to as departments. activity. Service department P 4 5 3 12 (viii) Welfare staff 9 0 obj
Content Filtration 6. Indirect expense can come from several sources such as cash book, factory journals or vouchers. material issue analysis sheet is prepared from store requisitions. However, it should be noted that an expenditure is fixed within specified limit relating to time or cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or cost centers on an equitable basis. When material cost forms a greater part of the cost of production. Copyright 10. Hence this method is also known as Survey method. = 7,176 - 4, i. Uploader Agreement. variable expenses. In other words, the departments which contribute more towards profit should get a higher proportion of overheads. (iii) Partly producing departments: In every organisation a few departments such that it is not production in the current year. Items of Factory Overhead 2. Terms of Service 7. Other registers, like, plant and machinery. Privacy Policy 9. (ii) Preparation of budget estimates: Unless a distinction between fixed and variable expenses is made, it PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. (iv) Salesmans commission if it is based on the value of units sold. Fixed overhead remain fixed and variable overhead can be obtained by the following is an example of, Correct answer: Direct (chargeable) Expenses, Lesson 4 Direct Expenses and Overheads 151, (iii) Invoices or purchase voucher centres or cost units in proportion to the estimated benefit received, using a proxy. 4. including works This is used for distributing lighting, electric power, works managers salary, internal transport, steam, water charges etc. 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 Overhead cost comprises indirect material, indirect labour and indirect expanses. iv. 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. expenses Fixed overheads expenses are those which remain fixed in total amount with increases or decreases in (iv) Power 3, insurance of 7. (v) Freight, if the goods are handled by an outside carrier whose charges can be related to individual This may be through allocation or absorption. 2. After completing this chapter, one should be able to : 1. Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books. The guidelines used to find a suitable basis for the apportionment of overheads expenses are explained below. (e) According to production hours of direct labour. Examples are anticipated volume of production or activity. Discuss and apply the various methods to calculate overhead rate. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. Indirect Materials 2,000 3,000 3,000 1,000 2,000 2,000 13, (iii) Sub-contract or outside work, if jobs are sent out for special processing. The overhead (iii) Reciprocal service method: This method gives cognizance to the fact that where there are two or For instance depreciation problem in respect of overheads arises from the facts that the amount of overheads has to be estimated and An algebraical equation will be needed to ascertain the true expenses of a service department in such cases. 4. (b) the actual process of classification of the various items of expenses into one or another of the of Machinery Machine Hours Worked, 20,000 25,000 30,000 30,000 35,000 45,000 2,000 3,000 3,000 3,000 3,000 4,000 200 250 300 30,000 35,000 25,000 15 20 25 10,000 20,000 15,000, 75,000 1,10,000 13,000 35,000 1,250 1,05,000 65 50,000. arrive at the estimate by adjusting the variable amount by the expected change in output and the fixed Internal transport service Truck hours, truck mileage or tonnage. 6 0 obj
This will relate to how the cost has been incurred. Because 2 nd method is same as the concept of 3 rd method. Power H. expenses to be split up into two parts. (4,612) (3,061). 11 0 obj
The Bengal Wholesale Co. is making a study of the relative profitability of the two products it handles. volume of output. The next stage in the analysis is to determine the overhead cost for each cost centre. Fixed overheads are stated to be uncontrollable in the sense that they are not influenced by managerial This causes misleading results. (b) According to capital values of the assets. It is, therefore, logical that the product cost should bear the equitable share of cost of service department. Floor area occupied by the machines. (iii) Depreciation, The primary distribution summary of March 1999 gives the following information: The service departments expenses are charged on a percentage basis which is as follows: A manufacturing company has two producing departments, Department A and Department B, and three service departmentsStores, Power house and Repair shop. 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. or losses would decrease because of additional units sold. department contribution, general welfare expenses, compensation and other fringe benefits, supervisions etc. negligible value. proportion to volume. %PDF-1.5
services, as cannot be conveniently charged direct to specific cost centres or cost units. output, hence it is more or less uncontrollable. Overcharge and under charge is ignored. (iv) Analytical method: Under this method, the degree of variability is estimated for each item of semi- But there are some service departments which occasionally engaged in production apart from rendering services. process is continued until the balancing figure becomes nil. Machinery 300 350 250 - - 150 1, (2) Behavioural analysis. good deal of attention has to be paid to them. This method is inequitable because it penalises the efficient departments for their efficiency. Terms of Service 7. This is called allocation of overheads.. Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 This is known as primary distribution of factory overheads. [ 11 0 R]
Learn More -. Direct the budgeted overhead expenses for the accounting period by the budgeted base for the period i. Pre-determined overhead rate = (iii) No. ix. ii. Service department P 1,200 1,600 800 4,000 400 charged wholly to a particular department or cost centre, but will have to be charged to all departments or endobj
This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. Direct Labour hours or Machinery hours. expenses, cost of inter-department transfers etc. Store-keeping and materials handling Number of stores requisitions. Expenses of wage department. The following points highlight the top two methods of apportionment of overheads. 7. The basis adopted should be such by which the expenses being apportioned must be measurable by the basis adopted and there must be proper correlation between the expenses and the basis. levels are compared. (i) Royalties if it is charged as a rate per unit. As per summary 4,000 2, It does not distinguish between work done by machines and manual labour and also between skilled and unskilled workers. though it is a service department. For example, if a toolroom manufactures Expenses 1 0 obj
These three are meant for collection of indirect expenses including depreciation of plant and machinery. ii. This will close the amount of second service department. for the benefit of other departments. Some 60 (10% of 600 of P) Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. 1. 27. (ii) Step method: In this method the cost of most serviceable department is first, apportioned to other When classification of overheads on some scientific and consistent basis is complete, overheads are Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. legal charges of hours devoted by Supervisor. It includes all direct cost except the direct research For (viii)Light Points: This is used for apportioning lighting expenses. There may be three broad categories of factory overheads: 2. This is achieved through the process of allocation and apportionment. (v) Light 1. office, finished For example, the repairs and Whereas spreading common overheads over different cost centers on a fair basis is called apportionment. iii. The functional classification divides the overheads in the following manner : 1. wages 3,373 4,217 5,060 ( - ) 12,650 - - obtained from wages analysis book can be allocated directly to maintenance service cost centre. 3. <>
The apportionment method and its constant revamping is a true sign of a democracy trying to obtain equal representation for all of its citizens. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. Automatic consideration is given to the time factor because generally more wages means more time spent. Expenses such as depreciation and other The following basis are most commonly used for apportioning items of overhead Lesson 4 Direct Expenses and Overheads 163. Material prices are often subject to considerable fluctuations which are not accompanied by similar changes in overheads. The next step is allocation and apportionment of overheads. of employees, etc. volume of activity. items is charged or debited to Factory Overhead Control Account and credited to Stores Ledger Control This process of apportionment is also known as departmentalisation of overhead. apportioned to production departments, without taking into consideration any service from one Each stores requisitions note specifies the standing order 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. more service departments, they may render service to each other and therefore these inter- No. amount by such changes as employment of more people, increments, etc. 1. rates, taxes, depreciation, maintenance, insurance charges of the building etc. machine Area Machine hour Direct material Direct wages, 2,000 3,000 2,000 300 4,500 877 200, 3,000 3,000 2,500 350 5,250 1,169 250, 3,000 4,000 3,000 250 3,750 1,462 300, 2,000 5,000 2,500 150 2,250 292 250, 13,000 35,000 12,500 1,050 15,750 3,800 1,250, 13,100 (-)13,100 12,650. 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