Production Departments manufacture products while service departments help them in this process. Estimated or actual time spent. Primary Distribution of Overhead 2. When only one kind of article is produced. It is also possible that expenses of one service department may also be apportioned in part to another service department to arrive at the total expenses incurred on the latter department, which will then be distributed among production department. depreciation (as a whole) semi-variable. Expenses, Accounting Treatment of Indirect Floor area For rent, rates and maintenance of building. Allocation means the allotment of whole items of cost to cost centres or cost units. Discuss the meaning and treatment of under-absorption and over-absorption of overheads and apply the same in cost computation. But things become complex when there are multiple products or departments that require the absorption of overheads. Group insurance, canteen expenses, E.S. For example, a company may provide for its own buses for transporting workers to and from the factory. This method does not distinguish between work done by skilled and unskilled workers, as unskilled workers take more time and thus give rise to more factory expense than skilled workers. Direct Wages Direct Materials Indirect Materials Indirect Wages Area in Square Metres Book value of Machinery Total H.P. (iv) Welfare expenses i. Additional records of labour must be maintained if this method is to be used. after sales service Single and Departmental Overhead Absorption Rates | Accounting, Overhead Absorption: Rate, Examples, Formula and Methods, Absorption of Factory Overheads: 7 Methods | Cost Accounting, What is Factory Overhead: Examples, Formula, Items, Steps, Methods and Distribution, Factory Overheads Steps: Collection, Classification, Allocation, Apportionment and Absorption, Factory Overheads Methods of Absorption (With Formulas, Advantages and Disadvantages), Top 3 Stages Involved in Distribution of Factory Overhead. apportionment when necessary. It is suitable when the production is not uniform. As per summary 4,000 2, i. This method combines the limitations of both direct materials and direct labour methods. i. that too before the concerned period begins (since it is only continuous costing that is found useful) and that, iii. apportionment and absorption of overheads. Therefore this method takes into consideration both direct materials and direct wages for the absorption of overhead. Allocation and Apportionment of Overheads, Cost Accounting Notes B.Com 4th Sem CBCS Pattern, Micro Economics Notes and Important Questions. Uploader Agreement. Floor area occupied by the machines. 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 For example, managers salary may be apportioned on the basis of time and attention given by him to different cost centres or the charge for services of cost accounting department may be apportioned to different production departments on the basis of number of workers employed in each department etc. In a factory a product does not pass through Service department (S), but service department renders service to production departments for carrying on production function. Lesson 4 Direct Expenses and Overheads 159. (b) According to capital values of the assets. Maintenance of building Area or labour hours. Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. Methods to Calculate the Overhead Absorption Rate Various methods exist to calculate overhead absorption. xOK0{ acP nm6Px;IZd`.BF')Ns&'F+).7jM &2Te/KnYMPj 4,ZulP=Hq[+>__|AiL&Rl`4EMcLGfzd This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. A In other words, common expenses have to be apportioned or distributed over the departments on some equitable basis. 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. ascertained first with the help of simultaneous equations. Fixed expenses = Mean expenses (Mean output Variable charges per unit) ii. In this method we use equation to allocate the service departments expenses to production departments. 1. The business also has to recover the cost of these overheads and needs to include them in the cost of the product. (iii) Division of responsibility as far as possible should be clear, without ambiguity and dual control. This method is particularly useful where the service department costs are largely fixed and services have been provided taking into consideration the potential requirements of the various departments. x. Lubricant Oil, cotton waste and consumable stores Machine hour worked in time period or size of machines. The cost of another service department plus the share received 2. This is also known as departmentalization of overheads. When labour forms the predominant part of the total cost. Each item of overheads may be seen and proper estimate of the amount for the coming period may be Delivery expenses. Stores O. material 3,573 4,168 5,359 - (-)13,100 - -. Under this method specific criteria are laid down after careful survey for apportionment of charge for different service functions. eg: rent on the basis of floor area. 5. //]]>. You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of methods: (i) Graphical Presentation Method: Under this method, a good number of observations in respect of the The amount so Before uploading and sharing your knowledge on this site, please read the following pages: 1. For a period, the expenses in the various departments of a factory were as follows: // Administrative & Selling & distribution 6 0 obj incurred during the accounting period by the actual quantum (quantity/value) of the base selected. Such sub-divisions are referred Content Filtration 6. At the end of each month, the total of these This method can be applied with advantage where the rates of workers are the same, where workers are or same or equal efficiency, and where the type of work performed by workers is uniform. An analytical study thus can make it possible for all semi-variable Supervisory Expenses No. required for carrying on the operations. Primary Distribution and Secondary Distribution. 2. charged wholly to a particular department or cost centre, but will have to be charged to all departments or endstream (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. [CDATA[ Using these methods, overheads are recovered, charged to, or absorbed in the factory cost. *Direct expenses are defined as costs, other than materials or wages, which are incurred for a specific when these are used for processes. Chartered Institute of Management Accountants, London, cost allocation is that part of cost attribution which They are known as semi-variable overheads 14 0 obj The items of factory overhead are as follows: 2. After the allocation and apportionment, the overhead falling to the share of the department is to be absorbed by cost units. (iv) Salesmans commission if it is based on the value of units sold. Carrying amount of assets For Depreciation, maintenance and insurance of plant and machinery, Kilowatt hours consumed For electricity and power, Machine hours For Machines running expenditure. Apportionment of Overheads: Certain expenses such as General Manager's salary, rent of the factory etc. Insurance on tools and fixtures, power, repairs and maintenance cost etc. After completing this chapter, one should be able to : 1. regularly collected i. estimated under standing order code numbers allotted to them. 2. Items Basis of Production Departments Service Departments Total 3. It deals with the whole items of cost. Thus, it is useful only when compared with the established norms or standards. Secondary Distribution. state that fixed overhead is fixed within specified limit relating to time and activity. Distribution of factory overheads involves three stages: (i) Collection and classification of factory overheads. 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