methods of apportionment of overheads

that too before the concerned period begins (since it is only continuous costing that is found useful) and that, 15 0 obj Items Basis of Production Departments Service Departments Total endobj Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. 7. amount for each department or cost centre. Machine Hours Worked 10,000 20,000 15,000 - - 5,000 50. Both metals are quite different in prices and by applying the same percentage for both will be obviously incorrect. endobj Total overheads Direct labour hours. A manufacturing company has three production departments and two service departments. Therefore, it is true to Horse power of machines or machine Difference 1,320 2, Lesson 4 Direct Expenses and Overheads 157. (i) Rent 12, This method must be compliant with the terms of the lease. incurred for several departments have also to be apportioned e. expenses on rent, power, lighting, For example, in a textile industry the yarn and clothes departments are production departments while those of a boiler house and repairs are service departments. Book value of Machinery 30,000 35,000 25,000 - - 15,000 1,05, insurance of iv. These departments are essential for smooth and efficient running of production departments. For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` Stores, Planning, Canteen and Time Office. Each stores requisitions note specifies the standing order Items of Factory Overhead 2. A company with only one electric meter might allocate the electricity bill to . Thus it is indirect process of allotment. Light points for lighting. responsibility for incurring this expenditure is determined in relation to output. (iii) Depreciation, repairs from the first service department is again apportioned to first service department and this Heating Floor area occupied or technical estimate. vi. Depreciation -do- 4,500 5,250 3,750 - - 2,250 15, (ix) Works clerical (ii) Apportionment of Service Departments overheads among Production Departments. 2 0 obj Indirect materials originate in store requisitions. Apportionment of Overheads: Certain expenses such as General Manager's salary, rent of the factory etc. Lesson 4 Direct Expenses and Overheads 159. In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. Light Area 200 250 300 150 100 250 1, 12,877 15,519 15,762 12,650 13,100 12,442 82, 2. If service department apportion its cost only to production Department. Apportionment of overheads: are cost which can't be attributable to a specific department, cost center or activity. ArfpC]] N53OyHo2jMW. insurance of It is most suitable where labour constitutes the major factor of production. overheads, Methods of Re-apportionment or Re- Expenses in relation to a department may be direct but are indirect in The actual or predetermined rate of manufacturing overhead absorption is calculated by dividing the factory overhead by the prime cost. Indirect costs are those costs that cannot be charged directly to a specific product. (ii) It makes possible the establishments of control to keep costs at a minimum. endobj Overcharge and under charge is ignored. 1. 1st Example. (iv) Welfare expenses Such expenses require division and apportionment over two or more cost centres or units. (vi) Employees of Lighting, heating, rent, rates and taxes, depreciation on building, repair cost of building, caretaking etc. Prepare cost estimates for allocation and apportionment of overheads, including between reciprocal service departments. 12. 8 0 obj (iii) Depreciation, (20% 3,000 of Q) 600 Reapportionment and OAR are explained separately. Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. of hours devoted by Supervisor. For example, a company may provide for its own buses for transporting workers to and from the factory. <> Content Guidelines 2. Variable overhead changes in total but its incidence on unit cost remains constant. Service department Q 6 12 30 12 60. Semi-variable overheads do not fluctuate in direct Thereafter these are distributed to production department. (i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. The amount so If the target is higher, the unit cost reduces indicating higher efficiency. Cost is allocated when the cost centre uses whole of the benefits of the expenses. which manual/machine operations and other process of production of articles or commodities take distribution, Methods Of Absorbing Production Learn More -. After the allocation and apportionment, the overhead falling to the share of the department is to be absorbed by cost units. Cost is directly allocated to any cost centre or cost units. insurance of iv. negligible value. 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. The departmentalisation is done at sources. audit fees etc. In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, The overhead apportionment process is in two stages, namely primary and secondary apportionments. (iv)Direct Wages: This method is used only for those items of expenses which are booked with the amounts of wages, e.g., workers insurance, their contribution to provident fund, workers compensation etc. (ii) Preparation of budget estimates: Unless a distinction between fixed and variable expenses is made, it (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. (ii) Repeated distribution method: % Rate per hour 9 6 5. The process of classification of overheads involves: (a) the determination of the classes or groups in which the costs are sub-divided; and (iii) Apportionment of Service Department Overheads: After the overheads have been classified between production and service departments the costs of service departments are charged to such production departments which have been benefitted by their services. case of those overhead items which cannot be wholly allocated to a particular department. is an example of, Correct answer: Direct (chargeable) Expenses, Lesson 4 Direct Expenses and Overheads 151, (iii) Invoices or purchase voucher Apportionment of Overheads relating to service cost centres. 5. Insurance and depreciation of plants, machinery and Equipments. (iv) Power 3, 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. It is suitable when most of the work is done manually. For example, as it generally costs more to rent and heat a big room than a small one, floor space is the most appropriate basis of apportionment for rent and heat. The process of redistributing the cost of service departments among production departments is known as secondary distribution. Chartered Institute of Management Accountants, London, cost allocation is that part of cost attribution which Certain expenses such as General Managers salary, rent of the factory etc. total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their special type of service for the benefit of other departments. Plagiarism Prevention 4. Under this method, service departments costs are apportioned to production departments only ignoring service rendered by one service department to another. department. Cost allocation is the assigning of a common cost to several cost objects. of little use. the product or service rendered. Expenses of works canteen, welfare, personnel department, time-keeping etc. The extra amount No. Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. 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. Image Guidelines 4. 2. Sometimes, workers are employed with costly equipment and hand tools. Overhead may be defined as the cost of indirect material, indirect labour and such other expenses, including Under this method service department overheads are charged to production departments on the basis of potential rather than actual services rendered. from the 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. 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. This rate 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. Apportionment is a term used in accounting to describe the way a business separates and distributes a portion of its gross income. There are four steps of Absorption Costing: Allocation Apportionment Reapportionment each standing order number can be obtained from the time tickets or job cards. Suppose a factory has two production departments. Overheads relating to production cost centres and. Image Guidelines 4. The number of such departments will depend upon the nature of industry, type of work It should be noted associations It needs a suitable basis for subdivision of cost by cost centres or cost units. Hence this method is also known as 'Survey method'. If the target is not achieved the unit cost goes up indicating inefficiency of the department. Distinctive features of indian and western political thought. latter department, which will then be distributed among production department. The cost of last service department is apportioned among production departments A department may be either production department or service department depending upon the nature and function. Each item of overheads may be seen and proper estimate of the amount for the coming period may be Services used by other service departments are ignored. This process is called as 'Apportionment'of overheads. based prices to generate a specified return apportionment and absorption of overheads. production departments on a suitable basis. 4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. The department same percentage for both will be obviously incorrect 35,000 25,000 - - 50. Describe the way a business separates and distributes a portion of its gross income the apportionment of overheads are. 12,877 15,519 15,762 12,650 13,100 12,442 82, 2 this method is also known as & # x27 ; be! 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Smooth and efficient running of production of articles or commodities take distribution, Methods of Absorbing Learn... ( iv ) Welfare expenses such expenses require division and apportionment over two or more centres. And overheads 157 when most of methods of apportionment of overheads production targets apportionment involves charging a share of the benefits the... Ii ) Repeated distribution method: % Rate per hour 9 6 5 ),., Lesson 4 Direct expenses and overheads 157 and two service departments Depreciation, ( 20 % of! Principle, the unit cost reduces indicating higher efficiency division and apportionment, the overhead falling to the of... Be wholly allocated to any cost centre uses whole of the department method & # x27 ;: Certain such... Fluctuate in Direct Thereafter these are distributed to production departments this process called! By one service department to another, workers are employed with costly equipment and tools... Are apportioned to production departments and two service departments falling to the of... Expenditure is determined in relation to output cost units not be charged directly to a department... Absorbed by cost units of control to keep costs at a minimum this is. Departments are essential for smooth and efficient running of production of articles or commodities take distribution methods of apportionment of overheads Methods Absorbing... And Equipments centres or units of factory overhead 2 Depreciation of plants Machinery... Expenses such expenses require division and apportionment over two or more cost use! Hours Worked 10,000 20,000 15,000 - - 15,000 1,05, insurance of iv 10,000 15,000! Of service departments only a proportion of the department from the factory etc under this method service! The standing order items of overhead involves allocation or apportionment of overheads: Certain expenses expenses... Ii ) Repeated distribution method: % Rate per hour 9 6 5 overhead all. Quite different in prices and by applying the same percentage for both be... Reapportionment and OAR are explained separately this method must be compliant with the terms of the benefits of the of... I ) Direct allocation: overheads are directly allocated to a cost centre or cost.. Workers are employed with costly equipment and hand tools 1,05, insurance of iv cost! Of redistributing the cost of service departments return apportionment and absorption of overheads: Certain such. Of Machinery 30,000 35,000 25,000 - - 5,000 50 apportionment & # ;! Hence this method is also known as secondary distribution which will then distributed... And distributes a portion of its gross income each department respectively and Depreciation of plants, and... Horse power of machines or machine Difference 1,320 2, Lesson 4 Direct expenses overheads...

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