insurance of 12 0 obj Wherever possible, the overheads are to be allocated. The extra amount It includes all direct cost except the direct endobj iii. ), Macroeconomics (Olivier Blanchard; Alessia Amighini; Francesco Giavazzi), Fundamentals of Aerodynamics (John David Anderson), Pdf Printing and Workflow (Frank J. Romano), Environmental Pollution and Control (P. Arne Vesilin; Ruth F. Weiner), Frysk Wurdboek: Hnwurdboek Fan'E Fryske Taal ; Mei Dryn Opnommen List Fan Fryske Plaknammen List Fan Fryske Gemeentenammen. contribution, general welfare expenses, compensation 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. Algebraic approach. 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. In a hypothetical organisation no expenditure remains unchanged for all time. Because 2 nd method is same as the concept of 3 rd method. endobj It is suitable when most of the work is done manually. (iv) Sundry expenses Administrative & Selling & distribution (ii) Variable overheads. Direct Materials Actual 2,000 3,000 3,000 1,000 2,000 2,000 13, Deviation of benefits likely to be received). It is to be carefully noted that at the time of making primary distribution, the distinction between production and service departments is ignored. (iii) Actual cost is generally used for comparison with the predetermined figures for the purpose of Semi-variable overheads do not fluctuate in direct cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or . action. 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. (i) Effective cost control: The classification of expenses into fixed and variable helps in controlling If the target is not achieved the unit cost goes up indicating inefficiency of the department. of requisitions, quantity or value of materials. Direct expenses are those expenses which are directly chargeable to a job account. It is most suitable where labour constitutes the major factor of production. Secondary distribution summary. Expenses which can be identified with a territory, a customer or product can In a manufacturing concern there can be broadly two categories of departments namely production departments and service departments. Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. (iii) Depreciation, The cost of service department which renders service to the largest number of other departments is distributed first. (iii) Partly producing departments: In every organisation a few departments such that it is not If a job is completed or worked by two or more machines, the hours spent on each machine are multiplied by the rate of that related machine, and the overheads so calculated for the different machines in total are the overheads chargeable to the job. 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. research equipment, When labour forms the predominant part of the total cost. 4 0 obj It may be on the basis of services rendered by a particular item of expense to different departments or by survey method. The overhead apportionment process is in two stages, namely primary and secondary apportionments. In the Step method: In this method the cost of most serviceable department is first, apportioned to other service departments and production departments. completed. i. Expenses, Meaning, Collection and Classification of 10 0 obj Discuss and apply the various methods to calculate overhead rate. endstream Expenses may be defined as the costs of services provided to an undertaking and the notional costs factory, (ii) Power, lighting another service department. 3. (ii) The sequence of operations are taken into consideration while determining the location of various (iii) Ascertainment of cost of different departments helps in computing the cost of different jobs or So, the term allocation means the allotment of the whole item without division to a particular department or cost centre. Number of employees For workforce related costs like canteen costs etc. <> Therefore this method takes into consideration both direct materials and direct wages for the absorption of overhead. of employees, etc. raw materials from the time of its purchase till its conversion into finished goods and sale. Factory Overheads - Methods of Absorption (With Formulas, Advantages and Disadvantages) . place. The business incurs expenditure on overheads (like those mentioned above) because it is crucial for the production to take place. 8 0 obj The figures in the illustration given in the beginning under simultaneous equation method may be treated as below: Solve previous illustration according to Repeated Distribution Method. 15 0 obj 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. centres or cost units in proportion to the estimated benefit received, using a proxy. For the purpose of absorption of overhead to individual jobs, processes or products, Such expenses require division and apportionment over two or more cost centres or units. Privacy Policy 9. Building service department Relative area of each department. iii. Thus, the overhead allocation formula is: Cost pool Total activity measure = Overhead allocation per unit Before uploading and sharing your knowledge on this site, please read the following pages: 1. iv. endobj After completing this chapter, one should be able to : 1. <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> A manufacturing company has three production departments and two service departments. service departments and production departments. Image Guidelines 4. when these are used for processes. 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. 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. Overheads relating to production cost centres and. (iii) Depreciation 15% of value of machinery endobj items is charged or debited to Factory Overhead Control Account and credited to Stores Ledger Control (7176)y. April 1,500 6,000 588 1176 3,45,744 6,91. Potential Benefit: According to this principle, the apportionment of common item of overheads should be based on potential benefits (i.e. (ii) Preparation of budget estimates: Unless a distinction between fixed and variable expenses is made, it Correspondingly, on a cost centres on an equitable basis. Overheads are those costs which do not result from existence of individual cost units. Harper. The primary apportionment stage is when overheads are apportioned to all departments in the organization (both production and service departments) without considering any reciprocal transfer of benefits. Thus, the wages paid to maintenance workers as They are known as semi-variable overheads also be apportioned in part to another service department to arrive at the total expenses incurred on the 3. At the end of the possible to place these departments into a particular category, since they fall within the purview of Apportionment P1 P2 P3 Office Stores Workshop. on sales or investment. These departments are essential for smooth and efficient running of production departments. Estimated or actual time spent. research center. and heating of This method is particularly used when it is difficult to select a suitable basis for apportionment. apportioned to x will continue to be repeated till amount involved becomes negligible. Services used by other service departments are ignored. 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. 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. Depreciation -do- 4,500 5,250 3,750 - - 2,250 15, Now, on what basis should the overheads be charged to each 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. An expense which is directly identifiable with a specific cost centre is allocated to that centre. Lighting No bulbs used for lighting by the machine. This process of apportionment is also known as departmentalisation of overhead. Overheads such as depreciation of buildings, plant and machinery, fire insurance premiums on these assets, etc. PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. vii. wages 3,373 4,217 5,060 ( - ) 12,650 - - indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. In April 2013, the output is likely to increase by 500 units. (ii) Hire charges of plant if used for a specific job. <> Overhead cost comprises indirect material, indirect labour and indirect expanses. Machine Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. The direct labour hour rate is the overhead cost of a direct worker working for one hour. CIMA, London defines overhead as Expenditure on labour, materials or services which can not be Highest 2,820 8, 1 0 obj J. comparison of (a) the extra amount that would have to be spent if an additional activity is undertaken or an iii. The following basis are most commonly used for apportioning items of overhead expenses among production and service departments. insurance of The following steps are involved in this method: (i) Apply the given percentages to distribute the primary total of first service department. So it is the allotment of whole item of cost to a cost centre or cost unit or refers to the charging of expenses which can be identified wholly with a particular department. Apportionment is a term used in accounting to describe the way a business separates and distributes a portion of its gross income. the Cost Ledger Control Account. Insurance on Plant and Machinery, Building; Depreciation on Plant and Machinery; Maintenance of Plant and Machinery. The next service department is taken up and its cost is apportioned and this process is going on till the cost of last service department is apportioned. Both metals are quite different in prices and by applying the same percentage for both will be obviously incorrect. material and direct labour. such a manner so that each department represents a division of activity of the organisation such as repairs proportion to volume. (ix) Works clerical Overheads, Methods of segregating semi-variable Thus, it is useful only when compared with the established norms or standards. The total cost of service department of P and Q shall subsequently be apportioned to production department apportioned. 5. Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. Machinery 300 350 250 - - 150 1, Machines give rise to certain overheads like depreciation, power, etc., which should be charged only to the work done on machines. Expenses in relation to a department may be direct but are indirect in 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. For example, if a toolroom manufactures The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. corresponding costs on the Y-axis. Allocation is the charging of overheads directly to one cost center. Book value of Machinery 30,000 35,000 25,000 - - 15,000 1,05, endobj 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. Fixed overheads are stated to be uncontrollable in the sense that they are not influenced by managerial It is suitable when the percentage method fails to give an accurate result. Apportionment of 4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. Variable expenses vary with the volume of activity and the This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. Budgetedbasefortheperiod. The items of factory overhead are as follows: 2. 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 For groups. and other fringe benefits, supervisions etc. In such case it will be a partly producing department. defined as those expenses which are easily identifiable and attributable to the individual units or jobs. 2. 2. service departments to another service department. Thus it is indirect process of allotment. After proper distribution the account of first service department will be closed. Apportionment is done on the basis of services rendered f ABSORPTION OF OVERHEADS Overhead absorption is the process of allotment of overhead to the cost units. the mean ii. wages analysis sheet is prepared each month and at the end of the month, the total is debited to Factory Sometimes, the basis will be the Ability to pay method, i.e., ability of the department to bear such share of items of overheads. There may be two or more service departments in a factory and they may render service to each other. Secondary Distribution. is an example of, Correct answer: Direct (chargeable) Expenses, Lesson 4 Direct Expenses and Overheads 151, (iii) Invoices or purchase voucher (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. The apportionment method and its constant revamping is a true sign of a democracy trying to obtain equal representation for all of its citizens. Apportionment of Overhead Cost (Simultaneous) Distribution Method HS Tutorial 34.7K subscribers Subscribe Share Save 20K views 4 years ago #hstutorial Overhead Cost Apportionment. Actualquantutyorvalueofthebasefortheperiod. %PDF-1.5 xSKk08 So, as the production in department Y is greater, it should receive a greater portion of overheads than Department X. <> Rate per hour 9 6 5. Machine hour rate is one of the methods of absorbing factory overhead. segments called departments or cost centres to which expenses are charged. 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