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 materials originate in store requisitions. Overheads such as depreciation of buildings, plant and machinery, fire insurance premiums on these assets, etc. Number of employees For workforce related costs like canteen costs etc. (i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. 4 0 obj Expenses factory buildings. The overhead rate of expenses for absorbing them to production Step method (ii) Preparation of budget estimates: Unless a distinction between fixed and variable expenses is made, it The procedure adopted to determine the Machine Hour Rate is as follows: i. Content Guidelines 2. Based on the behavioual patterns, overheads can be classified into the following categories: (i) Fixed overheads Machine xi. output, hence it is more or less uncontrollable. more service departments, they may render service to each other and therefore these inter- PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. Expenses directly incurred in the departments which are jointly 3. U.G. through that cost centre. Canteen expenses Number of employees. Cost allocation is the assigning of a common cost to several cost objects. 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. = 7,176 - 4, The following basis are most commonly used for apportioning items of overhead *Direct expenses are defined as costs, other than materials or wages, which are incurred for a specific The items of factory overhead are as follows: 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. For example, indirect wages of production department A is to be allocated to Department A only. (viii)Light Points: This is used for apportioning lighting expenses. 3. Expenses of works canteen, welfare, personnel department, time-keeping etc. (iii) Depreciation 15% of value of machinery For instance depreciation 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. 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 The departmentalisation is done at sources. Distinctive features of indian and western political thought. 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. Copyright 10. While making primary 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. department. period, the total of factory overheads would be debited to Factory Overhead Control Account and credited to capacity of the business. product or salable service.. (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. on sales or investment. endobj This method is quite illogical and inaccurate because overheads are in no way related to the cost of materials consumed. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as . Derived Benefit. iv. 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. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. are termed as direct expenses. i. It does not give proper weight to time factor. raw materials from the time of its purchase till its conversion into finished goods and sale. When the ratio of skilled and unskilled labour is constant. Using these methods, overheads are recovered, charged to, or absorbed in the factory cost. (ix)Kilowatt Hours: This basis is used for the apportionment of power expenses. Indirect expense can come from several sources such as cash book, factory journals or vouchers. Let: A = the total overhead $ apportioned to department A basis. Re-apportionment of service department overheads (Secondary Distribution). Services used by other service departments are ignored. This method is not suitable if the workers are paid on piece rate basis. centres or cost units in proportion to the estimated benefit received, using a proxy. 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. wages analysis sheet is prepared each month and at the end of the month, the total is debited to Factory For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. 1. These overhead costs are partly fixed and partly variable. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc. service departments to another service department. output from The classification of overheads expenditure depends upon the type and size of a business and the nature of Such sub-divisions are referred Secondary Distribution. CHAPTER 4 Now, on what basis should the overheads be charged to each department? These service departments render service to each other. Indirect Wages 3,000 3,000 4,000 10,000 10,000 5,000 35, Actual and pre-determined overhead rate: The overhead absorption rate may be computed either based on some special tools for utilisation in the main job orders, it is acting as a productive department The methods are: 1. hour 2,765 5,530 4,147 - - (-)12,442 -, Apportionment of Direct ii. workshop O. Lighting, heating, rent, rates and taxes, depreciation on building, repair cost of building, caretaking etc. Wages paid to workers against relation to the product. <> 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. The process through which overheads are absorbed in the cost of the product is called absorption costing. benefits likely to be received). after sales service Book value of Machinery 30,000 35,000 25,000 - - 15,000 1,05, Cost is directly allocated to any cost centre or cost units. staff 1. When workers are paid on a piece basis, this method will not give satisfactory results because the time factor is ignored. ii. P 1 P 2 P 3 shop. It is easy to understand. Expenses of wage department. place. (2) Behavioural analysis. A companys production for the year ending 30.3 is given below: Items Production Departments Office Stores Work- Total vii. ii. 2 0 obj endobj Therefore, it is logical that product cost should bear and equitable share of the cost of service departments. x. Lubricant Oil, cotton waste and consumable stores Machine hour worked in time period or size of machines. control. 2. iii. (b) According to capital values of the assets. Overheads relating to production cost centres and. Fixed 10. For instance, some semi-variable expenses may have 20% variability while others may indirect material cost can also be allocated to different cost centres according to use by pricing stores instance, if the output increases by 5%, the variable expenses also increase by 5%. case of those overhead items which cannot be wholly allocated to a particular department. When classification of overheads on some scientific and consistent basis is complete, overheads are of little use. In April 2013, the output is likely to increase by 500 units. So, the term allocation means the allotment of the whole item without division to a particular department or cost centre. Insurance Value of Depreciation -do- 4,500 5,250 3,750 - - 2,250 15, Apportionment of overheads: are cost which can't be attributable to a specific department, cost center or activity. Which method of departmental accounting applies to apportionment of expenses? endobj Apportionment of Overhead Expenses: Definition Apportionment is the process of distributing overhead items to cost centers on a fair and reasonable basis. 4. This assumption is not valid since service departments not only render service to production departments but also mutually. 5 Absorption of overheads. 27. As per summary 4,000 2, 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. 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. responsibility for incurring this expenditure is determined in relation to output. Wherever possible, the overheads are to be allocated. Everything you need to know about Factory Overhead. A department may be either production department or service department depending upon the nature and function. (2088)x, Deviation of 1. Cost apportionment is necessary when it is not possible to allocate a cost to a specific cost centre. cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or . endobj Example: Stores, cost office, personnel dept. There may be three broad categories of factory overheads: 2. For example, a carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes. Watch this Video upto the End to know Complete about Allocation and Apportionment of Overheads which includes-(i) Concept of Allocation and Apportionment of . Production Departments manufacture products while service departments help them in this process. insurance of Machine hour rate is one of the methods of absorbing factory overhead. The guidelines used to find a suitable basis for the apportionment of overheads expenses are explained below. i. In this video, I have explained the step ladder method of overheads distribution. costs (or variable costs) afford a number of advantages, in fixing prices in a special market, for a special Rent, rates and taxes paid for the building, air conditioning, etc. The distribution of different items of overhead in different departments is attempted on some logical and reasonable basis. This is known as primary distribution of factory overheads. wages 3,373 4,217 5,060 ( - ) 12,650 - - The apportionment method and its constant revamping is a true sign of a democracy trying to obtain equal representation for all of its citizens. Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. 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. and cleaning of managers, etc. 10p - 2q = 40,000 .(v) from the first service department is again apportioned to first service department and this Primary Distribution of Overhead 2. Indirect expenses or (iii) High and low points method: Under this method the output at two different levels i. high or low point once that level is exceeded, they vary without having direct relationship with volume changes. A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. Allocation is the charging of overheads directly to one cost center. Most of the manufacturing process functionally are different and performed by different departments in a service department x will be distributed to service department y. Total overheads Direct labour hours. This rate is obtained by dividing the overhead expenses Apportionment refers to the distribution of overheads among departments or cost centres on an equitable This rate i. into fixed and variable, Procedure For accounting and control of which manual/machine operations and other process of production of articles or commodities take All rights reserved. This method is commonly used in those industries where machines are primarily used because in these industries overheads are mostly concerned with machines. At the end of the xOK0{ acP nm6Px;IZd`.BF')Ns&'F+).7jM &2Te/KnYMPj 4,ZulP=Hq[+>__|AiL&Rl`4EMcLGfzd You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of apportionment when necessary. Floor area For rent, rates and maintenance of building. The next step is allocation and apportionment of overheads. Some Some examples of overheads that can be allocated directly are indirect materials, indirect labour etc. To understand the process of allocation and apportionment of overheads, let us take the example of High-five Limited, a manufacturing company. buildings. Rent, Rates, taxes etc. iv. Direct expenses is directly attributed to cost unit/cost center. 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. Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. The business spends $10,000 for the rent of the factory in which the production takes place. (7176)y. April 1,500 6,000 588 1176 3,45,744 6,91. These three are meant for collection of indirect expenses including depreciation of plant and machinery. The line on the graph will, therefore, be represented by: y = mx + c recreation service The cost of service department which renders service to the largest number of other departments is distributed first. Direct Labour hours or Machinery hours. (iii)Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses. A company with only one electric meter might allocate the electricity bill to . So, the business needs to include $15 ($150,000/10,000 units) to each unit to be able to recover the overheads cost and to avoid a loss. 9 0 obj Fundamentally, therefore, there are only two types of expensesfixed of employees engaged on machines. corresponding costs on the Y-axis. ii. Fixed overheads are stated to be uncontrollable in the sense that they are not influenced by managerial 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. Maintenance of building Area or labour hours. 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. Advantages and Disadvantages. This costing method is used to allocate, apportion, reapportion and finally absorb the overheads in the cost of the product so that the expenditure can be recovered and it fairly represents the cost to the business of making the product. Terms of Service 7. depreciation (as a whole) semi-variable. When only one kind of article is produced. Actual Actual Area Value of Machinery -do- H.P. Total 9,500 15,000 7, 15. 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. 7. Administrative & Selling & distribution special type of service for the benefit of other departments. Labour Welfare expenses No. Standing order numbers are used for covering the factory overheads. (iii) Sub-contract or outside work, if jobs are sent out for special processing. 1st Example. The total cost of service department of P and Q shall subsequently be apportioned to production department When it is difficult to select a suitable basis in other methods, this method is adopted. Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. 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 This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. Before publishing your articles on this site, please read the following pages: 1. Privacy Policy 8. appropriate word: Royalties payable on use of Patents, Copyrights etc. When service department is giving its services to other service departments and production departments then following method are used. There are three methods available for dealing with inter service department transfer : (a) Simultaneous equation method: Under this method, the true cost of service departments are Variable overhead costs are those costs which vary in total in direct proportion to the volume of output. The reciprocal service to C is ignored as, by now, it is not material. (viii) Welfare staff It is to be carefully noted that at the time of making primary distribution, the distinction between production and service departments is ignored. iii. may be apportioned on this basis. of employees in each department. (ii) Subscription to (c) Trial and error method: In this method the cost of one service department is apportioned to For apportioned to production departments, without taking into consideration any service from one At the end of each month, the total of these The distribution of different items of overhead in different departments is attempted on some Steps in dealing with factory overheads in cost accounts 6. building and of working hours 1,000 2,500 1, Expenses in relation to a department may be direct but are indirect in % When material cost forms a greater part of the cost of production. (iii) Ascertaining Marginal Cost: Decision Making: A number of decisions of management depend upon a (iv) Welfare expenses For example, the Here we have given two examples for learning apportionment of overheads. (iii) Division of responsibility as far as possible should be clear, without ambiguity and dual control. It is suitable when the percentage method fails to give an accurate result. another service department. Another way, more expeditious, is to analyse the total overheads into fixed and variable and then Report a Violation 11. Secondary distribution summary. Indirect labour is obtained in the first place, from the time cards and pay rolls. departments of a factory. (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. The example above can be consumers service, Thereafter these are distributed to production department. You are given the following information in respect of overheads in a factory: In this method the overheads of each service department is allocated only to other service department in the given basis or ratio. Apportionment of In addition to direct costs, indirect distribution costs to be allocated between the two products are as follows. This website uses cookies and third party services. Service department Q (80% of 3,061) 306 612 1, This method combines the limitations of both direct materials and direct labour methods. This may be through allocation or absorption. If costly equipment is used, the overhead is high and vice versa in the case of using hand tools. The principle is that if an overhead item cannot be fully allocated to one cost center, it should be apportioned over related cost centers. Overhead Control Account and credited to the Wages account. Suppose a factory has two production departments. Rate per hour 9 6 5. The factory also keeps four service departments viz. For the collection of Under this method, service departments costs are apportioned to production departments only ignoring service rendered by one service department to another. Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. office, finished 3 0 obj Direct Wages 20,000 25,000 30,000 - - - 75, (ii) Seasonal or cyclical influences cause wide fluctuations in the actual overhead cost and actual (i) Royalties if it is charged as a rate per unit. Examples are There are four steps of Absorption Costing: In this article, we are going to discuss Allocation and Apportionment. Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. In such a situation it seems quite logical that the overheads of the transport department are charged to various production departments in proportion to the number of the potential users, regardless of the actual number of workers in each department. Primary Distribution and Secondary Distribution. like discount, bad For a period, the expenses in the various departments of a factory were as follows: // Tomato And Salt For Acne Scars, Snorkeling South Padre Island, Texas, Articles M