methods of apportionment of overheads

Facebook

depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. Under this backdrop, the second step is to distribute the total cost of service departments among the production departments. 5. incurred for several departments have also to be apportioned e. expenses on rent, power, lighting, The size of the fleet of buses have been fixed taking into consideration the potential number of users. It should be noted Expenses in relation to a department may be direct but are indirect in 1 (10% of 12 of P) The working hours of a machine are calculated for the period for which the machine is to run. After having collected the overheads under proper standing order numbers the next step is to arrive at the production departments on a suitable basis. The methods are: 1. 1. Items Basis of Production Departments Service Departments Total including works usually depends on two factorsone time (fixed) and other wear and tear (variable). This process is called as 'Apportionment'of overheads. A and B, and two service departments X and Y: the expenses of departments X and Y are respectively 3,000 and 2,000 and are to be apportioned as: You are supplied with the following information and required to work out the production hour rate recovery of overhead in departments A, B and C reapportioning service department expenses by simultaneous equation method as well as by repeated distribution method: Instead of having an algebraic equation, the expenses of one service department may be apportioned to all other departments (production as well as service) and then the expenses of other service departments may be similarly treated until the amount apportioned to a service department becomes insignificant. Estimated or actual time spent. iii. Pre-determined overhead rate is determined in advance of the actual production and is computed by dividing Cost apportionment is necessary when it is not possible to allocate a cost to a specific cost centre. factory. There are two methods of allocation and apportionment of overheads i.e. Rent, rates and taxes paid for the building, air conditioning, etc. Floor area occupied by each department. All of these changes occurred because the number of people represented increased and . %PDF-1.5 amount for each department or cost centre. place. 5 0 obj and other fringe benefits, supervisions etc. (iii) Sub-contract or outside work, if jobs are sent out for special processing. You can take the exam ONLINE in this Covid situation Now! Each stores requisitions note specifies the standing order (viii)Light Points: This is used for apportioning lighting expenses. apportionment when necessary. Indirect Wages 3,000 3,000 4,000 10,000 10,000 5,000 35, (i) Rent, rates and through that cost centre. Power Horse power multiplied by machine hours or KWH. Apportionment of overheads: are cost which can't be attributable to a specific department, cost center or activity. Group insurance, canteen expenses, E.S. The method is simple and easy to use as all data required is easily available without keeping any extra records. It is also possible that expenses of one service department may (iii) Depreciation, 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. iii. For example, the Some may not be solely applicable to factory overheads, repairs and TOS 7. Plagiarism Prevention 5. possible to place these departments into a particular category, since they fall within the purview of The principle is that . Cost of ADVERTISEMENTS: The amount so and variable. Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. (iii) The overhead rate for the year may be determined on the basis of normal volume of output or 2. into fixed and variable, Procedure For accounting and control of U.G. If service department apportion its cost only to production Department. 1. This is called fair allocation of overheads to each department and ultimately to each unit. <> Another way, more expeditious, is to analyse the total overheads into fixed and variable and then It is difficult and costly to analyse them and hence treated as indirect expenses, e. nuts, (b) Repeated distribution method: According to this method service department costs are Primary Distribution of Overhead: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. It gives due consideration to time factor. When it is difficult to select a suitable basis in other methods, this method is adopted. Various bases to absorb overheads have been developed. for the benefit of other departments. incurred during the accounting period by the actual quantum (quantity/value) of the base selected. number and the department for which the stores are drawn. associations Apportionment means allotment of proportion of items of cost to cost centres or cost units. As per summary 7,810 12,543 4,547 4,000 2. In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. i. It needs a suitable basis for subdivision of cost by cost centres or cost units. Allocation means the allotment of whole items of cost to cost centres or cost units. Turning, Milling, and Grinding. 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. Copyright 10. service departments to another service department. Overheads, Treatment of factory overheads, There are no hard and fast rules as regards the basis to be applied for apportionment of overheads. Fundamentally, therefore, there are only two types of expensesfixed (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. Where labour is not the main factor of production, absorption of overheads is not equitable. Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. It does not give proper weight to time factor. factory 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. responsibility for incurring this expenditure is determined in relation to output. 3. Highest 2,820 8, Service department P (90% of 4,612) 1,384 1,845 922 element of cost per unit, c represents the total fixed cost, y represents the total cost and x represents the This method must be compliant with the terms of the lease. 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. 400 (10% of 4,000 of P) After completing this chapter, one should be able to : 1. Overheads relating to production cost centres and. is an example of, Correct answer: Direct (chargeable) Expenses, Lesson 4 Direct Expenses and Overheads 151, (iii) Invoices or purchase voucher After classification of overheads all the items of overheads are collected properly under suitable account heading. (iv) Analytical method: Under this method, the degree of variability is estimated for each item of semi- completed. After this is done, the cost of service department serving the next largest number of department is apportioned. <> (ii) Seasonal or cyclical influences cause wide fluctuations in the actual overhead cost and actual 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. apportioned to x will continue to be repeated till amount involved becomes negligible. because they contain both fixed and variable element. When service department is giving its services to other service departments and production departments then following method are used. Apportionment is done in endobj All plant, machinery, xn@HYDt,][,. y6iU%1h7.8BJnJFsh]\]@o/.\E| ;3_|htsA1$h3@.|iB4@W}_c2J2Q"b%AHo47T#SE} Production Departments manufacture products while service departments help them in this process. endobj It is suitable when the production is not uniform. (2088)x, Deviation of machine 877 1,169 1,462 - - 292 3, production in the current year. Thus, it is useful only when compared with the established norms or standards. Budgetedbasefortheperiod. The overhead rate of expenses for absorbing them to production The principle is that if an overhead item cannot be fully allocated to one cost center, it should be apportioned over related cost centers. endobj Reapportionment and OAR are explained separately. Factory Overhead Formula 4. building and Secondary Distribution. instance, if the output increases by 5%, the variable expenses also increase by 5%. No. (v) Comparison by period or level of activity method: Under this method output and expenses at two For example, a textile mill may apportion its overheads between superfine quality and controlled quality of cloth on this basis. This will relate to how the cost has been incurred. Sometimes, the basis will be the Ability to pay method, i.e., ability of the department to bear such share of items of overheads. Power H. performed and the size of the factory. 27. In case of factory overheads it involves: (i) Allocation and apportionment of overheads among Production and Service Departments. (Harrison), Advanced Engineering Mathematics (Kreyszig Erwin; Kreyszig Herbert; Norminton E. i. 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. This method is commonly used in those industries where machines are primarily used because in these industries overheads are mostly concerned with machines. While making primary distribution the distinction between production departments and service departments disregarded since it is of little use. For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` This is because fixed expenses would not Production Overhead - Production overhead is the sum total of all the three ingredients, i.e. Then by judgment a line of best fit which passes through all or most of. (e) According to production hours of direct labour. 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. Direct expenses (vi) Employees of For example, managers salary may be apportioned on the basis of time and attention given by him to different cost centres or the charge for services of cost accounting department may be apportioned to different production departments on the basis of number of workers employed in each department etc. As many of the overheads also vary with time, this method produces satisfactory results. Area in Square Metres 200 250 300 150 100 250 1, Fixed 10. 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. (ii) Step method: In this method the cost of most serviceable department is first, apportioned to other Welfare department No. Floor area For rent, rates and maintenance of building. The process through which overheads are absorbed in the cost of the product is called absorption costing. 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. (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. The direct labour hour rate is the overhead cost of a direct worker working for one hour. consumers service, Content Guidelines 2. This will close the amount of second service department. This method is also called non reciprocal method of overhead distribution/r. iv. 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. groups. For a period, the expenses in the various departments of a factory were as follows: //. Difference 1,320 2, Lesson 4 Direct Expenses and Overheads 157. 14 0 obj raw materials from the time of its purchase till its conversion into finished goods and sale. General expenses Direct Wages or No. cost centres on an equitable basis. 2. items is charged or debited to Factory Overhead Control Account and credited to Stores Ledger Control Calculate direct, variable and full costs of products, services and activities using overhead absorption rates to trace indirect costs to cost units. except when they are deliberately changed, e. increments granted to staff. 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. Distinctive features of indian and western political thought. Prohibited Content 3. indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. In addition to direct costs, indirect distribution costs to be allocated between the two products are as follows. (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. Total overheads Direct labour hours. Disclaimer 9. medical, items by nature are direct but treated as indirect because the amounts chargeable are either of small or Everything you need to know about Factory Overhead. Indirect costs are those costs that cannot be charged directly to a specific product. 8. This rate is determined by dividing the overhead expenses by the total number of direct labour hours. There is no hard and fast rule regarding classification of expenses into direct and indirect. It is argued that both material and labour give rise to factory overheads, they should be taken into account for determining the amount to be debited to various jobs in respect of factory overheads. Some expenses such as power, lighting, heating, rent, etc. The two together make This method of redistribution gives cognizance to the service rendered by one service department to another service department. etc. only. 4. Certain expenses such as General Managers salary, rent of the factory etc. is determined as follows: Actual overhead rate = endobj Expenses, Meaning, Collection and Classification of Distribution of factory overheads involves three stages: (i) Collection and classification of factory overheads. 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. Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. This method is applicable when the actual benefits are measurable. Uploader Agreement. (viii) Welfare staff (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. endstream expenses on rent, power, lighting, insurance etc. of employees or wages of each overhead expenses the following are some of the primary documents used:-. For instance, some semi-variable expenses may have 20% variability while others may Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. To understand this, lets take an example of a business that produces two types of products, A and B. Note 3 On the last reapportionment, D's overheads are apportioned on the basis of 75/95 to A and 20/95 to B. 7. Administrative & Selling & distribution Primary Distribution of Overhead: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. No. 2. customer and during a slump or a period of depression, decision on make or buy, shut down or continue etc. (iii) Ascertaining Marginal Cost: Decision Making: A number of decisions of management depend upon a %0A%0A

methods of apportionment of overheads