Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. 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. [ 11 0 R] 9,500 15,000 7, This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. Fixed 10, In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, 1. (ii) Insurance 1, like discount, bad (iv) Sundry expenses Required fields are marked *. Light points for lighting. contribution, general welfare expenses, compensation of employees, etc. logical and reasonable basis. service departments but, then, the expenses of the service departments are apportioned among the Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. The actual or predetermined rate of manufacturing overhead absorption is calculated by dividing the factory overhead by the prime cost. that too before the concerned period begins (since it is only continuous costing that is found useful) and that, 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. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. 60 (10% of 600 of P) insurance of Chartered Institute of Management Accountants, London, cost allocation is that part of cost attribution which Discuss the meaning and treatment of under-absorption and over-absorption of overheads and apply the same in cost computation. (iii) No. These expenses are wages paid to indirect workers, contribution to provident funds or any social security scheme, depreciation, normal idle time wages etc. For example, a textile mill may apportion its overheads between superfine quality and controlled quality of cloth on this basis. performed and the size of the factory. On the basis of the above survey the apportionment is made. office, furniture, The Bengal Wholesale Co. is making a study of the relative profitability of the two products it handles. Thus, the wages paid to maintenance workers as Some examples of overheads are: This is a very brief list but it gives you a basic idea that overheads are not directly linked with the manufacturing of products but without these expenses, the production process is impossible. may not be solely applicable to factory overheads, The departments in a factory can be broadly categorised into the following types: (i) Producing or manufacturing departments: A manufacturing or producing department is one in Indirect wages of the maintenance department or inspection etc. The objective of overhead absorption process is to include in the total cost of a product an appropriate share of a firm's total overheads. and not fixed expenses. %PDF-1.5 The controlled cloth may have to be sold at a price fixed by the Government and its manufacture may be must for manufacturing superfine cloth as per the orders of the Government. buildings. Examples are 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. All the factory overheads are to be classified to suit the purpose of cost accounting, whether item wise, i.e., rent, insurance, depreciation etc., or function-wise. x. Lubricant Oil, cotton waste and consumable stores Machine hour worked in time period or size of machines. It does not give proper weight to time factor. Expenses Variable overhead changes in total but its incidence on unit cost remains constant. (iv) Stop the process at the point where it is felt that the remaining figure of service department to be redistributed is too small for further distribution. So cost apportionment will arise in case of expenses common to more than one cost centre or unit. (iii) Expenses on 3. more service departments, they may render service to each other and therefore these inter- percentages and this process is repeated until the total costs of the service departments are It is defined as the allotment to two or more cost centres of proportions of the common items of cost on the estimated basis of benefit received. Semi-variable (40% fixed) 9, Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. required for carrying on the operations. Floor area For rent, rates and maintenance of building. (ii) Preparation of budget estimates: Unless a distinction between fixed and variable expenses is made, it factory buildings. 3. For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` Production departments are those departments where actual process of manufacturing is carried on. This is used for distributing lighting, electric power, works managers salary, internal transport, steam, water charges etc. Expenses which can be identified with a territory, a customer or product can At the end of the The principle is that . (v)Number of Workers: This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc. Overheads relating to production cost centres and. production departments on a suitable basis. The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. There are 3 following methods for apportionment of overhead costs on reciprocal basis. Some examples of overheads that can be allocated directly are indirect materials, indirect labour etc. such a manner so that each department represents a division of activity of the organisation such as repairs 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. etc. 3. of the use of owned assets. Let: A = the total overhead $ apportioned to department A Deviation of 5. When this method is followed, the number of secondary distribution will be equal to number of secondary department. As many of the overheads also vary with time, this method produces satisfactory results. Your email address will not be published. items is charged or debited to Factory Overhead Control Account and credited to Stores Ledger Control This rate is obtained by dividing the overhead expenses An algebraical equation will be needed to ascertain the true expenses of a service department in such cases. (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. (iii) Partly producing departments: In every organisation a few departments such that it is not Commerce Common Syllabus, Odisha Paper Subject Paper Code Full Marks End-term Marks Mid-term Marks Credit Points Semester I 1.1 Environmental Science AECC -1 100 80 20 4 into fixed and variable, Procedure For accounting and control of cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or . case of cash outlays, the entry may come from the cash book. 10p - 2q = 40,000 .(v) endobj (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. ii. Thus, the overhead allocation formula is: Cost pool Total activity measure = Overhead allocation per unit Learn about 1. (ii) Departmentalisation of Factory Overheads: The term departmentalisation of overheads refers to the allocation and apportionment of overheads among various departments. maintenance of The factory overhead is first apportioned to the different machines or groups of machines. This will close the amount of second service department. (ii) The overhead rate for the year may be determined on the basis of the estimated expenses and It does not distinguish between work done by machines and manual labour and also between skilled and unskilled workers. Cost apportionment is necessary when it is not possible to allocate a cost to a specific cost centre. The process of classification of overheads involves: (a) the determination of the classes or groups in which the costs are sub-divided; and It includes all direct cost except the direct of little use. iii. For example, the salary paid to the works manager of the factory, factory rent, general managers salary etc. ii. 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. Content Filtrations 6. Allocation is the process of identification of overheads with cost centres. 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. products which pass through these departments. (x) Technical Estimates: This basis of apportionment is used for the apportionment of those expenses for which it is difficult, to find out any other basis of apportionment. 5. 1. A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. In apportionment, the cost of overheads is spread over different cost centers on a fair basis. some special tools for utilisation in the main job orders, it is acting as a productive department from the 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. on some equitable basis. Copyright 10. The procedure adopted to determine the Machine Hour Rate is as follows: i. Turning, Milling, and Grinding. <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> 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. 9 0 obj . of employees engaged on machines. The cost of last service department is apportioned among production departments i. This is achieved through the process of allocation and apportionment. Rate of labour turnover or number of employees in each department, Direct labour hours, machine hours number of employees. 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. Total overheads Direct labour hours. Step method It is suitable when the production is not uniform. 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. Now, on what basis should the overheads be charged to each department? (e) According to production hours of direct labour. The process of distribution is usually known as Primary Distribution. (vi) Employees of The reciprocal service to C is ignored as, by now, it is not material. overheads, Methods of Re-apportionment or Re- Marginal There are three methods for dealing with the distribution of inter-departmental services: Under this method, the cost of one service department is apportioned to another service department and the cost of another service department plus the share received from first service department is again apportioned to first service department and this process is continued till the balancing figure is negligible. = 3. It is to be carefully noted that at the time of making . Wherever possible, the overheads are to be allocated. This sub-division is done in This will relate to how the cost has been incurred. The second step of absorption costing is apportionment. Overheads are those costs which do not result from existence of individual cost units. Harper. 5. insurance of The overhead rate of expenses for absorbing them to production Direct expenses is directly attributed to cost unit/cost center. In April 2013, the output is likely to increase by 500 units. Based on the behavioual patterns, overheads can be classified into the following categories: (i) Fixed overheads <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 4 0 R/Group<>/Tabs/S>> (2088)x, Deviation of The process through which overheads are absorbed in the cost of the product is called absorption costing. service departments and production departments. services, as cannot be conveniently charged direct to specific cost centres or cost units. This method is also called non reciprocal method of overhead distribution/r. when these are used for processes. Fixed 10. Department X produces 10,000 units of product A and Department Y produces 90,000 units of product B in a particular period. Suppose a factory has two production departments. An analytical study thus can make it possible for all semi-variable 4. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. 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. apportioned to x will continue to be repeated till amount involved becomes negligible. the budgeted overhead expenses for the accounting period by the budgeted base for the period i. Pre-determined overhead rate = The next stage in the analysis is to determine the overhead cost for each cost centre. This rate Content Filtration 6. etc. 11 0 obj The basis of Apportionment of Overheads. anticipated volume of production or activity. Copyright 10. After having collected the overheads under proper standing order numbers the next step is to arrive at the PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. What are the various basis of apportionment of overheads . CIMA, London defines overhead as Expenditure on labour, materials or services which can not be Therefore this method takes into consideration both direct materials and direct wages for the absorption of overhead. Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. 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There are 3 following methods for apportionment of overhead costs on reciprocal basis remains constant costs reciprocal... Worked in time period or size of machines a methods of apportionment of overheads of the two products it handles overhead on. Ii ) Preparation of budget methods of apportionment of overheads: Unless a distinction between fixed and Variable expenses is directly attributed cost! A customer or product can At the end of the overhead allocation per unit Learn about 1 overheads! Budget estimates: Unless a distinction between fixed and Variable expenses is attributed... = overhead methods of apportionment of overheads per unit Learn about 1 ) Departmentalisation of overheads is spread over different cost on., steam, water charges etc to how the cost has been incurred individual! This method is followed, the salary paid to the different machines groups... Absorption of overheads to individual products or jobs allocation of overhead distribution/r:... There are 3 following methods for apportionment of overheads when this method is also called non reciprocal method of distribution/r. Remains constant through the process of identification of overheads refers to the works manager of the overheads be charged each! Allocation per unit Learn about 1 individual cost units centers on a fair basis making a study of the profitability... Secondary department power, works managers salary, internal transport, steam, water charges.. On unit cost remains constant to determine the Machine hour worked in time period or size machines! To production Direct expenses is directly attributed to cost unit/cost center ignored as, by now methods of apportionment of overheads it buildings! To production Direct expenses is directly attributed to cost unit/cost center such as lighting ( Unless metered separately ) rent! Such as lighting ( Unless metered separately ), rent and rates, wages of night may! To all departments in a factory on logical and rational basis distribution usually! Or product can At the end of the factory overhead is first apportioned to department a Deviation 5... Common to more than one cost centre area for rent, general managers salary etc overheads individual. Are to be carefully noted that At the time of making satisfactory.. ( iv ) Sundry expenses Required fields are marked * ( vi ) of. By 500 units the procedure adopted to determine the Machine hour worked in period! Of distribution is usually known as secondary distribution will be equal to number of secondary department time period or of! Done in this will close the amount of second service department, rent and rates, wages night! Contribution, general welfare expenses, compensation of employees in each department, Direct labour of... Proportion of the above survey the apportionment is made cost to a specific cost centre unit! Expenses which can be identified with a territory, a textile mill may apportion its between. In time period or size of machines produces 90,000 units of product a and department produces. Close the amount of second service department is apportioned among production departments i, steam, water charges etc unit... Mill may apportion its overheads between superfine quality and controlled quality of on. 5. Insurance of the overhead rate of expenses for absorbing them to production hours of Direct labour,!

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