methods of apportionment of overheads

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. This process continues till the cost of last service department is apportioned. 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. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. (ii) Repeated distribution method: For example, a company may provide for its own buses for transporting workers to and from the factory. Content Guidelines 2. 8 0 obj The line on the graph will, therefore, be represented by: y = mx + c Once the overheads are allocated and apportioned into theproduction departments the overheads need to be related to or absorbedinto the units of product. This method does not take into account factors other than labour. U.G. If the target is not achieved the unit cost goes up indicating inefficiency of the department. (iii) No. (i) Rent, rates and (ix)Kilowatt Hours: This basis is used for the apportionment of power expenses. usually depends on two factorsone time (fixed) and other wear and tear (variable). All the factory overheads are to be classified to suit the purpose of cost accounting, whether item wise, i.e., rent, insurance, depreciation etc., or function-wise. Welfare department No. (vi) Operators i. For example, the salary paid to the works manager of the factory, factory rent, general manager's salary etc. It is to be carefully noted that at the time of making . If service department apportion its cost only to production Department. Similarly Re-write the following sentence after filling-in the blank spaces with This rate is determined by dividing the overhead expenses by the total number of direct labour hours. Cost Account numbers are used for covering the Administration, Selling and Distribution overheads. Direct expenses are those expenses which are directly chargeable to a job account. of hours devoted by Supervisor. Under this method specific criteria are laid down after careful survey for apportionment of charge for different service functions. The classification of overheads expenditure depends upon the type and size of a business and the nature of into fixed and variable, Procedure For accounting and control of iii. This sub-division is done in In this method we use equation to allocate the service departments expenses to production departments. The total cost of service department of P and Q shall subsequently be apportioned to production department prepared. department y plus the share from service department x will be apportioned to x. Discuss the meaning and treatment of under-absorption and over-absorption of overheads and apply the same in cost computation. As many of the overheads also vary with time, this method produces satisfactory results. etc. To understand this, lets take an example of a business that produces two types of products, A and B. formula: Change in the amount of expenses Under this method, costs of one service department are apportioned to other service departments and production departments on agreed percentages and this process is repeated till the figures of service departments are too small to be reckoned for further apportionment. Examples are indirect material and indirect labour. 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. AccountingNotes.net. also be apportioned in part to another service department to arrive at the total expenses incurred on the ii. Number of employees For workforce related costs like canteen costs etc. Copyright 10. (iv) Salary or pay bills. Under this method service department overheads are charged to production departments on the basis of potential rather than actual services rendered. Apportionment of Office O.H. The business has two departments, X and Y. Factory Overhead Formula 4. customer and during a slump or a period of depression, decision on make or buy, shut down or continue etc. Bases of absorption. When it is difficult to select a suitable basis in other methods, this method is adopted. (v) Tool room In such a situation it seems quite logical that the overheads of the transport department are charged to various production departments in proportion to the number of the potential users, regardless of the actual number of workers in each department. Fixed overhead costs remain the same from one period to another The guidelines used to find a suitable basis for the apportionment of overheads expenses are explained below. CIMA, London has defined it as that part of cost attribution which shares costs among two or more cost The example above can be Total 9,500 15,000 7, Overheads are those costs which do not result from existence of individual cost units. Harper. that direct costs(materials, labour, etc.) Plagiarism Prevention 5. Variable expenses vary with the volume of activity and the Generally, there are three methods to apportionment of overhead; they are: Direct distribution method Under this method, the costs of service department are distributed or apportioned to production department. percentages and this process is repeated until the total costs of the service departments are 3. For instance, some semi-variable expenses may have 20% variability while others may But there are some service departments which occasionally engaged in production apart from rendering services. 3 0 obj overheads absorption rates are applied. distribution, Methods Of Absorbing Production costs into fixed and variable costs, Advantages of classification of overheads 4. xn@HYDt,][,. y6iU%1h7.8BJnJFsh]\]@o/.\E| ;3_|htsA1$h3@.|iB4@W}_c2J2Q"b%AHo47T#SE} office, finished activity. The departments in a factory can be broadly categorised into the following types: (i) Producing or manufacturing departments: A manufacturing or producing department is one in case of those overhead items which cannot be wholly allocated to a particular department. from the first service department is again apportioned to first service department and this Variable overhead costs are those costs which vary in total in direct proportion to the volume of output. 10p - 2q = 40,000 .(v) ii. Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. 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. (x) Technical Estimates: This basis of apportionment is used for the apportionment of those expenses for which it is difficult, to find out any other basis of apportionment. (iv) Sundry Therefore, this method gives stable results. (iii) Actual cost is generally used for comparison with the predetermined figures for the purpose of iv. Area in Square Metres 200 250 300 150 100 250 1, 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. This may be through allocation or absorption. The extra amount This causes misleading results. These are then distributed among the Machinery 300 350 250 - - 150 1, When service department is giving its services to other service departments and production departments then following method are used. departments. Service department P 4 5 3 12 output, hence it is more or less uncontrollable. 7. Insurance on tools and fixtures, power, repairs and maintenance cost etc. This method of redistribution gives cognizance to the service rendered by one service department to another service department. contribution, general welfare expenses, compensation i. In a hypothetical organisation no expenditure remains unchanged for all time. Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. This principle states that the apportionment of common overhead items should be based on the actual benefit received by the respective cost centers. building, insurance of building, plant etc. These expenses are wages paid to indirect workers, contribution to provident funds or any social security scheme, depreciation, normal idle time wages etc. Required fields are marked *. product or salable service.. v. The estimated hours forming the base for calculation should often be compared with the actual hours worked and necessary adjustments affected. department contribution, general welfare expenses, compensation and other fringe benefits, supervisions etc. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. apportioned over other departments, production as well as service according to the agreed case of cash outlays, the entry may come from the cash book. The first stage in the analysis of overheads is the selection of approximate cost centres. Content Guidelines 2. another service department. and fixture and For Uploader Agreement. incurred for several departments have also to be apportioned e. expenses on rent, power, lighting, Thus true overhead cost of each service department is ascertained. 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. Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. This amount of overheads does not change because the work is being done on copper instead of iron. Factory Overheads - Methods of Absorption (With Formulas, Advantages and Disadvantages) . All the indirect costs of the business are called overheads. The term refers to the allotment of expenses which cannot identify wholly with a particular department. Thus it is indirect process of allotment. The next step is allocation and apportionment of overheads. office, (ii) lighting, heating Separation of semi-variable cost into fixed and variable can be done by applying any of the following But things become complex when there are multiple products or departments that require the absorption of overheads. production departments on a suitable basis. Overhead Control Account and credited to the Wages account. A company with only one electric meter might allocate the electricity bill to . Methods of Apportionment of Service Department Overheads! The overhead rate of expenses for absorbing them to production In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. products which pass through these departments. The cost of last service department is apportioned among production departments only. factory, (ii) Power, lighting 5 0 obj You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of Difference 1,320 2, Lesson 4 Direct Expenses and Overheads 157. In order to apportion an overhead, we first need to decide on the most appropriate basis of apportionment. //]]>. Copyright 10. viii. departments of a factory. Depreciation Actual depreciation as per Plant Register. The departmentalisation is done at sources. Apportionment and absorption of Production Overheads 5.1 Overheads are to be apportioned to different cost centres based on following two principles : i) Cause and Effect - Cause is the process or operation or activity and effect is the incurrence of cost. and produced 10,000 units. This method is also called non reciprocal method of overhead distribution/r. Primary Distribution and Secondary Distribution. Actual and pre-determined overhead rate: The overhead absorption rate may be computed either based on An. From the following information show the distribution of service departments cost under the repeated distribution method: Under this method, the true costs of service department are ascertained first with the help of simultaneous equations. window.__mirage2 = {petok:"mV5GQyOeXuAURipfQW4GKcKzTJSehtfJRlqTbRgcUuk-3600-0"}; The actual or predetermined rate of manufacturing overhead absorption is calculated by dividing the factory overhead by the prime cost.

Disadvantages Of Titanium Glasses, Is Burning Tires Illegal In Texas, Articles M