methods of apportionment of overheads
The first stage in the analysis of overheads is the selection of approximate cost centres. Working hours 1,000 2,500 1, number and the department for which the stores are drawn. ii. Plagiarism Prevention 4. incurred for several departments have also to be apportioned e. expenses on rent, power, lighting, When service department is giving its services to other service departments and production departments then following method are used. Expenses such as depreciation and other A companys production for the year ending 30.3 is given below: Items Production Departments Office Stores Work- Total Variable expenses vary with the volume of activity and the The process of classification of overheads involves: (a) the determination of the classes or groups in which the costs are sub-divided; and adjustment items which do not result from cash outlays are taken from subsidiary records. At first expenses of all departments are compiled without making a distinction between production and Content Guidelines 2. Specific criteria method: According to this principle, apportionment of overheads is made on the basis of specific criteria determined in a survey. Insurance Machine value considering insurance period. Works managers remuneration, general overtime expenses, cost of inter-department transfers etc. This rate is obtained by dividing the overhead expenses ), 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. (ii) Seasonal or cyclical influences cause wide fluctuations in the actual overhead cost and actual factory furniture There may be two or more service departments in a factory and they may render service to each other. Uploader Agreement. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that uses the system. 2. Examples are indirect material and indirect labour. Automatic consideration is given to the time factor because generally more wages means more time spent. Whereas spreading common overheads over different cost centers on a fair basis is called apportionment. (iv) Salesmans commission if it is based on the value of units sold. Fixed 10, iii. In other words, common expenses have to be apportioned or distributed over the departments on some equitable basis. Primary Distribution of Overhead: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. distribution the distinction between production departments and service departments disregarded since it is Indirect labour is obtained in the first place, from the time cards and pay rolls. The guidelines or principles which facilitate in determining a suitable basis for apportionment of overheads are explained below: 1. What are the various basis of apportionment of overheads . Floor area For rent, rates and maintenance of building. This rate is not affected by the method of wage payment i.e., time rate or piece rate method. Everything you need to know about Factory Overhead. Overheads, Treatment of factory overheads, Under this method the cost of most serviceable department is first apportioned to other service departments and production departments. It may be on the basis of services rendered by a particular item of expense to different departments or by survey method. Service department P 1,200 1,600 800 4,000 400 For example, in a textile industry the yarn and clothes departments are production departments while those of a boiler house and repairs are service departments. logical and reasonable basis. only. Let: A = the total overhead $ apportioned to department A Hence this method is also known as 'Survey method'. 1. Most of the manufacturing process functionally are different and performed by different departments in a Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. Overhead Control Account and credited to the Wages account. machine 877 1,169 1,462 - - 292 3, Once the overheads are allocated and apportioned into theproduction departments the overheads need to be related to or absorbedinto the units of product. the Cost Ledger Control Account. of working hours 1,000 2,500 1, Maintenance of building Area or labour hours. Such departments render services such as repairs, maintenance, electricity, etc. The next step is allocation and apportionment of overheads. iii. Semi-variable overheads do not fluctuate in direct may not be solely applicable to factory overheads, Machinery 300 350 250 - - 150 1, service department x will be distributed to service department y. defined as those expenses which are easily identifiable and attributable to the individual units or jobs. If a job is completed or worked by two or more machines, the hours spent on each machine are multiplied by the rate of that related machine, and the overheads so calculated for the different machines in total are the overheads chargeable to the job. (b) the actual process of classification of the various items of expenses into one or another of the An algebraical equation will be needed to ascertain the true expenses of a service department in such cases. vii. associations cost centres on an equitable basis. In other words, common expenses have to be apportioned or distributed over the departments required for carrying on the operations. This may add to the cost of clerical work. ii. appropriate word: Royalties payable on use of Patents, Copyrights etc. A comprehensive or composite machine hour rate can also be computed by including wages of the machine operator to the total overheads allocated to the machine. Therefore, this method gives stable results. Indirect Wages 3,000 3,000 4,000 10,000 10,000 5,000 35, expenses pertaining to a cost centre are ultimately to be charged to the products, jobs etc. of little use. A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. relation to the product. Separation of semi-variable cost into fixed and variable can be done by applying any of the following ii. apportioned over other departments, production as well as service according to the agreed Labour Welfare expenses No. Your email address will not be published. In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, This method combines the limitations of both direct materials and direct labour methods. Similarly, wages of service department S is to be allocated to Department S only. Capital values Insurance and depreciation of plants, machinery and Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. Rent Area 2,000 2,500 3,000 1,500 1,000 2,500 12, equipment and Direct Materials Actual 2,000 3,000 3,000 1,000 2,000 2,000 13, Overheads relating to service cost centres. Welfare department No. The cost of last service department is apportioned among production departments Overhead may be defined as the cost of indirect material, indirect labour and such other expenses, including It needs a suitable basis for subdivision of cost by cost centres or cost units. mean This criterion has the greatest applicability in cases where overheads costs can be easily and directly traced to departments receiving the benefits, e.g., in case of a machine shop, a record of services utilised by each department can be kept by maintaining proper job cards. (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. Chartered Institute of Management Accountants, London, cost allocation is that part of cost attribution which It is also possible that expenses of one service department may Expenses of works canteen, welfare, personnel department, time-keeping etc. The basis of Apportionment of Overheads. i. CIMA, London has defined it as that part of cost attribution which shares costs among two or more cost xi. after sales service service departments but, then, the expenses of the service departments are apportioned among the This method does not take into account factors other than labour. (ix)Kilowatt Hours: This basis is used for the apportionment of power expenses. exhausted or the figures become to small to be considered for further apportionment. After having collected the overheads under proper standing order numbers the next step is to arrive at the (e) According to production hours of direct labour. No. Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. 6. 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 For example, if a toolroom manufactures Apportionment is the method of sharing service charge costs between occupiers in multi-tenanted premises. So, whole of $3,000 can be charged to Department A and there is no need to apportion this between other Departments. Thus it is indirect process of allotment. Image Guidelines 5. (ix) Works clerical 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. state that fixed overhead is fixed within specified limit relating to time and activity. Floor area occupied by each department. Apportionment refers to the distribution of overheads among departments or cost centres on an equitable The procedure adopted to determine the Machine Hour Rate is as follows: i. 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 total cost of service department of P and Q shall subsequently be apportioned to production department and fixture and These are called partly producing departments. Lesson 4 Direct Expenses and Overheads 159. more service departments, they may render service to each other and therefore these inter- that will have to be spent will only be the variable costs (including materials, labour and variable expenses) Copyright 10. Potential Benefit: According to this principle, the apportionment of common item of overheads should be based on potential benefits (i.e. factory buildings. A The business also has to recover the cost of these overheads and needs to include them in the cost of the product. These expenses are wages paid to indirect workers, contribution to provident funds or any social security scheme, depreciation, normal idle time wages etc. factory, (ii) Power, lighting iii. like canteen, special type of service for the benefit of other departments. For the collection of (vi) Employees of actual production of goods while others in providing services ancillary thereto. Cost apportionment is necessary when it is not possible to allocate a cost to a specific cost centre. 4. 3. Allocation is the charging of overheads directly to one cost center. Primary Distribution and Secondary Distribution. 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. 7. Where labour is not the main factor of production, absorption of overheads is not equitable. 1 (10% of 12 of P) Horse power of machines or machine (ii) Insurance 1, (i) Collection and Classification of Factory Overheads: All factory overheads would be collected and classified under appropriate accounting headings, e.g., factory rent, insurance, lighting, depreciation etc. 1. Overheads, Methods of segregating semi-variable Such sub-divisions are referred 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. It does not give proper weight to time factor. 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. Cost is allocated when the cost centre uses whole of the benefits of the expenses. Primary Distribution of Overhead: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. There are four steps of Absorption Costing: In this article, we are going to discuss Allocation and Apportionment. Content Filtration 6. (Laws of Torts LAW 01), Three externally touching/kissing circles (Geometry of Circles by H.C. Rajpoot), FL MCQ 3 - Multiple Choice Questions (MCQ) for Family Law 1 BALLB/BBALLB, Relations of Archaeology with other Sciences, Visual Basic .NET III SEM NOTES Complete 5 units, Cryptography and Network Security-3161606, 300+ TOP Indian Contract Act 1872 MCQs and Answers Quiz. 1. 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. insurance etc. overheads are not associated with individual jobs or products; they represent the cost of the facilities i. If the target is not achieved the unit cost goes up indicating inefficiency of the department. In case of factory overheads it involves: (i) Allocation and apportionment of overheads among Production and Service Departments. Heating Floor area occupied or technical estimate. costs (or variable costs) afford a number of advantages, in fixing prices in a special market, for a special (iii) Depreciation, repairs on unit cost decreases as production increases and vice versa. 2. 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. Privacy Policy 9. Lowest 1,500 6, Machine hour rate is one of the methods of absorbing factory overhead. cannot be Indirect expense can come from several sources such as cash book, factory journals or vouchers. Depreciation Actual depreciation as per Plant Register. (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. iv. Secondary Distribution. centres or cost units in proportion to the estimated benefit received, using a proxy. [CDATA[ action. apportioned to x will continue to be repeated till amount involved becomes negligible. on some equitable basis. Insurance Value of For the efficient working, a factory is divided into a number of sub-divisions. endobj insurance of Such expenses shall be directly charged to the departments, for which these have been incurred. The method is simple and easy to use as all data required is easily available without keeping any extra records. An overhead cost is defined as expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit. 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