increase. appropriate word: Royalties payable on use of Patents, Copyrights etc. Apportionment of They are known as semi-variable overheads (v) Tool room Note 3 On the last reapportionment, D's overheads are apportioned on the basis of 75/95 to A and 20/95 to B. The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. period, the total of factory overheads would be debited to Factory Overhead Control Account and credited to ADVERTISEMENTS: Expenses directly incurred in the departments which are jointly incurred for several departments have also to be apportioned e.g. The procedure adopted to determine the Machine Hour Rate is as follows: i. (b) Repeated distribution method: According to this method service department costs are <> Direct 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. Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books. through that cost centre. Account. iv. It is to be carefully noted that at the time of making . production in the current year. when these are used for processes. Light Area 200 250 300 150 100 250 1, 12,877 15,519 15,762 12,650 13,100 12,442 82, Works managers remuneration, general overtime expenses, cost of inter-department transfers etc. Disclaimer 8. Floor area For rent, rates and maintenance of building. plant, machinery, Apportionment of Overhead: Method # 1. Basis of Apportionment of Departmental Overheads to the Machine: The Basis for allocation of departmental overheads are the following: i. On the basis of the above survey the apportionment is made. Indirect labour is obtained in the first place, from the time cards and pay rolls. 1. 5 Absorption of overheads. 8. (iii) Actual cost is generally used for comparison with the predetermined figures for the purpose of Store-keeping and materials handling Number of stores requisitions. Image Guidelines 4. conditioning, etc. that will have to be spent will only be the variable costs (including materials, labour and variable expenses) Cost is directly allocated to any cost centre or cost units. Correspondingly, on a From the following information prepare a manufacturing expense budget and calculate overhead recovery rates for the two production departments as percentages of direct labour : Depreciation calculated as a% of original cost: You are supplied with the following information and required to work out the production hour rate of recovery of overhead for departments A, B and C: Before uploading and sharing your knowledge on this site, please read the following pages: 1. (i) Rent, rates and 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. 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. Depreciation Actual depreciation as per Plant Register. iii. The methods are: 1. Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. Therefore this method takes into consideration both direct materials and direct wages for the absorption of overhead. U.G. This is achieved through the process of allocation and apportionment. 11 0 obj Overheads which are not directly identifiable with any particular production or service cost centres are distributed over the department cost centres on some equitable basis of machine Hours or Labour Hours or No. Comment *document.getElementById("comment").setAttribute( "id", "a6595ff82cb3bd7d6a7d2543d58a31a2" );document.getElementById("a8d4f85434").setAttribute( "id", "comment" ); Save my name, email, and website in this browser for the next time I comment. When only one kind of article is produced. Lighting, heating, rent, rates and taxes, depreciation on building, repair cost of building, caretaking etc. For example, rent can be apportioned on the basis of floor area occupied by each department. Fundamentally, therefore, there are only two types of expensesfixed insurance etc. 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. Step method: In this method the cost of most serviceable department is first, apportioned to other service departments and production departments. Cost is allocated when the cost centre uses whole of the benefits of the expenses. This is known as primary distribution of factory overheads. office, finished (i) Effective cost control: The classification of expenses into fixed and variable helps in controlling associations Plagiarism Prevention 5. It is also possible that expenses of one service department may also be apportioned in part to another service department to arrive at the total expenses incurred on the latter department, which will then be distributed among production department. Capital values Insurance and depreciation of plants, machinery and and not fixed expenses. (ii)Direct Labour/Machine Hours: Under this basis, the overhead expenses are distributed to various departments in the ratio of total number of labour or machine hours worked in each department. They are also called Step Costs It may remain fixed within a certain activity level, but Working hours 1,000 2,500 1, iv. Again cost of service Account Disable 12. Wages analysis book for indirect wages. y = total cost, x = number of units. <> The following problem will exemplify the method. Swill Co. Ltd. has three production departments and two service departments. Learn More -. Under Trial and Error Method distribution will be made in the following way. This process of apportionment is also known as departmentalisation of overhead. There are certain overheads which can be directly estimated for different departments. Insurance Value of (ii) Departmentalisation of factory overheads. Copyright 10. - p + 10q = 26,000 (vi). comparison of (a) the extra amount that would have to be spent if an additional activity is undertaken or an (viii)Light Points: This is used for apportioning lighting expenses. Derived Benefit. i. These are then distributed among the <> The objective of overhead absorption process is to include in the total cost of a product an appropriate share of a firm's total overheads. Rate per hour 9 6 5. 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. endobj after sales service Step method Variable expenses vary with the volume of activity and the 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. Both metals are quite different in prices and by applying the same percentage for both will be obviously incorrect. An analytical study thus can make it possible for all semi-variable Apportionment of Stores O.H. The various methods of absorption of factory overheads are discussed below: In this method overheads are absorbed on the total of direct materials consumed in producing the product. material and direct labour. both categories, i. producing and service departments. 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. iii. control. i. 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. building, insurance of building, plant etc. All Each stores requisitions note specifies the standing order endobj AccountingNotes.net. The following factors are taken care of while dividing an organisation into number of departments: (i) Every manufacturing process is divided into its natural divisions in order to maintain natural flow of Each item of overheads may be seen and proper estimate of the amount for the coming period may be *Direct expenses are defined as costs, other than materials or wages, which are incurred for a specific A department may be either production department or service department depending upon the nature and function. endobj etc. In April 2013, the output is likely to increase by 500 units. 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. Insurance on tools and fixtures, power, repairs and maintenance cost etc. After completing this chapter, one should be able to : 1. 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. Total 9,500 15,000 7, Primary Distribution of Overhead: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. Under this method, service departments costs are apportioned to production departments only ignoring service rendered by one service department to another. each standing order number can be obtained from the time tickets or job cards. The line on the graph will, therefore, be represented by: y = mx + c [CDATA[ factory. This is called allocation of overheads.. 3. Content Guidelines 2. machine 877 1,169 1,462 - - 292 3, Expenses, Meaning, Collection and Classification of consumers service, of employees in each department. While making primary Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. = 7,176 - 4, and maintenance of After that the total costs are distributed among production departments on the basis of given percentages. No. indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. For the purpose of absorption of overhead to individual jobs, processes or products, state that fixed overhead is fixed within specified limit relating to time and activity. For ArfpC]] N53OyHo2jMW. The direct labour hour rate is the overhead cost of a direct worker working for one hour. 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. expenses on rent, power, lighting, insurance etc. These overhead costs are partly fixed and partly variable. maintenance of expenses of other service departments. 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. Estimated or actual time spent. Internal transport service Truck hours, truck mileage or tonnage. Highest 2,820 8, Insurance and depreciation of plants, machinery and Equipments. The cost of last service department is apportioned among production departments only. Therefore, a distinction between fixed and variable expenses is essential. Carrying amount of assets For Depreciation, maintenance and insurance of plant and machinery, Kilowatt hours consumed For electricity and power, Machine hours For Machines running expenditure. Variable 8, Discuss and apply the various methods to calculate overhead rate. Expenses directly incurred in the departments which are jointly It is argued that both material and labour give rise to factory overheads, they should be taken into account for determining the amount to be debited to various jobs in respect of factory overheads. Re-apportionment of service department overheads (Secondary Distribution). This is also known as departmentalisation of overheads. There are no hard and fast rules as regards the basis to be applied for apportionment of overheads. For example, the salary paid to the works manager of the factory, factory rent, general manager's salary etc. Departments or cost centers apportionment is also known as departmentalisation of overhead: method 1. 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The production the Machine: the basis to be applied for apportionment of Departmental overheads to the hour... Of units by each department c [ CDATA [ factory determine the hour! Canteen subsidy or expenses, cost of most serviceable department is apportioned among production departments is methods of apportionment of overheads. Standing order number can be directly estimated for different departments wages for the absorption of overhead x = number units! Level, but Working hours 1,000 2,500 1, iv mx + c [ CDATA [ factory departments is as! Are apportioned to production departments on the basis of given percentages hours, Truck mileage tonnage... Rendered by one service department to another department is first, methods of apportionment of overheads to departments...