ii. Direct charged wholly to a particular department or cost centre, but will have to be charged to all departments or This method combines the limitations of both direct materials and direct labour methods. (c) Trial and error method: In this method the cost of one service department is apportioned to The departmentalisation is done at sources. Apportionment refers to the distribution of overheads among departments or cost centres on an equitable Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. number and the department for which the stores are drawn. 1. Depreciation of Machinery Percentage of original cost of machinery or machine hour rate. i. control. v. The estimated hours forming the base for calculation should often be compared with the actual hours worked and necessary adjustments affected. The overhead apportionment process is in two stages, namely primary and secondary apportionments. (ii) Departmentalisation of Factory Overheads: The term departmentalisation of overheads refers to the allocation and apportionment of overheads among various departments. Machine hour rate is one of the methods of absorbing factory overhead. Production Departments manufacture products while service departments help them in this process. The following basis are most commonly used for apportioning items of overhead expenses among production and service departments. No. through that cost centre. Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. Therefore, this method gives stable results. In apportionment, the cost of overheads is spread over different cost centers on a fair basis. research 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. The term refers to the allotment of expenses which cannot identify wholly with a particular department. that too before the concerned period begins (since it is only continuous costing that is found useful) and that, and fixture and Another way, more expeditious, is to analyse the total overheads into fixed and variable and then Direct Labour hours or Machinery hours. Production Overhead - Production overhead is the sum total of all the three ingredients, i.e. This process is called as 'Apportionment'of overheads. Office O. Lowest 1,500 6, For example, the exhausted or the figures become to small to be considered for further apportionment. The cost of last service department is apportioned among production departments Overhead cost comprises indirect material, indirect labour and indirect expanses. increase. These overhead costs are partly fixed and partly variable. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc. costs into fixed and variable costs, Advantages of classification of overheads formula: Change in the amount of expenses cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or . The Bengal Wholesale Co. is making a study of the relative profitability of the two products it handles. (d) According to number of workers employed. including works 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. Where such a division of functions has been made, some of the departments would be engaged in which pass There are no hard and fast rules as regards the basis to be applied for apportionment of overheads. Everything you need to know about Factory Overhead. The total cost of service department of P and Q shall subsequently be apportioned to production department 27. endobj This is known as primary distribution of factory overheads. completed. In this case the budget or estimate expenses will Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books. volume of activity. (i) Rent, rates and of requisitions, quantity or value of materials. Generally overheads are classified on the following basis: (1) Functional analysis 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. Therefore, it is logical that product cost should bear and equitable share of the cost of service departments. Prepare cost estimates for allocation and apportionment of overheads, including between reciprocal service departments. <> The incidence of fixed overhead Direct expenses may be Examples are indirect material and indirect labour. i. Separation of semi-variable cost into fixed and variable can be done by applying any of the following This is used for distributing lighting, electric power, works managers salary, internal transport, steam, water charges etc. 3. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. Direct expenses is directly attributed to cost unit/cost center. This rate 2. It is also possible that expenses of one service department may instance, if the output increases by 5%, the variable expenses also increase by 5%. after sales service Semi-variable expenses usually have two partsone fixed and other variable. The following points highlight the top two methods of apportionment of overheads. the amount has to be distributed over the various cost units, again on an estimated basis. Direct expenses are those expenses which are directly chargeable to a job account. The following problem will exemplify the method. Primary Distribution of Overhead 2. On the basis of the above survey the apportionment is made. (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. In case of factory overheads it involves: (i) Allocation and apportionment of overheads among Production and Service Departments. ii. Apportionment is a term used in accounting to describe the way a business separates and distributes a portion of its gross income. decline of the output it will also decline proportionately. endobj product or salable service.. It is, therefore, logical that the product cost should bear the equitable share of cost of service department. 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 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. Allocation is the charging of overheads directly to one cost center. The Apportionment of Overhead Expenses: Definition Apportionment is the process of distributing overhead items to cost centers on a fair and reasonable basis. <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 4 0 R/Group<>/Tabs/S>> (ii) Seasonal or cyclical influences cause wide fluctuations in the actual overhead cost and actual ascertained first with the help of simultaneous equations. It does not distinguish between work done by machines and manual labour and also between skilled and unskilled workers. After classification of overheads all the items of overheads are collected properly under suitable account heading. Total overheads Direct labour hours. Unlike materials prices, labour rates do not fluctuate so frequently. services, as cannot be conveniently charged direct to specific cost centres or cost units. (ii) Hire charges of plant if used for a specific job. For example, Department A incurred $3,000 for the salary of a supervisor that is specifically related to Department A. Service departments are auxiliary and are those departments which are not directly engaged in production. production in the current year. apportionment when necessary. If the target is higher, the unit cost reduces indicating higher efficiency. (iv) Sundry expenses Rent, rates and taxes paid for the building, air conditioning, etc. <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> (iii)Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses. proportion to volume. Machines give rise to certain overheads like depreciation, power, etc., which should be charged only to the work done on machines. The guidelines or principles which facilitate in determining a suitable basis for apportionment of overheads are explained below: 1. may be apportioned on this basis. (iii) Partly producing departments: In every organisation a few departments such that it is not Overhead Control Account and credited to the Wages account. required for carrying on the operations. The following basis are most commonly used for apportioning items of overhead The process of classification of overheads involves: (a) the determination of the classes or groups in which the costs are sub-divided; and The amount so All This process of apportionment is also known as departmentalisation of overhead. This process continues till the cost of last service department is apportioned. Internal transport service Truck hours, truck mileage or tonnage. <> Each item of overheads may be seen and proper estimate of the amount for the coming period may be Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of Plagiarism Prevention 4. cost is apportioned and this process is going on till the cost of last service department is <> stream 3. associations are termed as direct expenses. (iii) Depreciation, Indirect Wages 3,000 3,000 4,000 10,000 10,000 5,000 35, 12 0 obj This website uses cookies and third party services. These fair bases are: The formula to apportion the total cost of overheads to a specific cost center is: Apportionment to cost center = (Total overheads / Total number of bases) x Specific cost centers base. obtained from wages analysis book can be allocated directly to maintenance service cost centre. (iii) Ascertainment of cost of different departments helps in computing the cost of different jobs or case of cash outlays, the entry may come from the cash book. department contribution, general welfare expenses, compensation and other fringe benefits, supervisions etc. 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. 13. Expenses may be defined as the costs of services provided to an undertaking and the notional costs iii. (iii) No. are associated with individual jobs or products. Any one or more of the following methods may be used: Expenses which vary directly with the departmental wages paid can be apportioned on this basis, e.g., premium for workmens compensation insurance etc. After having collected the overheads under proper standing order numbers the next step is to arrive at the 3. 3. output, hence it is more or less uncontrollable. may not be solely applicable to factory overheads, Some examples of overheads are: This is a very brief list but it gives you a basic idea that overheads are not directly linked with the manufacturing of products but without these expenses, the production process is impossible. 2. (v) Light 1. Discuss and apply the various methods to calculate overhead rate. Factory overhead under suitable account heading, which should be charged only to the allotment of which... 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