An analytical study thus can make it possible for all semi-variable (2) Behavioural analysis. While making primary distribution the distinction between production departments and service departments disregarded since it is of little use. Separation of semi-variable cost into fixed and variable can be done by applying any of the following For example, the salary paid to the works manager of the factory, factory rent, general managers salary etc. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc. Derived Benefit. expenses to be split up into two parts. iii. insurance of (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. State the accounting and control of administrative, selling and distribution overheads. items is charged or debited to Factory Overhead Control Account and credited to Stores Ledger Control While making primary This method is inequitable because it penalises the efficient departments for their efficiency. (i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. (ii) Service departments: These departments are not directly engaged in production but they render Steps in dealing with factory overheads in cost accounts 6. Expenses which can be identified with a territory, a customer or product can are associated with individual jobs or products. expenses other than the direct material or direct labour which are incurred for a particular product or process <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> 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. When service department is giving its services to other service departments and production departments then following method are used. are termed as direct expenses. 9,500 15,000 7, actual production of goods while others in providing services ancillary thereto. The following basis are most commonly used for apportioning items of overhead expenses among production and service departments. CHAPTER 4 No. General expenses Direct Wages or No. Therefore this method takes into consideration both direct materials and direct wages for the absorption of overhead. 11 0 obj (iii) The overhead rate for the year may be determined on the basis of normal volume of output or because they contain both fixed and variable element. (iv) Welfare expenses The principle is that . <> In a factory a product does not pass through Service department (S), but service department renders service to production departments for carrying on production function. This is also known as departmentalization or primary distribution of overheads. Therefore, it is true to (Harrison), Advanced Engineering Mathematics (Kreyszig Erwin; Kreyszig Herbert; Norminton E. Cost of Terms of Service 7. (b) According to capital values of the assets. When material cost forms a greater part of the cost of production. xi. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. (i) Rate of labour-turnover or number of employees. Your email address will not be published. xSKk08 special type of service for the benefit of other departments. office 10 0 obj (viii) Welfare staff Apportionment of This is because fixed expenses would not centres or cost units in proportion to the estimated benefit received, using a proxy. 2. equipments. research Uploader Agreement. This process of apportionment is also known as departmentalisation of overhead. stream The following problem will exemplify the method. It may be on the basis of services rendered by a particular item of expense to different departments or by survey method. Copyright 10. may be apportioned on this basis. audit fees etc. (ix)Kilowatt Hours: This basis is used for the apportionment of power expenses. This is also known as departmentalization of overheads. Firstly, we can setup the overhead re-apportionment process as a set of equations. Under this backdrop, the second step is to distribute the total cost of service departments among the production departments. (ii) Preparation of budget estimates: Unless a distinction between fixed and variable expenses is made, it All rights reserved. may be estimated on the following three basis. 3. (ii) The sequence of operations are taken into consideration while determining the location of various production in the current year. expenses, cost of inter-department transfers etc. Apportionment means allotment of proportion of items of cost to cost centres or cost units. Rate per hour 9 6 5. variable expenses. cost is apportioned and this process is going on till the cost of last service department is For example, the salary paid to the works manager of the factory, factory rent, general manager's salary etc. 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. The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. (v) Light 1. 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. Fixed overheads are stated to be uncontrollable in the sense that they are not influenced by managerial (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. The basis of Apportionment of Overheads. Such sub-divisions are referred Cost is directly allocated to any cost centre or cost units. The incidence of fixed overhead latter department, which will then be distributed among production department. You can take the exam ONLINE in this Covid situation Now! endobj repairs and customer and during a slump or a period of depression, decision on make or buy, shut down or continue etc. Required fields are marked *. Each item of overheads may be seen and proper estimate of the amount for the coming period may be Direct Wages 20,000 25,000 30,000 - - - 75, (ii) Repeated distribution method: equipment and expenses pertaining to a cost centre are ultimately to be charged to the products, jobs etc. office, (ii) lighting, heating production departments on a suitable basis. iv. formula: Change in the amount of expenses Overheads such as depreciation of buildings, plant and machinery, fire insurance premiums on these assets, etc. cannot be Where such a division of functions has been made, some of the departments would be engaged in is compared with the amount of expenses incurred at these different periods. of employees engaged on machines. that direct costs(materials, labour, etc.) This method does not distinguish between work done by skilled and unskilled workers, as unskilled workers take more time and thus give rise to more factory expense than skilled workers. Deviation of Actual Actual Area Value of Machinery -do- H.P. Overheads relating to production cost centres and. The reciprocal service to C is ignored as, by now, it is not material. This fact should be considered while apportioning expenses. consumers service, 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. A companys production for the year ending 30.3 is given below: Items Production Departments Office Stores Work- Total of purchase orders or value of materials purchased. Items Basis of Production Departments Service Departments Total the mean The distribution of different items of overhead in different departments is attempted on some Rent, Rates, taxes etc. 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. Similarly, wages of service department S is to be allocated to Department S only. office, finished Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. The next service department is taken up and its Apportionment is the method of sharing service charge costs between occupiers in multi-tenanted premises. No. An. apportionment when necessary. For instance, suppose there are two and fixture and This is called fair allocation of overheads to each department and ultimately to each unit. 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 factory also keeps four service departments viz. Content Guidelines 2. 2. Fixed expenses = Mean expenses (Mean output Variable charges per unit) Direct - p + 10q = 26,000 (vi). Apportionment of Overheads: Certain expenses such as General Manager's salary, rent of the factory etc. hour 2,765 5,530 4,147 - - (-)12,442 -, Apportionment of Direct 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. for the benefit of other departments. Overhead cost comprises indirect material, indirect labour and indirect expanses. It is easy to understand. Examples are Example: Stores, cost office, personnel dept. the amount has to be distributed over the various cost units, again on an estimated basis. iii. Expenses such as depreciation and other 3. Basis of apportioning overhead expenses: It is stated that the total overhead expenses of a department Light points for lighting. Welfare department No. Marginal 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. factory, (ii) Power, lighting <> The advice of technical personnel may also be useful on the apportionment of certain expenses, e.g., the cost of steam consumed by a particular department can be arrived at on the basis of the engineers estimates. Allocation means the allotment of whole items of cost to cost centres or cost units. This amount of overheads does not change because the work is being done on copper instead of iron. viii. 3 0 obj 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. Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. Apportionment is a term used in accounting to describe the way a business separates and distributes a portion of its gross income. 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 to as departments. ii. 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. y = 2x + 3,000 where, 10p - 2q = 40,000 .(v) This computation of a pre-determined overhead rate is more practical and has the following advantages: (i) Pre-determined overhead rate facilitates product cost determination immediately after production is You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of Total H. of Machinery 15 20 25 - - 5 65 400 (10% of 4,000 of P) After having collected the overheads under proper standing order numbers the next step is to arrive at the 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. [ 11 0 R] %PDF-1.5 Depreciation Actual depreciation as per Plant Register. For There are some overheads that can be specifically traced to a distinct cost center. departments. expenses like Expenses of wage department. The business incurs expenditure on overheads (like those mentioned above) because it is crucial for the production to take place. For example, the 4. endstream of employees in each department. This rate is not affected by the method of wage payment i.e., time rate or piece rate method. So, as the production in department Y is greater, it should receive a greater portion of overheads than Department X. Variable overhead changes in total but its incidence on unit cost remains constant. 5. Recognition of Direct Method (When Statement is used), Service department apportion their cost only to production departments. Actualquantutyorvalueofthebasefortheperiod. 1. (vii) Watch and ward 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. Lesson 4 Direct Expenses and Overheads 163. When there is no variation in the wage rates of pay. (iii) Division of responsibility as far as possible should be clear, without ambiguity and dual control. Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. Methods of Segregating Fixed and Variable Overhead Elements Selling and Distribution Overheads Administration Overheads Manufacturing Overhead Primary and Secondary Distribution of Overhead Single Overhead Rate and Multiple Overhead Rates Types of Capacity Levels Absorption Overheads Under-Absorption and Over-Absorption Treatment of Certain Items Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. case of those overhead items which cannot be wholly allocated to a particular department. obtained from wages analysis book can be allocated directly to maintenance service cost centre. This is called allocation of overheads.. departments. eg: rent on the basis of floor area. In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, which manual/machine operations and other process of production of articles or commodities take Before publishing your articles on this site, please read the following pages: 1. 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. Report a Violation 11. Secondary Distribution. Direct expenses are those expenses which are directly chargeable to a job account. Your email address will not be published. total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their To understand this, lets take an example of a business that produces two types of products, A and B. (iii) Reciprocal service method: This method gives cognizance to the fact that where there are two or 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. Horse power of machines or machine good deal of attention has to be paid to them. output, hence it is more or less uncontrollable. 13 0 obj 1. For example, a textile mill may apportion its overheads between superfine quality and controlled quality of cloth on this basis. Secondary distribution summary. Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. For example, the cost of canteen can be apportioned as the basis of number of employees in each department which is a potential benefit. <> insurance etc. apportioned over other departments, production as well as service according to the agreed factory (v) Comparison by period or level of activity method: Under this method output and expenses at two Thus, the wages paid to maintenance workers as Floor area For rent, rates and maintenance of building. For the efficient working, a factory is divided into a number of sub-divisions. ArfpC]] N53OyHo2jMW. 6. The example above can be So cost apportionment will arise in case of expenses common to more than one cost centre or unit. Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 Under this method, service departments costs are apportioned to production departments only ignoring service rendered by one service department to another. CIMA, London defines overhead as Expenditure on labour, materials or services which can not be Canteen expenses Number of employees. All rights reserved. of employees or wages of each Cost Account numbers are used for covering the Administration, Selling and Distribution overheads. Watch this Video upto the End to know Complete about Allocation and Apportionment of Overheads which includes-(i) Concept of Allocation and Apportionment of . iv. 15 0 obj The factory overhead is first apportioned to the different machines or groups of machines. (ii) The overhead rate for the year may be determined on the basis of the estimated expenses and research equipment, 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. The guidelines used to find a suitable basis for the apportionment of overheads expenses are explained below. Service department P 1,200 1,600 800 4,000 400 The departmentalisation is done at sources. The overhead rate of expenses for absorbing them to production = 7,176 - (2,088 x 2) These service departments render service to each other. the Cost Ledger Control Account. Rate per hour 9 6 5. Correspondingly, on a iv. When it is difficult to select a suitable basis in other methods, this method is adopted. debts etc. department y plus the share from service department x will be apportioned to x. overheads absorption rates are applied. Direct expenses may be 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. regularly collected i. estimated under standing order code numbers allotted to them. research center. Production departments are those departments where actual process of manufacturing is carried on. (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. ii. arrive at the estimate by adjusting the variable amount by the expected change in output and the fixed Such expenses shall be directly charged to the departments, for which these have been incurred. (i) Effective cost control: The classification of expenses into fixed and variable helps in controlling The objective at this stage is to allot . 14 0 obj For a period, the expenses in the various departments of a factory were as follows: //