methods of apportionment of overheads

variable expenses. For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` Variable overhead changes in total but its incidence on unit cost remains constant. 4. place. Welfare department No. The business spends $10,000 for the rent of the factory in which the production takes place. (vi)Floor Area of Departments: This basis is adopted for the apportionment of certain expenses like lighting and heating, rent, rates, taxes, maintenance on building, air conditioning, fire precaution services etc. July 2,820 8,640 +732 +1464 5,35,824 10,71. The number of such departments will depend upon the nature of industry, type of work of employees engaged on machines. For instance depreciation D, JaSB)Mll;rM-D&^8K0vmY(zPh{R_1BhY]o>*Vz[s_P/\.B}&Oefhw_z 1Co4-Fy ic owZ,"vl7i*!i7|6}:ZT1Xu]~<>&e1QS2EJN ;9{4wc'dnMj[jm9iNi6/`ex7E6\]{v-W[x@XLgLQ[UIFIgj*&ezN:xM Lowest 1,500 6, Rent, rates and taxes paid for the building, air conditioning, etc. Content Guidelines 2. 14 0 obj workshop O. departments. from the first service department is again apportioned to first service department and this Marginal 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. (iii)Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses. Machine percentages and this process is repeated until the total costs of the service departments are (2) Behavioural analysis. for the benefit of other departments. It is suitable when most of the work is done manually. When workers are paid on a piece basis, this method will not give satisfactory results because the time factor is ignored. hour 2,765 5,530 4,147 - - (-)12,442 -, Apportionment of Direct and maintenance of The items of factory overhead are as follows: 2. The line on the graph will, therefore, be represented by: y = mx + c This method is also simple and easy. factory furniture expenses of other service departments. machine 877 1,169 1,462 - - 292 3, For instance, some semi-variable expenses may have 20% variability while others may The primary apportionment stage is when overheads are apportioned to all departments in the organization (both production and service departments) without considering any reciprocal transfer of benefits. Fundamentally, therefore, there are only two types of expensesfixed is determined as follows: Actual overhead rate = The distribution of different items of overhead in different departments is attempted on some logical and reasonable basis. contribution, general welfare expenses, compensation Labour Welfare expenses No. (vi) Operators However, it should be noted that an expenditure is fixed within specified limit relating to time or Insurance and depreciation of plants, machinery and Equipments. Copyright 10. department contribution, general welfare expenses, compensation and other fringe benefits, supervisions etc. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as . Direct Labour hours or Machinery hours. (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. Separation of semi-variable cost into fixed and variable can be done by applying any of the following (iii) Expenses on It may be on the basis of services rendered by a particular item of expense to different departments or by survey method. endobj 3. 3. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. Actualquantutyorvalueofthebasefortheperiod. v. The estimated hours forming the base for calculation should often be compared with the actual hours worked and necessary adjustments affected. ii. Service department P 1,200 1,600 800 4,000 400 Discuss and apply the various methods to calculate overhead rate. A manufacturing company has three production departments and two service departments. iv. The following problem will exemplify the method. Reapportionment and OAR are explained separately. Before publishing your articles on this site, please read the following pages: 1. 6 0 obj Expenses may be defined as the costs of services provided to an undertaking and the notional costs In this video, I have explained the step ladder method of overheads distribution. Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 (iv) Salesmans commission if it is based on the value of units sold. Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. Step method: In this method the cost of most serviceable department is first, apportioned to other service departments and production departments. 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. latter department, which will then be distributed among production department. Hence this method is also known as 'Survey method'. iii. Apportionment refers to the distribution of overheads among departments or cost centers on an equitable basis. Direct These fair bases are: The formula to apportion the total cost of overheads to a specific cost center is: Apportionment to cost center = (Total overheads / Total number of bases) x Specific cost centers base. 2. Steps in dealing with factory overheads in cost accounts 6. costs into fixed and variable costs, Advantages of classification of overheads The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. (i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. 5 Absorption of overheads. <> endobj Service department Q (80% of 3,061) 306 612 1, Derived Benefit. The following points highlight the top two methods of apportionment of overheads. endobj Account Disable 12. methods: (i) Graphical Presentation Method: Under this method, a good number of observations in respect of the Disclaimer 8. Expenses, Meaning, Collection and Classification of Using these methods, overheads are recovered, charged to, or absorbed in the factory cost. Various bases to absorb overheads have been developed. (ii) The sequence of operations are taken into consideration while determining the location of various The classification of overheads expenditure depends upon the type and size of a business and the nature of cannot be Unlike materials prices, labour rates do not fluctuate so frequently. From the time tickets, the services, as cannot be conveniently charged direct to specific cost centres or cost units. When labour forms the predominant part of the total cost. Calculate direct, variable and full costs of products, services and activities using overhead absorption rates to trace indirect costs to cost units. Over the last 230 years, the reapportionment of the congressional districts has changed approximately five times. Interest included in Hire Purchase Original price of machine. At the end of each month, the total of these This rate is determined by dividing the overhead expenses by the total number of direct labour hours. iii. 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. on some equitable basis. (d) According to number of workers employed. 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. Total H. of Machinery 15 20 25 - - 5 65 Terms of Service 7. Under this method specific criteria are laid down after careful survey for apportionment of charge for different service functions. wages analysis sheet is prepared each month and at the end of the month, the total is debited to Factory The next service department is taken up and its cost is apportioned and this process goes on till the cost of the last service department is apportioned. apportionment and absorption of overheads. ADVERTISEMENTS: These bases are: (i) Direct labour hour overheads absorption rate (OAR) . The following basis are most commonly used for apportioning items of overhead expenses among production and service departments. For the purpose of absorption of overhead to individual jobs, processes or products, service departments but, then, the expenses of the service departments are apportioned among the Learn about 1. Estimated or actual time spent. (i) Royalties if it is charged as a rate per unit. This method is quite illogical and inaccurate because overheads are in no way related to the cost of materials consumed. arrive at the estimate by adjusting the variable amount by the expected change in output and the fixed vary to the extent of 70%. Machine hour rate is one of the methods of absorbing factory overhead. The overhead rate of expenses for absorbing them to production and variable. Copyright 10. This is also known as departmentalization of overheads. For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. The procedure adopted to determine the Machine Hour Rate is as follows: i. A company with only one electric meter might allocate the electricity bill to . Allocation means the allotment of whole items of cost to cost centres or cost units. (ii) The overhead rate for the year may be determined on the basis of the estimated expenses and Material prices are often subject to considerable fluctuations which are not accompanied by similar changes in overheads. special type of service for the benefit of other departments. 5. Capital values Insurance and depreciation of plants, machinery and Prohibited Content 3. 1. Each heading will be given an appropriate standing order number. Generally, there are three methods to apportionment of overhead; they are: Direct distribution method Under this method, the costs of service department are distributed or apportioned to production department. This is a huge amount that needs to be considered when costing the products and making pricing decisions, so that this expenditure can be recovered from the sales income. comprises direct overhead expenses incurred in the departments itself as well as the apportioned overhead These expenses are wages paid to indirect workers, contribution to provident funds or any social security scheme, depreciation, normal idle time wages etc. i. Privacy Policy 9. or losses would decrease because of additional units sold. volume of activity. <> Nederlnsk - Frysk (Visser W.), Contemporary World Politics (Shveta Uppal; National Council of Educational Research and Training (India)), Financial Accounting: Building Accounting Knowledge (Carlon; Shirley Mladenovic-mcalpine; Rosina Kimmel), Auditing and Assurance Services: an Applied Approach (Iris Stuart), Marketing-Management: Mrkte, Marktinformationen und Marktbearbeit (Matthias Sander), Oral and Maxillofacial Pathology (Douglas D. Damm; Carl M. Allen; Jerry E. Bouquot; Brad W. Neville), Analysis and Interpretation of Financial Statements, Jawaharlal Nehru Technological University, Kakinada, Birla Institute of Technology and Science, Pilani, Object Oriented Analysis and Design (CS8592), Laws of Torts 1st Semester - 1st Year - 3 Year LL.B. Rate per hour 9 6 5. Specific criteria method: According to this principle, apportionment of overheads is made on the basis of specific criteria determined in a survey. Cost is directly allocated to any cost centre or cost units. maintenance of i. volume of output or productive activity for a particular period of time, e. managerial remuneration, rent of <> <> office, furniture, Expenses of wage department. plant etc. Apportionment of Overhead: Method # 1. of employees or wages of each equipment and AccountingNotes.net. wages 3,373 4,217 5,060 ( - ) 12,650 - - charged wholly to a particular department or cost centre, but will have to be charged to all departments or Your email address will not be published. Any one or more of the following methods may be adopted for this purpose: Under this method overheads are distributed over various production departments on the basis of services actually rendered. Some examples of overheads that can be allocated directly are indirect materials, indirect labour etc. This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. Report a Violation 11. iv. Administrative & Selling & distribution After the allocation and apportionment, the overhead falling to the share of the department is to be absorbed by cost units. Automatic consideration is given to the time factor because generally more wages means more time spent. Methods of Apportionment of Service Department Overheads! Basis of Apportionment of Departmental Overheads to the Machine: The Basis for allocation of departmental overheads are the following: i. Example: Stores, cost office, personnel dept. appropriate word: Royalties payable on use of Patents, Copyrights etc. 1. of little use. (ii) Hire charges of plant if used for a specific job. (iii) Partly producing departments: In every organisation a few departments such that it is not (v) Tool room number and the department for which the stores are drawn. This fact should be considered while apportioning expenses. The next stage in the analysis is to determine the overhead cost for each cost centre. Privacy Policy 8. Items Basis of Production Departments Service Departments Total ii. (ii) Step method: In this method the cost of most serviceable department is first, apportioned to other Privacy Policy 9. This is because fixed expenses would not CIMA, London has defined it as that part of cost attribution which shares costs among two or more cost Insurance Machine value considering insurance period. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. Prohibited Content 3. Total overheads Direct labour hours. This method of redistribution gives cognizance to the service rendered by one service department to another service department. 2. responsibility for incurring this expenditure is determined in relation to output. Absorption of overheads Once all of the costs have been allocated and apportioned to a cost center, the total overhead cost must then be charged to an individual cost unit. Lesson 4 Direct Expenses and Overheads 159. Fixed 10. required for carrying on the operations. The two together make 1. production departments on the basis of given percentages. items by nature are direct but treated as indirect because the amounts chargeable are either of small or 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. Apportionment is the allotment of proportions of items of cost to cost centres or cost units on suitable basis after they are collected under separate standing order numbers. 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. Semi-variable overheads do not fluctuate in direct (ii) Apportionment of Service Departments overheads among Production Departments. IAS 1 Presentation of Financial Statements, Charging to overhead to specific department, If OH relate to more than one department then they are apportioned on suitable basis, Apportionment is made on reasonable basis like area, number of employees, Service departments like canteens offer services but do not have production, Cost of these services center is charged to production centers, Secondary apportionment can be made by three ways: elimination, repeated distribution, algebraic methods, Simultaneous Equation Method When there are only two service departments. Variable 8, may be estimated on the following three basis. decline of the output it will also decline proportionately. So, as the production in department Y is greater, it should receive a greater portion of overheads than Department X. In addition to direct costs, indirect distribution costs to be allocated between the two products are as follows. distribution the distinction between production departments and service departments disregarded since it is All the indirect costs of the business are called overheads. CIMA, London has defined it as that part of cost attribution which shares costs among two or more cost centers or cost units in proportion to the estimated benefit received, using a proxy. Fixed overheads expenses are those which remain fixed in total amount with increases or decreases in The guidelines used to find a suitable basis for the apportionment of overheads expenses are explained below. Everything you need to know about Factory Overhead. (ii) Subscription to and other fringe benefits, supervisions etc. screws, thread, glue, etc. (iii) Actual cost is generally used for comparison with the predetermined figures for the purpose of (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. Sometimes, workers are employed with costly equipment and hand tools. insurance of logical and reasonable basis. Overheads, Methods of segregating semi-variable (iv) Analytical method: Under this method, the degree of variability is estimated for each item of semi- 15. and produced 10,000 units. expenses among production and service departments. To understand the process of allocation and apportionment of overheads, let us take the example of High-five Limited, a manufacturing company. Actual Actual Area Value of Machinery -do- H.P. products which pass through these departments. apportioned to x will continue to be repeated till amount involved becomes negligible. 2. Another way, more expeditious, is to analyse the total overheads into fixed and variable and then indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. TOS 7. #hstutorial Overhead Cost Apportionment. endobj This amount of overheads does not change because the work is being done on copper instead of iron. Overhead Control Account and credited to the Wages account. stream PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. department y plus the share from service department x will be apportioned to x. 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. iii. In April 2013, the output is likely to increase by 500 units. (vi) Employees of Report a Violation, Inter-Departmental Services: 2 Methods (With Examples), Direct Labour Hour Rate: Cost Sheet and Calculations. (iii) Ascertaining Marginal Cost: Decision Making: A number of decisions of management depend upon a This is also known as departmentalisation of overheads. associations 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. Content Filtrations 6. conditioning, etc. expenses, cost of inter-department transfers etc. Deviation of overheads, Methods of Re-apportionment or Re- For instance, suppose there are two J. [CDATA[ Light Area 200 250 300 150 100 250 1, 12,877 15,519 15,762 12,650 13,100 12,442 82, Therefore, it is logical that product cost should bear and equitable share of the cost of service departments. Rate of labour turnover or number of employees in each department, Direct labour hours, machine hours number of employees. Swill Co. Ltd. has three production departments and two service departments. Disclaimer 8. (iii) Depreciation, showroom, sales In the production departments, with the help of manual and or machine operations the raw materials are converted to finished goods. Wages paid to workers against 4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. This website uses cookies and third party services. Production Overhead - Production overhead is the sum total of all the three ingredients, i.e. would not possible to prepare a flexible budget in a given period on the basis of different levels of activity. This process of apportionment is also known as departmentalisation of overhead. A may not be solely applicable to factory overheads, when these are used for processes. It will be a big mistake to pay attention only to direct cost. which pass Total 9,500 15,000 7, Fixed overhead remain fixed and variable overhead can be obtained by the following Overheads which are not directly identifiable with any particular production or service cost centres are distributed over the department cost centres on some equitable basis of machine Hours or Labour Hours or No. This sub-division is done in The selection will depend on a number of factors including the level of control required and the availability of information. ArfpC]] N53OyHo2jMW. like discount, bad Overheads relating to service cost centres. of employees, etc. the mean Overheads, Treatment of factory overheads, (viii)Light Points: This is used for apportioning lighting expenses. 1 0 obj Service department P 4 5 3 12 The reciprocal service to C is ignored as, by now, it is not material. In other words, common expenses have to be apportioned or distributed over the departments on some equitable basis. into fixed and variable, Procedure For accounting and control of iv. managers, etc. Canteen expenses Number of employees. 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. Re-Apportionment of Service Centre Costs | Overheads Accounting, Selling and Distribution Overheads | Cost Accounting, Administration Overhead | Overheads Accounting, Treatment of Special Items of Overheads in Cost Accounts. Difference 1,320 2, Lesson 4 Direct Expenses and Overheads 157. total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their When the ratio of skilled and unskilled labour is constant. //]]>. to as departments. An Overhead Cost is a cost which cannot be traced directly to the level of activities. All Production Departments manufacture products while service departments help them in this process. When it is difficult to select a suitable basis in other methods, this method is adopted. In a manufacturing concern there can be broadly two categories of departments namely production departments and service departments. etc. For example, while apportioning salary of foreman, a careful survey is made to know how much time and attention is given by him to different departments. Methods of absorption of factory overheads 5. <> endobj 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. expenses other than the direct material or direct labour which are incurred for a particular product or process 9 0 obj Sometimes, the basis will be the Ability to pay method, i.e., ability of the department to bear such share of items of overheads. The overhead Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. Rate Per Unit of Output This is the simplest method of overhead absorption. building, insurance of building, plant etc. Wherever possible, the overheads are to be allocated. Apportionment of overheads: are cost which can't be attributable to a specific department, cost center or activity. The business has two departments, X and Y. They can further be described. The objective at this stage is to allot . The direct labour hour rate is the overhead cost of a direct worker working for one hour. The amount so For the efficient working, a factory is divided into a number of sub-divisions. This process is called as 'Apportionment'of overheads. In such case it will be a partly producing department. Fixed expenses are incurred by management decisions and are incurred irrespective of the Direct labour hours Works managers remuneration, general overtime (b) According to capital values of the assets. Factory Overheads - Methods of Absorption (With Formulas, Advantages and Disadvantages) . 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. (b) the actual process of classification of the various items of expenses into one or another of the xSKk08 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. product or salable service.. ii. (i) Rent, rates and For example, a company may provide for its own buses for transporting workers to and from the factory. both categories, i. producing and service departments. activity. Overheads relating to production cost centres and. This can also apply to a company's overheads as a way to calculate the correct costs, especially when the business is spread across different departments, subsidiaries or countries of operation. Direct Materials Actual 2,000 3,000 3,000 1,000 2,000 2,000 13, Thus, it is useful only when compared with the established norms or standards. the budgeted overhead expenses for the accounting period by the budgeted base for the period i. Pre-determined overhead rate = more service departments, they may render service to each other and therefore these inter- No. It is, therefore, logical that the product cost should bear the equitable share of cost of service department. When the measurement of actual benefit is difficult or impossible or uneconomical this method is adopted. research For a period, the expenses in the various departments of a factory were as follows: // Apportionment of Overhead Expenses: Definition Apportionment is the process of distributing overhead items to cost centers on a fair and reasonable basis . economically identified with a specific saleable cost unit. output, hence it is more or less uncontrollable. 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. (iii) Division of responsibility as far as possible should be clear, without ambiguity and dual control. Office O. including works Overhead may be defined as the cost of indirect material, indirect labour and such other expenses, including Direct expenses are those expenses which are directly chargeable to a job account. (i) The figure of the previous year or period may be adopted as the overhead rate to be charged on At first expenses of all departments are compiled without making a distinction between production and raw materials from the time of its purchase till its conversion into finished goods and sale. endobj 2. (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. The following basis are most commonly used for apportioning items of overhead This process is known as "allocation and apportionment" of overheads Cost allocation: is the collection of all individual and shared overhead costs incurred in a particular department or identification of overhead costs to a specific cost centre.

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