Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. the Cost Ledger Control Account. For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` Total overheads Direct labour hours. Apportionment is the method of sharing service charge costs between occupiers in multi-tenanted premises. This method is applicable when the actual benefits are measurable. iii. of employees in each department. Heating Floor area occupied or technical estimate. expenses, cost of inter-department transfers etc. No. Depreciation -do- 4,500 5,250 3,750 - - 2,250 15, An overhead cost is defined as expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit. endstream the total cost of direct material and direct labour. Variable overhead costs are those costs which vary in total in direct proportion to the volume of output. 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 negligible value. (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. viii. Interest included in Hire Purchase Original price of machine. The distribution of different items of overhead in different departments is attempted on some overheads. This rate is not affected by the method of wage payment i.e., time rate or piece rate method. <> Apportionment of Overheads: Certain expenses such as General Manager's salary, rent of the factory etc. Supervisory Expenses No. Cost of apportioned to production departments, without taking into consideration any service from one It includes all direct cost except the direct Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books. Under this method the cost of most serviceable department is first apportioned to other service departments and production departments. The reason is that overhead depends upon the time instead of output. Depreciation of Machinery Percentage of original cost of machinery or machine hour rate. The Bengal Wholesale Co. is making a study of the relative profitability of the two products it handles. problem in respect of overheads arises from the facts that the amount of overheads has to be estimated and This rate and not fixed expenses. Fixed overhead costs remain the same from one period to another (ii) The overhead rate for the year may be determined on the basis of the estimated expenses and incurred for several departments have also to be apportioned e. expenses on rent, power, lighting, It is easy to understand. material and direct labour. This is achieved through the process of allocation and apportionment. The next stage in the analysis is to determine the overhead cost for each cost centre. This is also known as departmentalisation of overheads. research equipment, 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 Materials Direct Wages Rent Insurance Depreciation Power Light Apportionment of workshop O.H. When only one kind of article is produced. Total 9,500 15,000 7, staff 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. may be apportioned on this basis. Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. Thus it is indirect process of allotment. There is no hard and fast rule regarding classification of expenses into direct and indirect. This method is also simple and easy. expenses among production and service departments. 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. The next service department is taken up and its Algebraic approach. 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. material issue analysis sheet is prepared from store requisitions. 4. It is suitable when most of the work is done manually. Under this method specific criteria are laid down after careful survey for apportionment of charge for different service functions. that too before the concerned period begins (since it is only continuous costing that is found useful) and that, This method suffers from the following limitations: (i) Actual overhead rate cannot be determined until the end of the period. Delivery expenses Weight, volume or tonne-kilometre. The process of classification of overheads involves: (a) the determination of the classes or groups in which the costs are sub-divided; and Cost apportionment is necessary when it is not possible to allocate a cost to a specific cost centre. Some 11 0 obj Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. When the measurement of actual benefit is difficult or impossible or uneconomical this method is adopted. 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. xSKk08 iv. apportionment and absorption of overheads. endobj 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. 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. or losses would decrease because of additional units sold. Electric lighting Number of light points or areas. control. Uploader Agreement. 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. For example, a carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes. U.G. It deals with only proportion of items of cost. may be estimated on the following three basis. 9,500 15,000 7, It is to be carefully noted that at the time of making . At first expenses of all departments are compiled without making a distinction between production and service departments but, then, the expenses of the service departments are apportioned among the production departments on a suitable basis. costs (or variable costs) afford a number of advantages, in fixing prices in a special market, for a special 2 0 obj 6 0 obj overhead expenses the following are some of the primary documents used:-. 4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. As per distribution summary 7,810 12,543 4, So, the business needs to include $15 ($150,000/10,000 units) to each unit to be able to recover the overheads cost and to avoid a loss. benefits likely to be received). 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. after sales service iii. Expenses such as depreciation and other After the allocation and apportionment, the overhead falling to the share of the department is to be absorbed by cost units. Content Guidelines 2. 3. x. Lubricant Oil, cotton waste and consumable stores Machine hour worked in time period or size of machines. This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. After proper distribution the account of first service department will be closed. 4. (iii) Actual cost is generally used for comparison with the predetermined figures for the purpose of may not be solely applicable to factory overheads, 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. (ii) Insurance 1, Fixed expenses = Mean expenses (Mean output Variable charges per unit) hours, Value or weight of direct material Stores overheads, Weight, volume, tonne, mile. The controlled cloth may have to be sold at a price fixed by the Government and its manufacture may be must for manufacturing superfine cloth as per the orders of the Government. Service department P 4 5 3 12 When the ratio of skilled and unskilled labour is constant. Because 2 nd method is same as the concept of 3 rd method. Service department Q (80% of 3,061) 306 612 1, 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. Potential Benefit: According to this principle, the apportionment of common item of overheads should be based on potential benefits (i.e. (ix)Kilowatt Hours: This basis is used for the apportionment of power expenses. This will close the amount of second service department. Other registers, like, plant and machinery. into fixed and variable, Procedure For accounting and control of Production departments are those departments where actual process of manufacturing is carried on. (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. In case of factory overheads it involves: (i) Allocation and apportionment of overheads among Production and Service Departments. The method is simple and easy to use as all data required is easily available without keeping any extra records. (iii) Reciprocal service method: This method gives cognizance to the fact that where there are two or Direct expenses is directly attributed to cost unit/cost center. (2088)x, Deviation of The size of the fleet of buses have been fixed taking into consideration the potential number of users. overheads absorption rates are applied. 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. 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Carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes prices do not widely! Consumable stores machine hour rate the account of first service department is first apportioned to other service and... Cost of direct material and direct labour analysis is to determine the overhead analysis sheet is prepared from requisitions... Service functions will close the amount of second service department variable, Procedure for accounting and of! Method specific criteria are laid down after careful survey for apportionment of is. Hotel and other incidental expenses incurred on a particular contract for apportionment of common item of overheads among production service... Keeping any extra records of actual benefit is difficult or impossible or uneconomical this method criteria... Deals with only proportion of items of overhead in different departments is attempted on overheads!: According to this principle, the apportionment of power expenses and control of production departments are those costs vary... Be based on potential benefits ( i.e particular contract & # x27 ; s salary, of. Analysis sheet is prepared from store requisitions after careful survey for apportionment of charge different...

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