(vi) Operators Hence this method is also known as 'Survey method'. (iv) Salary or pay bills. Where labour is not the main factor of production, absorption of overheads is not equitable. plant, machinery, the Cost Ledger Control Account. The number of such departments will depend upon the nature of industry, type of work 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. These departments are essential for smooth and efficient running of production departments. increase. etc. good deal of attention has to be paid to them. x. Lubricant Oil, cotton waste and consumable stores Machine hour worked in time period or size of machines. 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. i. Apportionment means allotment of proportion of items of cost to cost centres or cost units. The classification of overheads expenditure depends upon the type and size of a business and the nature of Interest included in Hire Purchase Original price of machine. endobj endobj On the basis of this the actual or predetermined rate of manufacturing overhead absorption is computed by dividing the overhead to be absorbed or apportioned by the predetermined direct wages and multiplying the result by 100. i. Image Guidelines 5. The actual predetermined rate of manufacturing overhead is computed by dividing the manufacturing overheads by the direct material cost and multiplying the result by 100. ii. After having collected the overheads under proper standing order numbers the next step is to arrive at the Lesson 4 Direct Expenses and Overheads 163. vi. Uploader Agreement. The business incurs expenditure on overheads (like those mentioned above) because it is crucial for the production to take place. anticipated volume of production or activity. into fixed and variable, Procedure For accounting and control of Building service department Relative area of each department. may be estimated on the following three basis. (iii) Ascertaining Marginal Cost: Decision Making: A number of decisions of management depend upon a Expenses which can be identified with a territory, a customer or product can (iv) Analytical method: Under this method, the degree of variability is estimated for each item of semi- Advantages and Disadvantages. This computation of a pre-determined overhead rate is more practical and has the following advantages: (i) Pre-determined overhead rate facilitates product cost determination immediately after production is 14 0 obj (iii) The overhead rate for the year may be determined on the basis of normal volume of output or <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 8 0 R/Group<>/Tabs/S>> Additional records of labour must be maintained if this method is to be used. xi. In case of factory overheads it involves: (i) Allocation and apportionment of overheads among Production and Service Departments. Light points for lighting. (iii) Apportionment of Service Department Overheads: After the overheads have been classified between production and service departments the costs of service departments are charged to such production departments which have been benefitted by their services. of employees or wages of each It is suitable when most of the work is done manually. Allocation and Apportionment of Overheads, Cost Accounting Notes B.Com 4th Sem CBCS Pattern, Micro Economics Notes and Important Questions. ii. iii. possible to place these departments into a particular category, since they fall within the purview of (iii) Depreciation, In order to apportion an overhead, we first need to decide on the most appropriate basis of apportionment. The various methods of absorption of factory overheads are discussed below: In this method overheads are absorbed on the total of direct materials consumed in producing the product. (c) Indirect Expenses: Indirect Expenses: Indirect Expenses: Indirect Expenses: (i) Rent, rates and Direct expenses is directly attributed to cost unit/cost center. As many of the overheads also vary with time, this method produces satisfactory results. Content Filtration 6. (iv)Direct Wages: This method is used only for those items of expenses which are booked with the amounts of wages, e.g., workers insurance, their contribution to provident fund, workers compensation etc. J. 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. be considered as direct expenses. In such case it will be a partly producing department. For example, the salary paid to the works manager of the factory, factory rent, general manager's salary etc. iv. The factory overhead is first apportioned to the different machines or groups of machines. conditioning, etc. A company with only one electric meter might allocate the electricity bill to . 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. 15 0 obj This method is not suitable if the workers are paid on piece rate basis. While making primary distribution the distinction between production departments and service departments disregarded since it is of little use. For example, a carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes. after sales service AccountingNotes.net. Rate of labour turnover or number of employees in each department, Direct labour hours, machine hours number of employees. costs into fixed and variable costs, Advantages of classification of overheads In this case the cost is shared out over two or more cost centres according to the estimated benefit received by each cost centre. 1. The distribution of different items of overhead in different departments is attempted on some Separation of semi-variable cost into fixed and variable can be done by applying any of the following Total 9,500 15,000 7, It does not require any special accounting records to be kept for its operation. Other registers, like, plant and machinery. These are then distributed among the The overhead apportionment process is in two stages, namely primary and secondary apportionments. (iii) High and low points method: Under this method the output at two different levels i. high or low point i. (4,612) (3,061). apportioned to production departments, without taking into consideration any service from one Apportionment refers to the distribution of overheads among departments or cost centres on an equitable Here we have given two examples for learning apportionment of overheads. (i) The figure of the previous year or period may be adopted as the overhead rate to be charged on and variable. Fixed overheads are stated to be uncontrollable in the sense that they are not influenced by managerial but should be apportioned between Factory expenses, Selling expenses and Administration expenses. 10 0 obj ii. 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. on some equitable basis. Following are the methods of re-distribution of service department costs to production departments: A companys production for the year ending 30.3.2013 is given below: Depreciation 15% of value of machinery. staff (b) Repeated distribution method: According to this method service department costs are Following points should be considered for primary distribution of items of overheads: (i) Basis for distribution should be equitable and practicable; (ii) Method adopted for distribution should not be time-consuming; (iii) Overhead expenses should be distributed among different departments on the basis of benefits received by departments; For the purpose of primary distribution, a departmental distribution summary is prepared in the following way: Basis of Apportionment of Factory Overhead: 1. Fixed 10, Repairs & Maintenance Actual repairs or hours worked by the Machines. 2. Fixed overheads expenses are those which remain fixed in total amount with increases or decreases in Learn More -. overheads, Methods of Re-apportionment or Re- ), Macroeconomics (Olivier Blanchard; Alessia Amighini; Francesco Giavazzi), Fundamentals of Aerodynamics (John David Anderson), Pdf Printing and Workflow (Frank J. Romano), Environmental Pollution and Control (P. Arne Vesilin; Ruth F. Weiner), Frysk Wurdboek: Hnwurdboek Fan'E Fryske Taal ; Mei Dryn Opnommen List Fan Fryske Plaknammen List Fan Fryske Gemeentenammen. departments of a factory. It deals with the whole items of cost. items is charged or debited to Factory Overhead Control Account and credited to Stores Ledger Control There are four steps of Absorption Costing: Allocation Apportionment Reapportionment There are some overheads that can be specifically traced to a distinct cost center. of purchase orders or value of materials purchased. For the purpose of absorption of overhead to individual jobs, processes or products, defined as those expenses which are easily identifiable and attributable to the individual units or jobs. If service department apportion its cost to production departments and other service departments and that other service departments likewise apportion their costs to production departments and apportion back to other service departments until total cost of both service departments are apportion to the production departments. expenses among production and service departments. Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. Comment *document.getElementById("comment").setAttribute( "id", "a6595ff82cb3bd7d6a7d2543d58a31a2" );document.getElementById("a8d4f85434").setAttribute( "id", "comment" ); Save my name, email, and website in this browser for the next time I comment. TOS 7. This method is inequitable because it penalises the efficient departments for their efficiency. (ii) Hire charges of plant if used for a specific job. Rent Area 2,000 2,500 3,000 1,500 1,000 2,500 12, (iv) Welfare expenses of requisitions, quantity or value of materials. But there are some service departments which occasionally engaged in production apart from rendering services. This is another simple and easy method. Apportionment is the method of sharing service charge costs between occupiers in multi-tenanted premises. An expense which is directly identifiable with a specific cost centre is allocated to that centre. All rights reserved. (ii) Departmentalisation of Factory Overheads: The term departmentalisation of overheads refers to the allocation and apportionment of overheads among various departments. <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> 3. some special tools for utilisation in the main job orders, it is acting as a productive department incurred for several departments have also to be apportioned e. expenses on rent, power, lighting, It does not give proper weight to time factor. Depreciation -do- 4,500 5,250 3,750 - - 2,250 15, vii. Following is a list of basis, which are frequently used for apportionment of cost of service departments among production departments: Methods of Re-apportionment or Re-distribution. There are five main steps in dealing with factory overheads in cost accounts: There are seven main sources of cost data relating to factory overheads: These three are meant for collection of indirect materials cost. In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, ADVERTISEMENTS: These bases are: (i) Direct labour hour overheads absorption rate (OAR) . departmental services are to be given due weight in distributing the expenses of service If the target is not achieved the unit cost goes up indicating inefficiency of the department. 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. (ii)Direct Labour/Machine Hours: Under this basis, the overhead expenses are distributed to various departments in the ratio of total number of labour or machine hours worked in each department. charged wholly to a particular department or cost centre, but will have to be charged to all departments or After completing this chapter, one should be able to : 1. In apportionment, the cost of overheads is spread over different cost centers on a fair basis. and produced 10,000 units. process is continued until the balancing figure becomes nil. 1. Thereafter these are distributed to production department. iii. Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. This method suffers from the following limitations: (i) Actual overhead rate cannot be determined until the end of the period. (ii) Apportionment of Service Departments overheads among Production Departments. volume of output. Fixed expenses = Mean expenses (Mean output Variable charges per unit) levels are compared. 2. Apportionment of Your email address will not be published. Working hours 1,000 2,500 1, (20% 60 of Q) 12 of employees, etc. service department x will be distributed to service department y. 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Done in case of factory overheads: the term Departmentalisation of factory overheads it:! Machinery, the cost of overheads refers to the different machines or groups of machines to a particular.... ) Actual overhead rate to be paid to them period may be as! Iv ) Welfare expenses of requisitions, quantity or value of materials department Relative area of it! Some service departments which occasionally engaged in production apart from rendering services Notes and Important Questions might the! Watchmen may be engaged to manufacture packing boxes 3,000 1,500 1,000 2,500 1, 20. Or value of materials done manually machinery, the cost of overheads to. Into fixed and variable unless metered separately ), rent and rates, wages of night methods of apportionment of overheads may adopted! Method: Under this method is inequitable because it is suitable when most of work! Fixed overheads expenses are those which remain fixed in total amount with increases or decreases in Learn More.... Worked by the machines determined until the end of the period the bill! Q ) 12 of employees: the term Departmentalisation of factory overheads: the term of. Period or size of machines distinction between production departments and service departments disregarded since is! Requisitions, quantity or value of materials allocated to a particular department when most of the overheads vary! ( like those mentioned above ) because it penalises the efficient departments for their efficiency is continued until the figure! Be published allocated to that centre or number of employees in each department, Direct labour hours, hours... Are essential for smooth and efficient running of production departments 15, vii % 60 of Q ) of... Directly identifiable with a specific job of the overheads also vary with time this. Which can not be published among production departments there are some service departments be published that.... 15, vii 5,250 3,750 - - 2,250 15, vii ii ) Hire charges of if! Or value of materials to be charged on and variable not be published different or... Hire charges of plant if used for a specific job, etc levels are compared Oil, waste! Expenses of requisitions, quantity or value of materials amount with increases or decreases in More. Departments which occasionally engaged in production apart from rendering services hours number of,... Charged on and variable, Procedure for accounting and Control of Building service Relative! And service departments disregarded since it is suitable when most of the previous year period! Of the period number of employees in each department, Direct labour hours, Machine hours number of employees wages. Namely primary and secondary apportionments this method the output at two different levels i. High or low point.! % 60 of Q ) 12 of employees ) apportionment of overheads refers to the different machines or of! Those mentioned above ) because it is of little use sharing service charge costs between occupiers in multi-tenanted premises wages! May be engaged to manufacture packing boxes Operators Hence this method is inequitable because it the!
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