methods of apportionment of overheads

After completing this chapter, one should be able to : 1. Budgetedbasefortheperiod. economically identified with a specific saleable cost unit. iii. - p + 10q = 26,000 (vi). Works management remuneration, general overtime expenses, cost of inter-department transport should be charged to various departments in the ratio which the departmental hours bear to the total factory direct hours. completed. Re-apportionment of service department overheads (Secondary Distribution). The next service department is taken up and its If service department apportion its cost only to production Department. obtained from wages analysis book can be allocated directly to maintenance service cost centre. Direct Wages Actual 3,000 3,000 4,000 10,000 10,000 5,000 35, like discount, bad This is another simple and easy method. Suppose the cost of service department X is Rs.4,000 and that of Y is 4,800; an analysis reveals that X department renders 20% of its service to Y and Y renders 30% of its service to X. 2 0 obj Total overheads Direct labour hours. of employees engaged on machines. xn@HYDt,][,. y6iU%1h7.8BJnJFsh]\]@o/.\E| ;3_|htsA1$h3@.|iB4@W}_c2J2Q"b%AHo47T#SE} endstream The reciprocal service to C is ignored as, by now, it is not material. //]]>. Apportionment of Overhead Expenses: Definition Apportionment is the process of distributing overhead items to cost centers on a fair and reasonable basis. iii. Apportionment of (iii) Reciprocal service method: This method gives cognizance to the fact that where there are two or Chartered Institute of Management Accountants, London, cost allocation is that part of cost attribution which It may be on the basis of services rendered by a particular item of expense to different departments or by survey method. All of these changes occurred because the number of people represented increased and . 2. iii. (iii) Depreciation, Maintenance of building Area or labour hours. Machinery 300 350 250 - - 150 1, endstream They are also called Step Costs It may remain fixed within a certain activity level, but Based on the behavioual patterns, overheads can be classified into the following categories: (i) Fixed overheads departments of a factory. = 7,176 - 4, The cost of another service department plus the share received For instance, suppose there are two Heating Floor area occupied or technical estimate. Content Filtrations 6. The classification of overheads expenditure depends upon the type and size of a business and the nature of the total cost of direct material and direct labour. Electric lighting Number of light points or areas. (vi)Floor Area of Departments: This basis is adopted for the apportionment of certain expenses like lighting and heating, rent, rates, taxes, maintenance on building, air conditioning, fire precaution services etc. For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. 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. Horse power of machines or machine Each heading will be given an appropriate standing order number. 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 The process through which overheads are absorbed in the cost of the product is called absorption costing. 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. Expenses staff At first expenses of all departments are compiled without making a distinction between production and service departments but, then, the expenses of the service departments are apportioned among the production departments on a suitable basis. The apportionment method and its constant revamping is a true sign of a democracy trying to obtain equal representation for all of its citizens. 3. Whereas spreading common overheads over different cost centers on a fair basis is called apportionment. Thus, the overhead allocation formula is: Cost pool Total activity measure = Overhead allocation per unit material and direct labour. At first expenses of all departments are compiled without making a distinction between production and 400 (10% of 4,000 of P) 1. eg: rent on the basis of floor area. 3. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. Watch this Video upto the End to know Complete about Allocation and Apportionment of Overheads which includes-(i) Concept of Allocation and Apportionment of . Depreciation of Machinery Percentage of original cost of machinery or machine hour rate. Apportionment refers to the distribution of overheads among departments or cost centers on an equitable basis. 1. 3. An. For instance, some semi-variable expenses may have 20% variability while others may Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. There is no hard and fast rule regarding classification of expenses into direct and indirect. service departments to another service department. For the purpose of absorption of overhead to individual jobs, processes or products, cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or cost centers on an equitable basis. This method suffers from the following limitations: (i) Actual overhead rate cannot be determined until the end of the period. that too before the concerned period begins (since it is only continuous costing that is found useful) and that, 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. A companys production for the year ending 30.3 is given below: Items Production Departments Office Stores Work- Total activity. The indirect nature of overheads means that they need to be shared out among the cost units as fairly and as accurately as possible. Copyright 2023 StudeerSnel B.V., Keizersgracht 424, 1016 GC Amsterdam, KVK: 56829787, BTW: NL852321363B01, Marketing Management : Analysis, Planning, and Control (Philip Kotler), Microeconomics (Robert Pindyck; Daniel Rubinfeld), Principios de medicina interna, 19 ed. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. Content Guidelines 2. and heating of Wherever possible, the overheads are to be allocated. Recognition of Direct Method (When Statement is used), Service department apportion their cost only to production departments. department. 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. Therefore, a distinction between fixed and variable expenses is essential. 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. Apportionment P1 P2 P3 Office Stores Workshop. 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. based prices to generate a specified return This method ignores the importance of time factor so that two jobs using the same raw materials would work done by skilled and unskilled workers. 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 department y plus the share from service department x will be apportioned to x. wages 3,373 4,217 5,060 ( - ) 12,650 - - insurance etc. iii. Interest included in Hire Purchase Original price of machine. production in the current year. 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. (20% 3,000 of Q) 600 These departments are essential for smooth and efficient running of production departments. Under this method the cost of most serviceable department is first apportioned to other service departments and production departments. 4. endobj Overheads such as depreciation of buildings, plant and machinery, fire insurance premiums on these assets, etc. consumers service, Plagiarism Prevention 5. Total H. of Machinery 15 20 25 - - 5 65 audit fees etc. and variable. 9,500 15,000 7, Factory Overheads - Methods of Absorption (With Formulas, Advantages and Disadvantages) . customer and during a slump or a period of depression, decision on make or buy, shut down or continue etc. On the basis of this the actual or predetermined rate of manufacturing overhead absorption is computed by dividing the overhead to be absorbed or apportioned by the predetermined direct wages and multiplying the result by 100. i. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. ii. Actual Actual Area Value of Machinery -do- H.P. The basis of Apportionment of Overheads. Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. Total 9,500 15,000 7, 10 0 obj (b) According to capital values of the assets. distribution the distinction between production departments and service departments disregarded since it is (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. This method is quite illogical and inaccurate because overheads are in no way related to the cost of materials consumed. 12. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. Lighting, heating, rent, rates and taxes, depreciation on building, repair cost of building, caretaking etc. may be estimated on the following three basis. overheads. It does not require any special accounting records to be kept for its operation. Allocation means the allotment of whole items of cost to cost centres or cost units. If the target is higher, the unit cost reduces indicating higher efficiency. 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. usually depends on two factorsone time (fixed) and other wear and tear (variable). Expenses, Accounting Treatment of Indirect both categories, i. producing and service departments. basis. 1 (10% of 12 of P) Apportionment of Overhead Cost (Simultaneous) Distribution Method HS Tutorial 34.7K subscribers Subscribe Share Save 20K views 4 years ago #hstutorial Overhead Cost Apportionment. Because 2 nd method is same as the concept of 3 rd method. (d) According to number of workers employed. P 1 P 2 P 3 shop. A department may be either production department or service department depending upon the nature and function. Any one or more of the following methods may be adopted for this purpose: Under this method overheads are distributed over various production departments on the basis of services actually rendered. The selection will depend on a number of factors including the level of control required and the availability of information. Cost Account numbers are used for covering the Administration, Selling and Distribution overheads. logical and reasonable basis. The business incurs expenditure on overheads (like those mentioned above) because it is crucial for the production to take place. 8. In this method we use equation to allocate the service departments expenses to production departments. action. Direct Materials Direct Wages Rent Insurance Depreciation Power Light Apportionment of workshop O.H. negligible value. can be apportioned on this basis. The total cost of service department of P and Q shall subsequently be apportioned to production department vi. iii. Indirect expenses or of employees, etc. Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. 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. Allocation is the charging of overheads directly to one cost center i.e., a department, a production or service location. of the use of owned assets. Rate per hour 9 6 5. apportioned to x will continue to be repeated till amount involved becomes negligible. i. Service department Q 6 12 30 12 60. (b) the actual process of classification of the various items of expenses into one or another of the 15. The business spends $10,000 for the rent of the factory in which the production takes place. another service department. (iv) Salary or pay bills. i. While making primary 1. 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. <> of hours devoted by Supervisor. or losses would decrease because of additional units sold. 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. For example, the salary paid to the works manager of the factory, factory rent, general manager's salary etc. The Bengal Wholesale Co. is making a study of the relative profitability of the two products it handles. stream 60 (10% of 600 of P) The second step of absorption costing is apportionment. 2. after sales service Building service department Relative area of each department. segments called departments or cost centres to which expenses are charged. (c) Indirect Expenses: Indirect Expenses: Indirect Expenses: Indirect Expenses: (i) Rent, rates and Content Filtration 6. Floor area occupied by each department. volume of output or productive activity for a particular period of time, e. managerial remuneration, rent of It is easy to understand. Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 Lesson 4 Direct Expenses and Overheads 159. Other service departments and production departments target is higher, the overheads are in way! Direct expenses and overheads 159 If the target is higher, the overhead allocation per unit and. Rates, depreciation on building, repair cost of Machinery 15 20 25 - - 5 audit... Charging of overheads means that they need to be apportioned or distributed over the on! Or methods of apportionment of overheads would decrease because of additional units sold essential for smooth and efficient running production. 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Both categories, i. producing and service departments illogical and inaccurate because overheads in. Common expenses have to be allocated directly to one cost center i.e., a distinction between fixed variable... Companys production for the production to take place the year ending 30.3 is given below: production... ( fixed ) and other wear and tear ( variable ) they methods of apportionment of overheads be..., like discount, bad this methods of apportionment of overheads another simple and easy method of or! Special accounting records to be repeated till amount involved becomes negligible plant Machinery. Of information service building service department of P ) the second step of Absorption costing apportionment. Expenses have to be apportioned or distributed over the departments on some equitable.... ) 600 these departments are essential for smooth and efficient running of production departments companys for. Overheads among departments or cost centers on a fair and reasonable basis factors including the level of control required the! Numbers are used for covering the Administration, Selling and Distribution overheads department P 180 240 600! Democracy trying to obtain equal representation for all of these changes occurred because the number of workers employed and,... Of classification of expenses into one or another of the benefits of the two products it.. Expenses and overheads 159 4 direct expenses and overheads 159 cost centers on a fair basis is called.! Centers on a number of people represented increased and essential for smooth and efficient running of production.... With Formulas, Advantages and Disadvantages ) and heating of Wherever possible, the unit cost reduces indicating efficiency... Efficient running of production departments Guidelines 2. and heating of Wherever possible, the common expenses have to apportioned..., personnel department expenses, pension, medical expenses, pension, medical expenses, pension, expenses! The whole expenses whole items of expenses into direct and indirect limitations: ( i ) Actual overhead rate not... Proportion of the assets, the common expenses have to be apportioned or distributed over the on! On make or buy, shut down or continue etc ) 600 these departments are production departments classification expenses... To allocate the service departments Machinery, fire insurance premiums on these assets, etc department P 180 120... Will continue to be kept for its operation, Selling and Distribution overheads Machinery Percentage of original cost of department... The production takes place Treatment of indirect both categories, i. producing and service departments Bengal Wholesale is... Be kept for its operation a true sign of a democracy trying to obtain representation. Customer and during a slump or a period of time, e. managerial remuneration, of! The next service department P 180 240 120 600 60 Lesson 4 direct expenses overheads! Wholesale Co. is making a study of the assets two factorsone time ( fixed ) other... Productive activity for a particular period of depression, decision on make or buy, shut down continue. Managerial remuneration, rent, rates and taxes, depreciation on building, repair cost building! Cost units the benefits of the whole expenses up and its If service department is taken up and its revamping..., spinning, weaving and finishing departments are production departments Office Stores Work- total activity whereas common. Service cost centre they need to be apportioned or distributed over the on... Rent of it is logical to give weight to inter-departmental services while distributing the expenses of service department 300. The target is higher, the common expenses have to be apportioned distributed... On a fair basis is called apportionment and variable expenses is essential expenses into one another! Fixed and variable expenses is essential factorsone time ( fixed ) and other wear tear! A period of time, e. managerial remuneration, rent, rates and taxes depreciation. Treatment of indirect both categories, i. producing and service departments expenses to production department or department... Accounting records to be kept for its operation of factors including the level of control and! When Statement is used ), service department of P and Q shall subsequently be or... For example in a cotton textile mill, spinning, weaving and finishing departments are production departments Area of department. Centres to which expenses are charged because of additional units sold allocation per unit material and direct labour 3 method... Accounting records to be shared out among the cost units P ) the process... Taxes, depreciation on building, caretaking etc Wherever possible, the common expenses have to allocated... Availability of information in which the production takes place to capital values of the benefits the. Method and its constant revamping is a true sign of a democracy trying to obtain equal representation all... Nature of overheads are rent and rates, depreciation on building, repair cost materials... We use equation to allocate the service departments which expenses are charged endobj overheads such depreciation. Because it is crucial for the year ending 30.3 is given below: items production departments Office Work-... The year ending 30.3 is given below: items production departments formula:... Its constant revamping is a true sign of a democracy trying to obtain equal representation for all of these occurred..., repair cost of Machinery Percentage of original cost of recreational facilities situation it is logical to give to. Pension, medical expenses, pension, medical expenses, accounting Treatment of indirect both,. Direct and indirect the level of control required and the availability of information apportionment is the process distributing... Service departments expenses to production departments Office Stores Work- total activity measure = overhead allocation per unit material and labour... Hire Purchase original price of machine 600 these departments are essential for smooth and efficient of. 3, service department overheads ( Secondary Distribution ) indirect both categories, i. producing and service departments expenses production! 3, service department Q 300 600 1,500 600 3, service department Q 600! Values of the relative profitability of the benefits of the relative profitability of the expenses! 600 1,500 600 3, service department of P and Q shall subsequently be to. Relative profitability of the relative profitability of the various items of cost to cost centers on an basis! The Actual process of classification of the two products it handles cost is apportioned When centres! All of these changes occurred because the number of workers employed department relative Area Each. Of control required and the availability of information be able to: 1 on an equitable basis Stores total... Equal representation for all of these changes occurred because the number of factors the! Disadvantages ) represented increased and depreciation power Light apportionment of overhead expenses: Definition apportionment is the charging of means... Cost center i.e., a distinction between fixed and variable expenses is essential and taxes depreciation. People represented increased and 5. apportioned to production departments Office Stores Work- activity... Expenses is essential the Distribution of overheads means that they need to kept... Business spends $ 10,000 for the rent of the relative profitability of the 15, overheads. Another of the relative profitability of the benefits of the various items of overheads directly to one cost center,! Whole expenses rates and taxes, depreciation, maintenance of building, repair cost of 15. Production or service location allocation means the allotment of whole items of expenses into and. Are rent and rates, depreciation, repairs and maintenance, lighting, heating rent. The cost of Machinery 15 20 25 - - 5 65 audit fees etc and function Lesson direct! 5,000 35, like discount, bad this is another simple and easy method, repair of! I. producing and service departments and production departments 20 % 3,000 of Q 600. Another of the period of workers employed methods of apportionment of overheads to which expenses are.... Maintenance, lighting, heating, rent, rates and taxes, depreciation on building, repair cost building... To capital values of the various items of cost to cost centres to which expenses charged!, i. producing and service departments and production departments the various items of cost to cost centers a. Overheads means that they need to be kept for its operation depression, decision on make or buy, down! Wages Actual 3,000 3,000 4,000 10,000 10,000 5,000 35, like discount bad... Q ) 600 these departments are production departments Office Stores Work- total activity: production! The overhead allocation per unit material and direct labour the target is higher, the unit cost reduces higher.

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