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Overhead costs are the operating costs of a business enterprise which can not
be traced directly to a particular unit of output.
ALLOCATION AND APPORTIONMENT OF OVERHEADS
iv)
Allocation and apportionment overheads among production & service
departments (primary distribution)
v)
Apportionment of service deptt among production deptt (secondary
distribution)
ALLOCATION
Allocation is the process of charging the full amount of overheads costs
to a particular cost centre. This is possible when the nature of expenses
is such that it can be easily identified with a particular cost centre.
APPORTIONMENT
It is the process of splitting up an item of overhead cost and charging it to
the cost centers on an equitable basis.
Number of workers
Direct wages
Capital values
5. General overhead
6. Electric power
7. Lighting expenses
Primary distribution
A co. Ltd has three production deptt A, B and C and two service deptt
D and E. the following figures are extracted from the records of the
company
Rent & rates
Indirect wages
Depreciation of
Machinery
5,000
1,500
10,000
General lighting
Power
Sundry expenses
600
1,500
10,000
Total
20,000
4,000
5,000
6,000
4,000
1,000
Light points
120
20
30
40
20
10
Direct wages
(RS)
10,000
3,000
2,000
3,000
1,500
500
H.P of
machines
150
60
30
50
10
Value of
machinery
2,50,000
60,000
80,000
1,00,000
5,000
5,000
Apportion the cost to various deptt on most equitable basis and [prepare
overhead distribution summary.
Apportionment to
production deptt only
Non reciprocal
Simultaneous
equations methods
Repeated distribution
method
Reciprocal
Maintenance deptt
Personnel deptt
Purchase deptt
Welfare deptt
No of employees
ABSORPTION OF OVERHEADS
Absorption of factory overheads refers to charging of the factory
overheads of a particular production deptt to various product
manufactured, or jobs completed or orders expected in that
department. It is basically charging of overheads to cost units.
Two steps:
v)
vii)
Rs.4,000
4,000
Rs.2,000
3,000
Rs.1,000
1,000
BASIS
STANDING CHARGES
1. Rent & Rates
3. Supervision
4. Insurance
6. Miscellaneous expenses
BASIS
RUNNING/MACHINE CHARGES
1.
Depreciation
1.
Power
1.
Repairs
Pre-determined Rate
This rate is determined in
advance of the period in which it is to be used. It is
computed by dividing the estimated or budgeted amount
of overheads by the budgeted base.
Example
Pre-determined overhead rate
Actual machine hours
Actual overheads
Overhead absorbed
Under-absorption