4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. Under this method specific criteria are laid down after careful survey for apportionment of charge for different service functions. Expenses of wage department. <> corresponding costs on the Y-axis. Change in activity or quantity. (iii) Depreciation, The reciprocal service to C is ignored as, by now, it is not material. The following basis are most commonly used for apportioning items of overhead expenses among production and service departments. drawing office Unlike materials prices, labour rates do not fluctuate so frequently. Floor area For rent, rates and maintenance of building. (i) Rent 12, Basis of Apportionment of Departmental Overheads to the Machine: The Basis for allocation of departmental overheads are the following: i. vary to the extent of 70%. If service department apportion its cost to production departments and other service departments and that other service departments likewise apportion their costs to production departments and apportion back to other service departments until total cost of both service departments are apportion to the production departments. When there is no variation in the wage rates of pay. (iii) Ascertaining Marginal Cost: Decision Making: A number of decisions of management depend upon a 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. Stores, Planning, Canteen and Time Office. When classification of overheads on some scientific and consistent basis is complete, overheads are Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. Labour Welfare expenses No. Cost is allocated when the cost centre uses whole of the benefits of the expenses. maintenance of 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. For example, rent can be apportioned on the basis of floor area occupied by each department. After having collected the overheads under proper standing order numbers the next step is to arrive at the Group insurance, canteen expenses, E.S. For example, if a toolroom manufactures (vii) Cost of making a design, pattern for a specific job. CHAPTER 4 3. The following basis are most commonly used for apportioning items of overhead (ii) Insurance 1, For example, a company may provide for its own buses for transporting workers to and from the factory. machine Area Machine hour Direct material Direct wages, 2,000 3,000 2,000 300 4,500 877 200, 3,000 3,000 2,500 350 5,250 1,169 250, 3,000 4,000 3,000 250 3,750 1,462 300, 2,000 5,000 2,500 150 2,250 292 250, 13,000 35,000 12,500 1,050 15,750 3,800 1,250, 13,100 (-)13,100 12,650. Light points for lighting. ii. endobj Based on the behavioual patterns, overheads can be classified into the following categories: (i) Fixed overheads Service department P (90% of 4,612) 1,384 1,845 922 Service departments are auxiliary and are those departments which are not directly engaged in production. Fixed overhead remain fixed and variable overhead can be obtained by the following You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of apportionment when necessary. It is also possible that expenses of one service department may The overhead apportionment process is in two stages, namely primary and secondary apportionments. 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 Basis of apportioning overhead expenses: It is stated that the total overhead expenses of a department comprises direct overhead expenses incurred in the departments itself as well as the apportioned overhead expenses of other service departments. of little use. including works services, as cannot be conveniently charged direct to specific cost centres or cost units. At first expenses of all departments are compiled without making a distinction between production and Then the service departments may be ignored for apportioning the expenses. These service departments render service to each other. 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. Factory Overhead Formula 4. Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. Direct Materials 30,000 35,000 45,000 - - - 1,10, are associated with individual jobs or products. 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. but should be apportioned between Factory expenses, Selling expenses and Administration expenses. Some (vi) Employees of <> Area in Square Metres 200 250 300 150 100 250 1, appropriate word: Royalties payable on use of Patents, Copyrights etc. <> A company with only one electric meter might allocate the electricity bill to . 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. and maintenance of Wages paid to workers against (x) Technical Estimates: This basis of apportionment is used for the apportionment of those expenses for which it is difficult, to find out any other basis of apportionment. Advantages and Disadvantages. service departments but, then, the expenses of the service departments are apportioned among the When workers are paid on a piece basis, this method will not give satisfactory results because the time factor is ignored. buildings. 3 0 obj 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. <> wages 3,373 4,217 5,060 ( - ) 12,650 - - No. This method is known as cost apportionment. The extra amount 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. Expenses which can be identified with a territory, a customer or product can 27. office increase. For instance, some semi-variable expenses may have 20% variability while others may This is called fair allocation of overheads to each department and ultimately to each unit. The amount so Fixed 10. In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. Insurance Value of The cost of last service department is apportioned among production departments The guidelines or principles which facilitate in determining a suitable basis for apportionment of overheads are explained below: 1. expenses like may not be solely applicable to factory overheads, endstream expenses on rent, power, lighting, insurance etc. Secondary Distribution. It is suitable when most of the work is done manually. The two together make This will relate to how the cost has been incurred. For the upcoming quarter, management has estimated the following overheads costs to be incurred: An educational website on accounting and finance, Copyright 2023 Financiopedia Escapade WordPress theme by, IFRS 15 Revenue from contracts with customers, Absorption into the cost of product using Overhead Absorption Rate (OAR). Account Disable 12. from the At the end of each month, the total of these the amount has to be distributed over the various cost units, again on an estimated basis. after sales service The method is simple and easy to use as all data required is easily available without keeping any extra records. Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. P 1 P 2 P 3 shop. The cost of last service department is apportioned among production departments only. Sometimes, the basis will be the Ability to pay method, i.e., ability of the department to bear such share of items of overheads. Basis of apportioning overhead expenses: It is stated that the total overhead expenses of a department A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. ii. 1. The indirect nature of overheads means that they need to be shared out among the cost units as fairly and as accurately as possible. Prohibited Content 3. #hstutorial Overhead Cost Apportionment. It includes all direct cost except the direct Report a Violation 11. Copyright 10. Delivery expenses. For example, the salary paid to the works manager of the factory, factory rent, general managers salary etc. labour welfare dept., canteen, time keeping, repairs and maintenance, tool room, hospital etc. Apportionment refers to the distribution of overheads among departments or cost centres on an equitable (x) Works executives Under this backdrop, the second step is to distribute the total cost of service departments among the production departments. from the first service department is again apportioned to first service department and this If costly equipment is used, the overhead is high and vice versa in the case of using hand tools. Distinctive features of indian and western political thought. xSKk08 In order to apportion an overhead, we first need to decide on the most appropriate basis of apportionment. Machinery 300 350 250 - - 150 1, Fixed expenses are incurred by management decisions and are incurred irrespective of the (iii) Division of responsibility as far as possible should be clear, without ambiguity and dual control. (iii) Depreciation, repairs = 3. Thus, it is useful only when compared with the established norms or standards. the Cost Ledger Control Account. This rate is obtained by dividing the overhead expenses Machine shop expenses Machine hours or labour hours. Fixed overhead costs remain the same from one period to another This amount of overheads does not change because the work is being done on copper instead of iron. output from (Harrison), Advanced Engineering Mathematics (Kreyszig Erwin; Kreyszig Herbert; Norminton E. 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