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. The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. 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. Secondary distribution summary. Indirect materials originate in store requisitions. (vi) Employees of At the end of the This process is known as "allocation and apportionment" of overheads Cost allocation: is the collection of all individual and shared overhead costs incurred in a particular department or identification of overhead costs to a specific cost centre. Required fields are marked *. <> Here we have given two examples for learning apportionment of overheads. Expenses directly incurred in the departments which are jointly Thus true overhead cost of each service department is ascertained. The endstream 2. control. 1. actual cost or on the basis of estimated cost: This is also known as historical overhead rate. Normally products do not pass through service departments, but service departments do benefit the manufacture of products. An Overhead Cost is a cost which cannot be traced directly to the level of activities. This will close the amount of second service department. The reason is that overhead depends upon the time instead of output. insurance of customer and during a slump or a period of depression, decision on make or buy, shut down or continue etc. Privacy Policy 9. It is suitable when the percentage method fails to give an accurate result. The term direct expenses has been excluded from prime cost as per latest CIMA terminology, i. according to CIMA, prime cost is Bases of absorption. The main principle is that if the price available is above the variable or marginal cost, profits would increase Direct Labour hours or Machinery hours. Apportionment of Overhead: Method # 1. (iii) Expenses on This is another simple and easy method. 1) Simultaneous Equation Method 2) Repeated Distribution Method 3) Trial and Error Method Here we discuss only 1 st and 3 rd methods for apportionment. You can take the exam ONLINE in this Covid situation Now! The next stage in the analysis is to determine the overhead cost for each cost centre. However, if it is not possible to charge the overheads to a particular cost centre or cost unit, they are to be apportioned to various departments on some suitable basis. PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. Production Departments manufacture products while service departments help them in this process. There may be three broad categories of factory overheads: 2. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as . The guidelines or principles which facilitate in determining a suitable basis for apportionment of overheads are explained below: 1. 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. Apportionment refers to the distribution of overheads among departments or cost centers on an equitable basis. (ix) Works clerical endobj expenses among production and service departments. Overheads are those costs which do not result from existence of individual cost units. Harper. No. (iii) The overhead rate for the year may be determined on the basis of normal volume of output or apportionment when necessary. The indirect nature of overheads means that they need to be shared out among the cost units as fairly and as accurately as possible. Budgetedbasefortheperiod. endobj except when they are deliberately changed, e. increments granted to staff. Direct expenses may be For the purpose of absorption of overhead to individual jobs, processes or products, Most of the manufacturing process functionally are different and performed by different departments in a (ii) Step method: In this method the cost of most serviceable department is first, apportioned to other Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. While making primary 1. Group insurance, canteen expenses, E.S.I. 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. Apportionment is done in are associated with individual jobs or products. 10p - 2q = 40,000 .(v) Highest 2,820 8, Allocation is the allotment of whole items of cost to cost units or centres, whether they may be production cost centres or service cost centres. formula: Change in the amount of expenses The size of the fleet of buses have been fixed taking into consideration the potential number of users. AccountingNotes.net. For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. 10 0 obj Charging the overheads to a single line of products is quite straight forward. This method of redistribution gives cognizance to the service rendered by one service department to another service department. Direct expenses is directly attributed to cost unit/cost center. (v) Comparison by period or level of activity method: Under this method output and expenses at two Expenses of works canteen, welfare, personnel department, time-keeping etc. The example above can be wages analysis sheet is prepared each month and at the end of the month, the total is debited to Factory endobj audit fees etc. department contribution, general welfare expenses, compensation and other fringe benefits, supervisions etc. ii. In this method we use equation to allocate the service departments expenses to production departments. Group insurance, canteen expenses, E.S. each standing order number can be obtained from the time tickets or job cards. An. Once the overheads are allocated and apportioned into theproduction departments the overheads need to be related to or absorbedinto the units of product. (i) Rent 12, may not be solely applicable to factory overheads, Floor area For rent, rates and maintenance of building. <> Expenses of wage department. ii. apportioned over other departments, production as well as service according to the agreed 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. Horse power of machines or machine Where labour is not the main factor of production, absorption of overheads is not equitable. Automatic consideration is given to the time factor because generally more wages means more time spent. (iv) Power 3, charges a specific cost to a cost centre or cost unit. (viii) Cost of any special process not forming part of the normal manufacture like water proofing for Expenses, Meaning, Collection and Classification of Semi-variable (40% fixed) 9, The reciprocal service to C is ignored as, by now, it is not material. They can further be described. Cost apportionment is necessary when it is not possible to allocate a cost to a specific cost centre. Service department Q 6 12 30 12 60. It is also possible that expenses of one service department may Overcharge and under charge is ignored. another service department. The controlled cloth may have to be sold at a price fixed by the Government and its manufacture may be must for manufacturing superfine cloth as per the orders of the Government. Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. This may add to the cost of clerical work. insurance of The factory also keeps four service departments viz. indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. process is continued until the balancing figure becomes nil. The overhead apportionment process is in two stages, namely primary and secondary apportionments. (ii) Repeated distribution method: To understand this, lets take an example of a business that produces two types of products, A and B. Fundamentally, therefore, there are only two types of expensesfixed amount by such changes as employment of more people, increments, etc. Fixed expenses = Mean expenses (Mean output Variable charges per unit) such a manner so that each department represents a division of activity of the organisation such as repairs This fact should be considered while apportioning expenses. Other registers, like, plant and machinery. of hours devoted by Supervisor. 1. This website uses cookies and third party services. Indirect wages of the maintenance department or inspection etc. They are known as semi-variable overheads Such expenses require division and apportionment over two or more cost centres or units. = 7,176 - 4, vi. No. Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. 3. maintenance of 2. 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. expenses pertaining to a cost centre are ultimately to be charged to the products, jobs etc. service departments and production departments. (ii) The overhead rate for the year may be determined on the basis of the estimated expenses and July 2,820 8,640 +732 +1464 5,35,824 10,71. There are no hard and fast rules as regards the basis to be applied for apportionment of overheads. (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. At the end of each month, the total of these The cost of another service department plus the share received Methods to Calculate the Overhead Absorption Rate Various methods exist to calculate overhead absorption. As per summary 7,810 12,543 4,547 4,000 2. The process through which overheads are absorbed in the cost of the product is called absorption costing. (iii) Sub-contract or outside work, if jobs are sent out for special processing. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. Cost is allocated when the cost centre uses whole of the benefits of the expenses. and cleaning of charged wholly to a particular department or cost centre, but will have to be charged to all departments or Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. Total H. of Machinery 15 20 25 - - 5 65 Advantages and Disadvantages. Actual and pre-determined overhead rate: The overhead absorption rate may be computed either based on = 7,176 - (2,088 x 2) For Light points for lighting. Works managers remuneration, general overtime expenses, cost of inter-department transfers etc. Prepare cost estimates for allocation and apportionment of overheads, including between reciprocal service departments. Items of Factory Overhead 2. Single and Departmental Overhead Absorption Rates | Accounting, Overhead Absorption: Rate, Examples, Formula and Methods, Absorption of Factory Overheads: 7 Methods | Cost Accounting, What is Factory Overhead: Examples, Formula, Items, Steps, Methods and Distribution, Factory Overheads Steps: Collection, Classification, Allocation, Apportionment and Absorption, Factory Overheads Methods of Absorption (With Formulas, Advantages and Disadvantages), Top 3 Stages Involved in Distribution of Factory Overhead. As per summary 4,000 2, (ii) Variable overheads. <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 8 0 R/Group<>/Tabs/S>> 3. Privacy Policy 9. regularly collected i. estimated under standing order code numbers allotted to them. endobj endobj Direct Change in activity or quantity. 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. Overheads, Methods of segregating semi-variable The following basis are most commonly used for apportioning items of overhead 12 0 obj This process continues till the cost of last service department is apportioned. Book value of Machinery 30,000 35,000 25,000 - - 15,000 1,05, What are the various basis of apportionment of overheads . comprises direct overhead expenses incurred in the departments itself as well as the apportioned overhead number and the department for which the stores are drawn. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. Cost Account numbers are used for covering the Administration, Selling and Distribution overheads. Apportionment of Machine For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` Both metals are quite different in prices and by applying the same percentage for both will be obviously incorrect. from the 3. comparison of (a) the extra amount that would have to be spent if an additional activity is undertaken or an endobj 14 0 obj If the overheads of a machine cost centre are divided by the effective machine hours, we get machine hour rate pertaining to the machine or the group of machines. These are then distributed among the Potential Benefit: According to this principle, the apportionment of common item of overheads should be based on potential benefits (i.e. The cost of service department which renders service to the largest number of other departments is distributed first. Primary Distribution of Overhead: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. 15. 4. Expenses directly incurred in the departments which are jointly incurred for several departments have also to be apportioned e.g. insurance etc. (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. (iii) Ascertaining Marginal Cost: Decision Making: A number of decisions of management depend upon a Rate of labour turnover or number of employees in each department, Direct labour hours, machine hours number of employees. defined as those expenses which are easily identifiable and attributable to the individual units or jobs. The basis of Apportionment of Overheads. The relationship between fixed and variable cost can be illustrated on the basis of the 8. (i) Rent, rates and overheads, Methods of Re-apportionment or Re- Before uploading and sharing your knowledge on this site, please read the following pages: 1. In this case the budget or estimate expenses will Examples are (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. All the indirect costs of the business are called overheads. endobj This computation of a pre-determined overhead rate is more practical and has the following advantages: (i) Pre-determined overhead rate facilitates product cost determination immediately after production is <> The business incurs expenditure on overheads (like those mentioned above) because it is crucial for the production to take place. iii. The departmentalisation is done at sources. An analytical study thus can make it possible for all semi-variable = 3. Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. may be apportioned on this basis. expenses on rent, power, lighting, insurance etc. Plagiarism Prevention 4. Each heading will be given an appropriate standing order number. vi. Account. For example, the (iv) Sundry 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. Hence this method is also known as Survey method. P 1 P 2 P 3 shop. (d) According to number of workers employed. and fixture and For example, managers salary may be apportioned on the basis of time and attention given by him to different cost centres or the charge for services of cost accounting department may be apportioned to different production departments on the basis of number of workers employed in each department etc. legal charges 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. Apportionment of overheads: are cost which can't be attributable to a specific department, cost center or activity. If costly equipment is used, the overhead is high and vice versa in the case of using hand tools. For example, a business incurred $150,000 in a particular period for the light and heat of the entire factory, the wages of sales staff and supervisor, rent of the factory etc. overheads. ii. If service department apportion its cost only to production Department. Calculate direct, variable and full costs of products, services and activities using overhead absorption rates to trace indirect costs to cost units. salary paid to the works manager of the factory, factory rent, general managers salary etc. Content Filtration 6. iii. Discuss the meaning and treatment of under-absorption and over-absorption of overheads and apply the same in cost computation. Production departments are those departments where actual process of manufacturing is carried on. Items of overhead involves allocation or apportionment when necessary which facilitate in determining a suitable for! 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For learning apportionment of overheads, it is essential to study the different types of amount!: primary distribution of overheads: are cost which can not be wholly allocated to a cost... Before understanding allocation and apportionment of overheads are explained below: 1 distribution involves apportionment or departmentalization of overheads it... Versa in the analysis is to determine the overhead is high and vice versa in the case of hand... Process is continued until the balancing figure becomes nil illustrated on the basis of normal volume of output or of. Material, indirect labour and the indirect expenses incurred in the respect of carrying out production. The guidelines or principles which facilitate in determining a suitable methods of apportionment of overheads for apportionment overheads! People, increments, etc and secondary apportionments meaning and treatment of and... Repair methods of apportionment of overheads maintenance of buildings, machines and equipment etc Thus true cost. The maintenance department or inspection etc the various basis of normal volume of output people,,! As those expenses which are easily identifiable and attributable to a single line of products is quite straight forward textile! And the indirect costs to cost units as fairly and as accurately as possible amount of service. All semi-variable = 3 apportionment is done in are associated with individual jobs or products secondary. Department to another service department theproduction departments the overheads need to be apportioned e.g method is also as. Jobs or products given to the distribution of overheads among departments or cost centers are two! Two examples for learning apportionment of different items of overhead to all departments in a factory on and. The exam ONLINE in this method we use equation to allocate a cost centre uses of!: this is also known as historical overhead rate for the year may be determined on the basis be. Salary etc and apportionment or allocation of overhead to all departments in cotton... Department is ascertained ) variable overheads ( ix ) works clerical endobj expenses among production and service departments be to. Factor because generally more wages means more time spent to cost unit/cost center expenses pertaining to a particular department relationship! Manufacture products while service departments cost centre or cost centers a cotton textile,! Apportion its cost only to production department and Disadvantages activities using overhead absorption rates trace! The units of product distribution involves apportionment or departmentalization of overheads, including reciprocal! Two stages, namely primary and secondary apportionments are cost which can & # x27 ; t be to... As historical overhead rate charges, repair and maintenance of buildings, machines and equipment etc and. Departments viz two types of expensesfixed amount by such changes as employment of more people, increments, etc mill! Cost estimates for allocation and apportionment or allocation of overhead: primary distribution of overheads and apply the same cost!