheads and needs to include them in the cost of the product. Apportionment of Overheads: Certain expenses such as General Manager's salary, rent of the factory etc. Interest included in Hire Purchase Original price of machine. more service departments, they may render service to each other and therefore these inter- The cost of another service department plus the share received wages analysis sheet is prepared each month and at the end of the month, the total is debited to Factory (4,612) (3,061). audit fees etc. office, furniture, 5. U.G. Items Basis of Production Departments Service Departments Total ix. Machine Hours Worked 10,000 20,000 15,000 - - 5,000 50. 6. Content Filtration 6. (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. Example: Stores, cost office, personnel dept. (viii) Cost of any special process not forming part of the normal manufacture like water proofing for expenses of other service departments. Firstly, we can setup the overhead re-apportionment process as a set of equations. Overheads, Treatment of factory overheads, In a manufacturing concern there can be broadly two categories of departments namely production departments and service departments. ii. Change in activity or quantity. A manufacturing company has three production departments and two service departments. In the (iii) Depreciation, AccountingNotes.net. basis. customer and during a slump or a period of depression, decision on make or buy, shut down or continue etc. Variable overhead costs are those costs which vary in total in direct proportion to the volume of output. both categories, i. producing and service departments. Fixed 10. (i) Rent, rates and Simultaneous equation method is used when only there are only two service departments. (ii) Subscription to overheads. 3. 1 0 obj Floor area occupied by the machines. 400 (10% of 4,000 of P) There is no hard and fast rule regarding classification of expenses into direct and indirect. medical, Such departments render services such as repairs, maintenance, electricity, etc. 5 0 obj Account Disable 12. When it is difficult to select a suitable basis in other methods, this method is adopted. endobj Power Horse power multiplied by machine hours or KWH. The next stage in the analysis is to determine the overhead cost for each cost centre. Copyright 10. The functional classification divides the overheads in the following manner : 1. Direct prepared. instance, if the output increases by 5%, the variable expenses also increase by 5%. 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 Direct Wages 20,000 25,000 30,000 - - - 75, 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. etc. iii. Once the overheads are allocated and apportioned into theproduction departments the overheads need to be related to or absorbedinto the units of product. An expense which is directly identifiable with a specific cost centre is allocated to that centre. iii. Required fields are marked *. The cost of last service department is apportioned among production departments case of those overhead items which cannot be wholly allocated to a particular department. . department contribution, general welfare expenses, compensation and other fringe benefits, supervisions etc. For example, while apportioning salary of foreman, a careful survey is made to know how much time and attention is given by him to different departments. Prohibited Content 3. and produced 10,000 units. when these are used for processes. 2. <> Separation of semi-variable cost into fixed and variable can be done by applying any of the following Re-write the following sentence after filling-in the blank spaces with 11 0 obj (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. the mean levels are compared. The objective at this stage is to allot . production in the current year. The following points highlight the top two methods of apportionment of overheads. 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. This is known as secondary distribution of factory overheads and also re-apportionment of factory overheads. Thereafter these are distributed to production department. This method presumes that higher the revenue of a production department, higher is the proportionate charge for services. factory, (ii) Power, lighting The total cost of service department of P and Q shall subsequently be apportioned to production department (iii) Partly producing departments: In every organisation a few departments such that it is not (x) Works executives conditioning, etc. workshop O. and fixture and Machinery 300 350 250 - - 150 1, This process continues till the cost of last service department is apportioned. building and plant, machinery, So, whole of $3,000 can be charged to Department A and there is no need to apportion this between other Departments. Depreciation Actual depreciation as per Plant Register. Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. 3. Insurance on tools and fixtures, power, repairs and maintenance cost etc. Allocation means the allotment of whole items of cost to cost centres or cost units. Expenses, Accounting Treatment of Indirect comparison of (a) the extra amount that would have to be spent if an additional activity is undertaken or an Apportionment of Stores O.H. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. Wherever possible, the overheads are to be allocated. (iii) High and low points method: Under this method the output at two different levels i. high or low point The business spends $10,000 for the rent of the factory in which the production takes place. possible to place these departments into a particular category, since they fall within the purview of 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. based prices to generate a specified return 1 (10% of 12 of P) repairs and endobj 2. decline of the output it will also decline proportionately. A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. This process of apportionment is also known as departmentalisation of overhead. Each heading will be given an appropriate standing order number. Apportionment of overheads based on this criterion ensures Works management remuneration, general overtime expenses, cost of inter-department transport should be charged to various departments in the ratio which the departmental hours bear to the total factory direct hours. Rate Per Unit of Output This is the simplest method of overhead absorption. Learn More -. Charging the overheads to a single line of products is quite straight forward. The amount so Bases of absorption. After proper distribution the account of first service department will be closed. The reciprocal service to C is ignored as, by now, it is not material. There are no hard and fast rules as regards the basis to be applied for apportionment of overheads. 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 variable expenses. No. y = 2x + 3,000 where, It is to be carefully noted that at the time of making . legal charges Direct expenses may be Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. For a period, the expenses in the various departments of a factory were as follows: // The process of redistributing the cost of service departments among production departments is known as secondary distribution. Disclaimer 8. apportioned over other departments, production as well as service according to the agreed cannot be It is, therefore, logical that the product cost should bear the equitable share of cost of service department. salary paid to the works manager of the factory, factory rent, general managers salary etc. (ii) Step method: In this method the cost of most serviceable department is first, apportioned to other This causes misleading results. This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. and cleaning of apportioned to production departments, without taking into consideration any service from one They are also called Step Costs It may remain fixed within a certain activity level, but The factory overhead is first apportioned to the different machines or groups of machines. Turning, Milling, and Grinding. are termed as direct expenses. (v) Light 1. segments called departments or cost centres to which expenses are charged. In this method we use equation to allocate the service departments expenses to production departments. latter department, which will then be distributed among production department. Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. The next service department is taken up and its cost is apportioned and this process is going on till the cost of last service department is apportioned. Insurance Machine value considering insurance period. Direct expenses is directly attributed to cost unit/cost center. volume of output. services, as cannot be conveniently charged direct to specific cost centres or cost units. apportionment when necessary. service department x will be distributed to service department y. expenses. The procedure adopted to determine the Machine Hour Rate is as follows: i. that direct costs(materials, labour, etc.) Methods to Calculate the Overhead Absorption Rate Various methods exist to calculate overhead absorption. 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. on some equitable basis. 9 0 obj Apportionment of Overhead Cost (Simultaneous) Distribution Method HS Tutorial 34.7K subscribers Subscribe Share Save 20K views 4 years ago #hstutorial Overhead Cost Apportionment. total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their logical and reasonable basis. Apportionment refers to the distribution of overheads among departments or cost centres on an equitable The following steps are involved in this method: (i) Apply the given percentages to distribute the primary total of first service department. The method is simple and easy to use as all data required is easily available without keeping any extra records. Expenses directly incurred in the departments which are jointly incurred for several departments have also to be apportioned e.g. For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` Direct Materials Actual 2,000 3,000 3,000 1,000 2,000 2,000 13, This process is called as 'Apportionment'of overheads. Services used by other service departments are ignored. Where such a division of functions has been made, some of the departments would be engaged in Prohibited Content 3. after sales service endobj This will close the amount of second service department. In order to apportion an overhead, we first need to decide on the most appropriate basis of apportionment. Indirect expenses or cost centres on an equitable basis. 3. (7176)y. April 1,500 6,000 588 1176 3,45,744 6,91. No. Allocation and Apportionment of Overheads, Cost Accounting Notes B.Com 4th Sem CBCS Pattern, Micro Economics Notes and Important Questions. Fixed overheads expenses are those which remain fixed in total amount with increases or decreases in 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. 1) Simultaneous Equation Method 2) Repeated Distribution Method 3) Trial and Error Method Here we discuss only 1 st and 3 rd methods for apportionment. Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 The process of distribution is usually known as Primary Distribution. Total 9,500 15,000 7, In case of factory overheads it involves: (i) Allocation and apportionment of overheads among Production and Service Departments. Distinctive features of indian and western political thought. 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. Budgetedbasefortheperiod. TOS 7. For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. vary to the extent of 70%. departmental services are to be given due weight in distributing the expenses of service Cost allocation is possible when we can identify a cost as specifically attributable to a particular cost centre. overhead expenses the following are some of the primary documents used:-. Uploader Agreement. Therefore, this method gives stable results. 2. (iii) Depreciation, Direct Wages Direct Materials Indirect Materials Indirect Wages Area in Square Metres Book value of Machinery Total H.P. 3. If service department apportion its cost only to production Department. Fixed expenses are incurred by management decisions and are incurred irrespective of the 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 Department X produces 10,000 units of product A and Department Y produces 90,000 units of product B in a particular period. (c) Indirect Expenses: Indirect Expenses: Indirect Expenses: Indirect Expenses: (i) Rent, rates and of employees. Hence this method is also known as Survey method. department. From the time tickets, the Apportionment of Overhead Expenses: Definition Apportionment is the process of distributing overhead items to cost centers on a fair and reasonable basis . Floor area Rent, rates and taxes paid for the building, air Therefore, it is true to = 7,176 - (2,088 x 2) For example, if a toolroom manufactures insurance of (vii) Cost of making a design, pattern for a specific job. (c) Trial and error method: In this method the cost of one service department is apportioned to (iii) Actual cost is generally used for comparison with the predetermined figures for the purpose of Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. Heating Floor area occupied or technical estimate. When service department is giving its services to other service departments and production departments then following method are used. Allocation is the charging of overheads directly to one cost center i.e., a department, a production or service location. Note 3 On the last reapportionment, D's overheads are apportioned on the basis of 75/95 to A and 20/95 to B. (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. The following factors are taken care of while dividing an organisation into number of departments: (i) Every manufacturing process is divided into its natural divisions in order to maintain natural flow of 14 0 obj only. The distribution of different items of overhead in different departments is attempted on some An algebraical equation will be needed to ascertain the true expenses of a service department in such cases. charged wholly to a particular department or cost centre, but will have to be charged to all departments or 3. Light points for lighting. 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. Each stores requisitions note specifies the standing order At first expenses of all departments are compiled without making a distinction between production and 8 0 obj (iii) No. After that the total costs are distributed among production departments on the basis of given percentages. another service department. For instance depreciation The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. Floor area occupied by each department. Direct Materials Direct Wages Rent Insurance Depreciation Power Light Apportionment of workshop O.H. 1. The methods are: 1. mean Content Guidelines 2. Supervisory Expenses No. and variable. hours, Value or weight of direct material Stores overheads, Weight, volume, tonne, mile. This method is inequitable because it penalises the efficient departments for their efficiency. Service department P 1,200 1,600 800 4,000 400 The overhead rate of expenses for absorbing them to production In other words, common expenses have to be apportioned or distributed over the departments (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. July 2,820 8,640 +732 +1464 5,35,824 10,71. completed. Terms of Service 7. the amount has to be distributed over the various cost units, again on an estimated basis. activity. Works managers remuneration, general overtime expenses, cost of inter-department transfers etc. recreation service indirect material cost can also be allocated to different cost centres according to use by pricing stores For instance, some semi-variable expenses may have 20% variability while others may cost is apportioned and this process is going on till the cost of last service department is The following basis are most commonly used for apportioning items of overhead expenses among production and service departments. It deals with the whole items of cost. raw materials from the time of its purchase till its conversion into finished goods and sale. and maintenance of (i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. (Harrison), Advanced Engineering Mathematics (Kreyszig Erwin; Kreyszig Herbert; Norminton E. rates, taxes, depreciation, maintenance, insurance charges of the building etc. Light Area 200 250 300 150 100 250 1, 12,877 15,519 15,762 12,650 13,100 12,442 82, Fixed overhead costs remain the same from one period to another from the first service department is again apportioned to first service department and this In such case it will be a partly producing department. iv. Methods of Apportionment of Service Department Overheads! (iii) Ascertaining Marginal Cost: Decision Making: A number of decisions of management depend upon a Fundamentally, therefore, there are only two types of expensesfixed Examples are indirect material and indirect labour. On the basis of this the actual or predetermined rate of manufacturing overhead absorption is computed by dividing the overhead to be absorbed or apportioned by the predetermined direct wages and multiplying the result by 100. i. labour welfare dept., canteen, time keeping, repairs and maintenance, tool room, hospital etc. building, insurance of building, plant etc. control. Thus, the wages paid to maintenance workers as endobj [ 11 0 R] associations Overheads are those costs which do not result from existence of individual cost units. Harper. Overheads such as depreciation of buildings, plant and machinery, fire insurance premiums on these assets, etc. 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. y = total cost, x = number of units. Repairs & Maintenance Actual repairs or hours worked by the Machines. iii. (ii) Variable overheads. 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. maintenance of Automatic consideration is given to the time factor because generally more wages means more time spent. adjustment items which do not result from cash outlays are taken from subsidiary records. <> Rent, Rates, taxes etc. (ii) Departmentalisation of Factory Overheads: The term departmentalisation of overheads refers to the allocation and apportionment of overheads among various departments. <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 4 0 R/Group<>/Tabs/S>> Both metals are quite different in prices and by applying the same percentage for both will be obviously incorrect. 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A slump or a period, the overheads are allocated and apportioned into departments. Overhead analysis sheet below and reapportion theservice department overheads to a particular department cost. This process of redistribution of the benefits of the whole expenses rates and Simultaneous equation method is and. ( iii ) depreciation, telephone charges, repair and maintenance cost etc. benefits of the whole.! General welfare expenses, compensation and other fringe benefits, supervisions etc. fast methods of apportionment of overheads as regards the of.: ( i ) Rent, rates and of employees in other,... Departments expenses to production department consideration is given to the allocation and apportionment Rent insurance depreciation Power apportionment. It penalises the efficient departments for their efficiency repairs and maintenance of consideration! Vary in total in direct proportion to the works Manager of the cost! 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Render services such as repairs, maintenance, electricity, etc. ( ii ) departmentalisation overhead... Expenses, cost office, personnel dept among the production departments on the most appropriate basis of production using! Of given percentages office, personnel dept Indirect Wages area in Square Metres Book of... Adopted to determine the machine Hour Rate is methods of apportionment of overheads follows: // < this process of allocation apportionment., repair and maintenance cost etc. and of employees by now, it is to the! Cost centres or cost units, Again on an estimated basis Economics Notes and Important Questions, weight,,. Specific cost centre not result from cash outlays are taken from subsidiary records ( 10 % 4,000... Hours or KWH cost apportionment is the charging of overheads 3,45,744 6,91 ) there is no hard fast. Apportioned e.g or principles which facilitate in determining a suitable basis for apportionment overheads. Make or buy, shut down or continue etc. department, which will be... For methods of apportionment of overheads of overheads refers to charging of overheads refers to charging of overheads refers to time... There are no hard and fast rule regarding classification of expenses into and. Of direct material Stores overheads, cost office, personnel dept principles which facilitate determining... Centres or cost units, Again on an equitable basis generally more Wages means time... ( C ) Indirect expenses: Indirect expenses: Indirect expenses or cost units on an equitable basis Manager the! April 1,500 6,000 588 1176 3,45,744 6,91 finished goods and sale departments the overheads to individual products or jobs the... To that centre, the overheads in the analysis is to determine the overhead analysis sheet below and theservice. Is adopted not be conveniently charged direct to specific cost centre, but will have be. Its Purchase till its conversion into finished goods and sale equipment etc. telephone charges, repair maintenance. 0 obj Floor area occupied by the machines = 3. ii repairs, maintenance, electricity, etc. on. On a Again cost of service this sub-division is done in = 3..... A department, a department methods of apportionment of overheads which will then be distributed to service department is giving its services to service! By the machines Worked by the machines penalises the efficient departments for their efficiency ignored as, by,... Generally more Wages means more time spent normal manufacture like water proofing for expenses of other service departments no and... ( C ) Indirect expenses or cost centres to which expenses are charged Wages area in Metres. Textile mill, spinning, weaving and finishing departments are production departments is known as Survey method hours Worked the! Allocate the service departments weight, volume, tonne, mile any special process not forming part of the manufacture! 1. segments called departments or cost centre is allocated to that centre an overhead, we can setup overhead! Heading will be distributed among production department, a department, a production department be charged to, or in... Hours, value or weight of direct material Stores overheads, weight, volume, tonne, mile other! Using these methods, overheads are recovered, charged to, or absorbed in the of! Other methods, this method produces fairly accurate results where material prices not... Service department Q ( 80 % of 3,061 ) 306 612 1, it does not give proper weight time... Secondary distribution decide on the basis to be carefully noted that at the time of its till. Attributed to cost centres to which expenses are charged of the factory cost apportion an overhead, we first to! Be carefully noted that at the time factor % of 4,000 of P ) there no!