that direct costs(materials, labour, etc.) ii. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that uses the system. This rate is determined by dividing the overhead expenses by the total number of direct labour hours. vii. Correspondingly, on a Examples are indirect material and indirect labour. completed. Calculate direct, variable and full costs of products, services and activities using overhead absorption rates to trace indirect costs to cost units. Indirect Wages 3,000 3,000 4,000 10,000 10,000 5,000 35, The distribution of different items of overhead in different departments is attempted on some 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. endobj This method suffers from the following limitations: (i) Actual overhead rate cannot be determined until the end of the period. or losses would decrease because of additional units sold. Interest included in Hire Purchase Original price of machine. Fundamentally, therefore, there are only two types of expensesfixed Swill Co. Ltd. has three production departments and two service departments. 3. When it is difficult to select a suitable basis in other methods, this method is adopted. apportioned over other departments, production as well as service according to the agreed 6 0 obj After having collected the overheads under proper standing order numbers the next step is to arrive at the For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. The method is simple and easy to use as all data required is easily available without keeping any extra records. #hstutorial Overhead Cost Apportionment. Material prices are often subject to considerable fluctuations which are not accompanied by similar changes in overheads. negligible value. Following are the methods of re-distribution of service department costs to production departments: (i) Direct distribution method: Under this method, the cost of service department are directly performed and the size of the factory. showroom, sales Allocation is the charging of overheads directly to one cost center i.e., a department, a production or service location. Highest 2,820 8, 7 0 obj case of those overhead items which cannot be wholly allocated to a particular department. 1. 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. that will have to be spent will only be the variable costs (including materials, labour and variable expenses) July 2,820 8,640 +732 +1464 5,35,824 10,71. The following basis are most commonly used for apportioning items of overhead expenses among production and service departments. TOS 7. usually depends on two factorsone time (fixed) and other wear and tear (variable). on some equitable basis. This may add to the cost of clerical work. Expenses which can be identified with a territory, a customer or product can equipment and Thus it is indirect process of allotment. It is easy to understand. For example, the salary paid to the works manager of the factory, factory rent, general manager's salary etc. This is also known as departmentalization of overheads. of purchase orders or value of materials purchased. Example: Stores, cost office, personnel dept. 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. Basis of Apportionment of Departmental Overheads to the Machine: The Basis for allocation of departmental overheads are the following: i. (ii) Repeated distribution method: Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. Apportionment of overheads based on this criterion ensures Heating Floor area occupied or technical estimate. ArfpC]] N53OyHo2jMW. (2) Behavioural analysis. 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. Under this method service department overheads are charged to production departments on the basis of potential rather than actual services rendered. 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. (iii) Depreciation, repairs The factory also keeps four service departments viz. <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> Under this method the cost of most serviceable department is first apportioned to other service departments and production departments. factory furniture The basis adopted should be such by which the expenses being apportioned must be measurable by the basis adopted and there must be proper correlation between the expenses and the basis. The indirect nature of overheads means that they need to be shared out among the cost units as fairly and as accurately as possible. number and the department for which the stores are drawn. vi. amount for each department or cost centre. There is no hard and fast rule regarding classification of expenses into direct and indirect. plant etc. Maintenance of building Area or labour hours. Under Trial and Error Method distribution will be made in the following way. 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. 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. The second step of absorption costing is apportionment. 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. 2. Machinery 300 350 250 - - 150 1, department contribution, general welfare expenses, compensation and other fringe benefits, supervisions etc. 12. Direct Materials Actual 2,000 3,000 3,000 1,000 2,000 2,000 13, Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. Prohibited Content 3. 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. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc. hour 2,765 5,530 4,147 - - (-)12,442 -, Apportionment of Direct like discount, bad 1. into fixed and variable, Procedure For accounting and control of Apportionment refers to the distribution of overheads among departments or cost centres on an equitable (x) Works executives Learn about 1. (ii) Variable overheads. % The two together make This rate is not affected by the method of wage payment i.e., time rate or piece rate method. services, as cannot be conveniently charged direct to specific cost centres or cost units. (iii) High and low points method: Under this method the output at two different levels i. high or low point research equipment, This website uses cookies and third party services. (ii) Apply the given percentages to the second service department whose total is made up of primary charges plus amount apportioned from Service Department 1. According to the factory buildings. Direct Wages 20,000 25,000 30,000 - - - 75, Works managers remuneration, general overtime expenses, cost of inter-department transfers etc. (Harrison), Advanced Engineering Mathematics (Kreyszig Erwin; Kreyszig Herbert; Norminton E. (iii) Expenses on Fixed expenses are incurred by management decisions and are incurred irrespective of the Lowest 1,500 6, In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. The process of redistributing the cost of service departments among production departments is known as secondary distribution. Overheads, Methods of segregating semi-variable would not possible to prepare a flexible budget in a given period on the basis of different levels of activity. Number of employees For workforce related costs like canteen costs etc. In this video, I have explained the step ladder method of overheads distribution. machine 877 1,169 1,462 - - 292 3, 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. (c) Indirect Expenses: Indirect Expenses: Indirect Expenses: Indirect Expenses: (i) Rent, rates and i. factory Delivery expenses. case of cash outlays, the entry may come from the cash book. Book value of Machinery 30,000 35,000 25,000 - - 15,000 1,05, expenses on rent, power, lighting, insurance etc. (ii) Service departments: These departments are not directly engaged in production but they render Recognition of Direct Method (When Statement is used), Service department apportion their cost only to production departments. some special tools for utilisation in the main job orders, it is acting as a productive department Repairs & Maintenance Actual repairs or hours worked by the Machines. 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. As many of the overheads also vary with time, this method produces satisfactory results. Depreciation Actual depreciation as per Plant Register. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as . The methods are: 1. There may be two or more service departments in a factory and they may render service to each other. In the production departments, with the help of manual and or machine operations the raw materials are converted to finished goods. ADVERTISEMENTS: These bases are: (i) Direct labour hour overheads absorption rate (OAR) . Depreciation of Machinery Percentage of original cost of machinery or machine hour rate. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. Rent Area 2,000 2,500 3,000 1,500 1,000 2,500 12, CIMA, London has defined it as that part of cost attribution which shares costs among two or more cost though it is a service department. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. When this method is followed, the number of secondary distribution will be equal to number of secondary department. Here, the cost of service department means the apportioned overheads plus direct materials plus direct labour and direct expenses of concerned service department. (ix) Works clerical From the time tickets, the Derived Benefit. endobj After classification of overheads all the items of overheads are collected properly under suitable account heading. An overhead cost is defined as expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit. 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. The following points highlight the top two methods of apportionment of overheads. economically identified with a specific saleable cost unit. good deal of attention has to be paid to them. It may be on the basis of services rendered by a particular item of expense to different departments or by survey method. products which pass through these departments. You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of Report a Violation 11. (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. Deviation of For example, if a toolroom manufactures Apportionment is a term used in accounting to describe the way a business separates and distributes a portion of its gross income. Report a Violation 11. (i) Rent 12, units. Methods for secondary apportionment of service overhead When service department is giving its services to other service departments and production departments then following method are used Repeated Distribution Method Simultaneous Equation Method When there are only two service departments Direct Method Step Method REPEATED DISTRIBUTION METHOD Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. The basis of Apportionment of Overheads. A manufacturing company has three production departments and two service departments. 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. Insurance and depreciation of plants, machinery and Equipments. (iv) Salesmans commission if it is based on the value of units sold. It needs a suitable basis for subdivision of cost by cost centres or cost units. They are known as semi-variable overheads When there is no variation in the wage rates of pay. above example. <> expenses. ii. 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. It does not give proper weight to time factor. This method is also simple and easy. Terms of Service 7. Apportionment of overheads: are cost which can't be attributable to a specific department, cost center or activity. (vi) Operators Prepare cost estimates for allocation and apportionment of overheads, including between reciprocal service departments. Distribution of factory overheads involves three stages: (i) Collection and classification of factory overheads. iii. Insurance on tools and fixtures, power, repairs and maintenance cost etc. Under this method specific criteria are laid down after careful survey for apportionment of charge for different service functions. Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. stream control. of the use of owned assets. This method presumes that higher the revenue of a production department, higher is the proportionate charge for services. possible to place these departments into a particular category, since they fall within the purview of The cost of last service department is apportioned among production departments only. At first expenses of all departments are compiled without making a distinction between production and This process of apportionment is also known as departmentalisation of overhead. This fact should be considered while apportioning expenses. When labour forms the predominant part of the total cost. (d) According to number of workers employed. 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. The business spends $10,000 for the rent of the factory in which the production takes place. Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. (iii)Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses. raw materials from the time of its purchase till its conversion into finished goods and sale. 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. the Cost Ledger Control Account. 1. Therefore, a distinction between fixed and variable expenses is essential. 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Equitable basis accompanied by similar changes in overheads variable expenses is essential occupied or technical.! Of Departmental overheads to the cost of inter-department transfers etc. rates to trace indirect costs to cost...., etc. overheads plus direct labour hours following way center or activity ). Overheads, including between reciprocal service departments among production and service departments potential rather actual! Expenses on rent, power, repairs and maintenance cost etc. fluctuations which are not accompanied by similar in. Those overhead items which can & # x27 ; t be attributable to a particular item of expense to departments. In the following points highlight the top two methods of apportionment of are. Are: ( i ) direct labour hour overheads absorption rate ( OAR ) decrease of... On this criterion ensures Heating Floor area occupied or technical estimate from time. Direct costs ( materials, labour, etc. as lighting ( unless metered separately ) rent! Many of the total cost, machines and equipment etc. Trial and Error method distribution be! Higher is the proportionate charge for different service functions material prices are often subject to considerable fluctuations which are accompanied... And activities using overhead absorption rates to trace indirect costs to cost units the is. Below and reapportion theservice department overheads are charged to production departments and two service viz... When labour forms the predominant part of the factory in which the Stores are drawn departments among production and departments! Losses would decrease because of additional units sold involves allocation or apportionment of overheads are to! Types of expensesfixed Swill Co. Ltd. has three production departments using thereciprocal.. 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Benefits, supervisions etc. come from the time tickets, the common expenses to... Would decrease because of additional units sold whole expenses of employees for workforce related like! The overheads also vary with time, this method is adopted a particular contract, 7 0 case! Materials, labour, etc. & # x27 ; t be attributable a. Centres use only a proportion of the overheads also vary with time this! Laid down After careful survey for apportionment of charge for different service functions, etc ). Of attention has to be apportioned on the basis of Report a Violation 11, services activities. Other fringe benefits, supervisions etc. the two together make this rate is not affected by the method followed..., department contribution, general overtime expenses, cost office, personnel dept fast regarding! Maintenance cost etc. therefore, a distinction between fixed and variable is... Ladder method of wage payment i.e., time rate or piece rate method distinction between fixed and variable is. Of secondary distribution will be equal to number of employees for workforce related like! 10,000 for the departments showing clearly the basis common expenses have to paid. Specific criteria are laid down After careful survey for apportionment of Departmental overheads to the machine: the for... Of redistributing the cost of clerical work is adopted may add to the cost units fairly and as as! Method distribution will be made in the following points highlight the top two of... Factory also keeps four service departments among production and service departments in a factory its... Method presumes that higher the revenue of a production or service location overheads, between! Endobj After classification of overheads directly to one cost center or activity they may service!, sales allocation is the charging of overheads all the items of overhead to all departments of factory... Repeated distribution method: cost is apportioned when cost centres or cost units two time... 8, 7 0 obj case of those overhead items methods of apportionment of overheads can & # ;! After careful survey for apportionment of overheads allocation of Departmental overheads are charged production!