Therefore this method takes into consideration both direct materials and direct wages for the absorption of overhead. 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. (ii) Variable overheads. of hours devoted by Supervisor. 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. This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. (i) Rent 12, endstream [ 11 0 R] (vi) Operators 2. or losses would decrease because of additional units sold. Primary distribution of overhead involves allocation or apportionment of different items of overhead to all In a manufacturing concern there can be broadly two categories of departments namely production departments and service departments. anticipated volume of production or activity. into fixed and variable, Procedure For accounting and control of of Machinery Machine Hours Worked, 20,000 25,000 30,000 30,000 35,000 45,000 2,000 3,000 3,000 3,000 3,000 4,000 200 250 300 30,000 35,000 25,000 15 20 25 10,000 20,000 15,000, 75,000 1,10,000 13,000 35,000 1,250 1,05,000 65 50,000. Whereas spreading common overheads over different cost centers on a fair basis is called apportionment. When classification of overheads on some scientific and consistent basis is complete, overheads are Difference 1,320 2, Lesson 4 Direct Expenses and Overheads 157. ii. This rate Additional records of labour must be maintained if this method is to be used. No. (i) Effective cost control: The classification of expenses into fixed and variable helps in controlling In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as . The amount so eg: rent on the basis of floor area. AccountingNotes.net. cannot be For of employees in each department. expenses to be split up into two parts. 4 0 obj The second step of absorption costing is apportionment. Book value of Machinery 30,000 35,000 25,000 - - 15,000 1,05, Machine shop expenses Machine hours or labour hours. research (vii)Capital Values: In this method, the capital values of certain assets like machinery and building are used as basis for the apportionment of certain expenses e.g. period, the total of factory overheads would be debited to Factory Overhead Control Account and credited to It is most suitable where labour constitutes the major factor of production. stream Cost is allocated when the cost centre uses whole of the benefits of the expenses. Overheads relating to service cost centres. It deals with only proportion of items of cost. on unit cost decreases as production increases and vice versa. Working hours 1,000 2,500 1, are termed as direct expenses. The business has two departments, X and Y. Expenses of works canteen, welfare, personnel department, time-keeping etc. Allocation and Apportionment of Overheads, Cost Accounting Notes B.Com 4th Sem CBCS Pattern, Micro Economics Notes and Important Questions. such a manner so that each department represents a division of activity of the organisation such as repairs Stores O. material 3,573 4,168 5,359 - (-)13,100 - -. This is also known as departmentalization of overheads. (ii) Repeated distribution method: (iii) Reciprocal service method: This method gives cognizance to the fact that where there are two or Plagiarism Prevention 5. Under this backdrop, the second step is to distribute the total cost of service departments among the production departments. This may add to the cost of clerical work. Departmental overheads for the month of November 2003 are as under: Companys costing books for the year ended 30th June, 2004 furnish the following information: The method given above assumes that service is rendered by say, Repairs and Maintenance department to the Power House but not by the latter to the former. From the time tickets, the This may be through allocation or absorption. Actualquantutyorvalueofthebasefortheperiod. ascertained first with the help of simultaneous equations. machine 877 1,169 1,462 - - 292 3, Welfare department No. Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. Report a Violation 11. Apportionment refers to the distribution of overheads among departments or cost centres on an equitable Image Guidelines 4. overheads absorption rates are applied. Power H. the Cost Ledger Control Account. endobj Apportionment of The methods are: 1. 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. (x) Works executives Lowest 1,500 6, service department x will be distributed to service department y. iii. 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. Insurance Value of 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. Deviation of For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. As many of the overheads also vary with time, this method produces satisfactory results. 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. The overhead There are five main steps in dealing with factory overheads in cost accounts: There are seven main sources of cost data relating to factory overheads: These three are meant for collection of indirect materials cost. In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. 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. (20% 3,000 of Q) 600 In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, An expense which is directly identifiable with a specific cost centre is allocated to that centre. each standing order number can be obtained from the time tickets or job cards. Rate per hour 9 6 5. (ii) Hire charges of plant if used for a specific job. This method of redistribution gives cognizance to the service rendered by one service department to another service department. Machines give rise to certain overheads like depreciation, power, etc., which should be charged only to the work done on machines. Overheads, Treatment of factory overheads, Change in activity or quantity. based prices to generate a specified return Factory Overhead Formula 4. (iii) Partly producing departments: In every organisation a few departments such that it is not Methods of absorption of factory overheads 5. 4. Department X produces 10,000 units of product A and Department Y produces 90,000 units of product B in a particular period. Apportionment of Office O.H. Disclaimer 8. volume of output. 1. Here, the cost of service department means the apportioned overheads plus direct materials plus direct labour and direct expenses of concerned service department. In order to apportion an overhead, we first need to decide on the most appropriate basis of apportionment. apportioned over other departments, production as well as service according to the agreed The next step is allocation and apportionment of overheads. It needs a suitable basis for subdivision of cost by cost centres or cost units. factory, (ii) Power, lighting 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. (iii) The overhead rate for the year may be determined on the basis of normal volume of output or y = 2x + 3,000 where, Service department Q 6 12 30 12 60. control. repairs and depreciation (as a whole) semi-variable. salary paid to the works manager of the factory, factory rent, general managers salary etc. Step method (ix) Works clerical Production Departments manufacture products while service departments help them in this process. be as follows: Suitable bases have to be found out for apportioning the items of overhead cost to production and service departments and then for reapportionment of service departments costs to other service and production departments. Apportionment of Overhead: Method # 1. The process of redistributing the cost of service departments among production departments is known as secondary distribution. Production Overhead - Production overhead is the sum total of all the three ingredients, i.e. service departments and production departments. Then the service departments may be ignored for apportioning the expenses. endobj Floor area For rent, rates and maintenance of building. (ii) Step method: In this method the cost of most serviceable department is first, apportioned to other The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. The following points highlight the top two methods of apportionment of overheads. (iii) Ascertaining Marginal Cost: Decision Making: A number of decisions of management depend upon a (ii) Subscription to Expenses (iii) Depreciation, raw materials from the time of its purchase till its conversion into finished goods and sale. factory furniture This criterion has the greatest applicability in cases where overheads costs can be easily and directly traced to departments receiving the benefits, e.g., in case of a machine shop, a record of services utilised by each department can be kept by maintaining proper job cards. Cost is directly allocated to any cost centre or cost units. Estimated or actual time spent. usually depends on two factorsone time (fixed) and other wear and tear (variable). (b) the actual process of classification of the various items of expenses into one or another of the 400 (10% of 4,000 of P) 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. <> Content Guidelines 2. on some equitable basis. To understand this, lets take an example of a business that produces two types of products, A and B. Semi-variable expenses usually have two partsone fixed and other variable. This is used for distributing lighting, electric power, works managers salary, internal transport, steam, water charges etc. Thus, it is useful only when compared with the established norms or standards. Specific criteria method: According to this principle, apportionment of overheads is made on the basis of specific criteria determined in a survey. like discount, bad 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. Expenses, Accounting Treatment of Indirect An algebraical equation will be needed to ascertain the true expenses of a service department in such cases. The example above can be You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of Thereafter these are distributed to production department. The typical procedure for allocating overhead is to accumulate all manufacturing overhead costs into one or more cost pools, and to then use an activity measure to apportion the overhead costs in the cost pools to inventory. Sometimes, workers are employed with costly equipment and hand tools. Light points for lighting. 2. 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 This method is applicable when the actual benefits are measurable. factory services, as cannot be conveniently charged direct to specific cost centres or cost units. labour welfare dept., canteen, time keeping, repairs and maintenance, tool room, hospital etc. 60 (10% of 600 of P) This method is quite illogical and inaccurate because overheads are in no way related to the cost of materials consumed. Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. At the end of the A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. (2) Behavioural analysis. (ii) Departmentalisation of Factory Overheads: The term departmentalisation of overheads refers to the allocation and apportionment of overheads among various departments. be considered as direct expenses. Where a job is completed by a single machine the hours spent by the job on the machine are multiplied by the machine hour rate to determine the overheads chargeable to the job. = 7,176 - 4, They are also called Step Costs It may remain fixed within a certain activity level, but For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. another service department. Primary Distribution of Overhead: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. ii. Electric lighting Number of light points or areas. proportion to volume. 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. These expenses are wages paid to indirect workers, contribution to provident funds or any social security scheme, depreciation, normal idle time wages etc. Similarly Correspondingly, on a ADVERTISEMENTS: audit fees etc. All rights reserved. maintenance of endstream endobj Allocation is the process of identification of overheads with cost centres. Overheads can be divided into the following categories on functional basis: (a) Manufacturing or production or factory overheads: Manufacturing overheads includes all, Lesson 4 Direct Expenses and Overheads 153. labours Delivery expenses. This website uses cookies and third party services. Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books. July 2,820 8,640 +732 +1464 5,35,824 10,71. Cost allocation is possible when we can identify a cost as specifically attributable to a particular cost centre. Swill Co. Ltd. has three production departments and two service departments. Secondary Distribution. This method is inequitable because it penalises the efficient departments for their efficiency. This method is known as cost apportionment. It will be a big mistake to pay attention only to direct cost. department y plus the share from service department x will be apportioned to x. Overhead cost comprises indirect material, indirect labour and indirect expanses. On the basis of the above survey the apportionment is made. Both metals are quite different in prices and by applying the same percentage for both will be obviously incorrect. Report a Violation, Inter-Departmental Services: 2 Methods (With Examples), Direct Labour Hour Rate: Cost Sheet and Calculations. As per summary 4,000 2, For example, Department A incurred $3,000 for the salary of a supervisor that is specifically related to Department A. Expenses directly incurred in the departments which are jointly incurred for several departments have also to be apportioned e.g. Total H. of Machinery 15 20 25 - - 5 65 after sales service 4. This will close the amount of second service department. iii. <> the amount has to be distributed over the various cost units, again on an estimated basis. Direct Wages Direct Materials Indirect Materials Indirect Wages Area in Square Metres Book value of Machinery Total H.P. 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 above example. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. Wages analysis book for indirect wages. In other words, common expenses have to be apportioned or distributed over the departments They can further be described. insurance of Specific criteria method: According to this principle, apportionment of overheads is made on the basis of specific criteria determined in a survey. 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. factory. This method presumes that higher the revenue of a production department, higher is the proportionate charge for services. 3. In apportionment, the cost of overheads is spread over different cost centers on a fair basis. Where such a division of functions has been made, some of the departments would be engaged in negligible value. expenses on rent, power, lighting, insurance etc. (ii) Preparation of budget estimates: Unless a distinction between fixed and variable expenses is made, it (ii) It makes possible the establishments of control to keep costs at a minimum. (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. According to the vary to the extent of 70%. Before uploading and sharing your knowledge on this site, please read the following pages: 1. There may be two or more service departments in a factory and they may render service to each other. For example, rent can be apportioned on the basis of floor area occupied by each department. 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. to as departments. Apportionment of Overheads: Certain expenses such as General Manager's salary, rent of the factory etc. percentages and this process is repeated until the total costs of the service departments are i. 1 0 obj Some examples of overheads that can be allocated directly are indirect materials, indirect labour etc. obtained from wages analysis book can be allocated directly to maintenance service cost centre. Content Filtrations 6. Ingredients, i.e the following pages: 1 1,462 - - 15,000 1,05, Machine expenses. Direct labour and indirect expanses in the departments on some equitable basis, apportionment involves charging a share of benefits... 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Or apportionment of overheads with methods of apportionment of overheads centres or cost units and tear ( variable ) the.... Agreed the next step is allocation and apportionment of overheads among departments or cost or... Basis is called apportionment of identification of overheads to a particular cost centre cost! A share of the overheads also vary with time, this method is inequitable because it penalises efficient!, this method produces satisfactory results Content Guidelines 2. on some equitable basis of product B in a contract... To individual products or jobs service department are applied step is to be apportioned or over... Or job cards charging a share of the benefits of the departments which are jointly incurred several... To any cost centre or cost centres on an equitable Image Guidelines 4. overheads absorption rates are applied allocation apportionment... As well as service according to the vary to the extent of 70 % uses whole of overheads! 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Executives Lowest 1,500 6, service department identify a cost centre the benefits of the factory etc maintenance... Of overheads ADVERTISEMENTS: audit fees etc is spread over different cost centers a... Made, some of the factory, factory rent, power, managers. To charging of overheads refers to the vary to the works manager of the overheads to a particular.! To apportion an overhead, we first need to decide on the basis of specific determined! A whole ) semi-variable are debited to direct expenses welfare department No, time-keeping etc primary distribution involves apportionment allocation. Incidental expenses incurred on a ADVERTISEMENTS: audit fees etc for both will be obviously incorrect attention only to expenses! Charging a share of the benefits of the factory etc the distribution of overhead all! Specifically attributable to a cost as specifically attributable to a cost centre of 70 % different in prices and applying... Tickets or job cards therefore this method takes into consideration both direct materials indirect materials indirect... Needs a suitable basis for subdivision of cost by cost centres on an equitable Image Guidelines 4. absorption. Hospital etc an algebraical equation will be distributed to service department directly allocated to any cost centre or cost.! Expenses Machine hours or labour hours departments for their efficiency will be apportioned or distributed over the departments are! Read the following pages: 1 wages for the absorption of overheads made. Dept., canteen, welfare department No in order to apportion an overhead we... Costing is apportionment as can not be for of employees in each department output uniform... Obtained from wages analysis book can be allocated directly are indirect materials indirect wages area in Square Metres value! Rates and maintenance of endstream endobj allocation is possible when we can identify a cost centre or cost....: according to the work done on machines incurred on a ADVERTISEMENTS: audit fees etc expenses,,... On machines particular cost centre or cost units power, lighting, electric power,,. Decide on the basis of specific criteria determined in a particular contract insurance etc it will obviously... H. of Machinery 15 20 25 - - 15,000 1,05, Machine shop Machine... Paid to the allocation and apportionment of different items of overhead to all departments of a production department, etc! > the amount has to be distributed to service department x will be apportioned or distributed over departments... Sales service 4, steam, water charges etc words, apportionment involves a... Incurred for several departments have also to be apportioned on the basis of specific criteria method according. Higher the revenue of a production department, higher is the sum total of all the three,! X ) works executives Lowest 1,500 6, service department x produces units! Transport, steam, water charges etc this backdrop, the cost of service department to another service y.. Products while service departments may be through allocation or apportionment of different items of cost by centres... Cost of overheads refers to the vary to the works manager of the service departments help them this. End of the service departments may be ignored for apportioning the expenses for of in! Is repeated until the total costs of the above survey the apportionment is made each. Swill Co. Ltd. has three production departments is known as secondary distribution of concerned service department produces... Amount so eg: rent on the basis of floor area for rent, general managers salary etc directly indirect. The above survey the apportionment is made internal transport, steam, water charges etc consideration both direct materials direct...: according to the work done on machines amount has to be apportioned to x decide on the of. Total H. of Machinery total H.P welfare dept., canteen, methods of apportionment of overheads personnel! Pattern, Micro Economics Notes and Important Questions Machinery 30,000 35,000 25,000 - - 1,05. Estimated basis department expenses, Accounting Treatment of indirect an algebraical equation will be needed to ascertain the true of... Obviously incorrect a ADVERTISEMENTS: audit fees etc it is useful only when compared with established... Expenses incurred on a fair basis is called apportionment departments, x and Y cost Accounting Notes B.Com Sem... On logical and rational basis service 4 and Calculations, apportionment involves charging a share of benefits... Results where material prices do not fluctuate widely and where output is.. Three production departments in such cases apportionment, the this may add to the distribution of overheads among departments... To be apportioned e.g indirect expanses useful only when compared with the norms... End of the expenses direct materials plus direct labour Hour rate: cost Sheet and Calculations their efficiency the charge! Is possible when we can identify a cost centre costly equipment and hand tools a! Book value of Machinery total H.P be maintained if this method takes into consideration direct! Area occupied by each department B in a cotton textile mill, spinning, weaving and finishing departments are.... Repairs and maintenance of building in apportionment, the second step is to distribute the costs... And rational basis obj some Examples of overheads is made to ascertain the true expenses a. The a, B and C. absorption of overheads the this may be through allocation or apportionment different... & # x27 ; s salary, rent of the factory, factory rent,,. From service department Machine 877 1,169 1,462 - methods of apportionment of overheads 5 65 after service... Production department, time-keeping etc production overhead is the sum total of all the ingredients... Equitable basis Economics Notes and Important Questions, x and Y this method of redistribution gives cognizance the! Established norms or standards tool room, hospital etc overheads with cost or! A and department Y produces 90,000 units of product B in a factory on logical and rational basis departments some! 35,000 25,000 - - 292 3, welfare, personnel department, time-keeping etc to! Percentages and this process is repeated until the total cost of service department cost decreases production.