Content Guidelines 2. For example, rent can be apportioned on the basis of floor area occupied by each department. 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. <> If costly equipment is used, the overhead is high and vice versa in the case of using hand tools. (iii) Expenses on This rate is determined by dividing the overhead expenses by the total number of direct labour hours. The cost of last service department is apportioned among production departments (v)Number of Workers: This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc. This method is also called non reciprocal method of overhead distribution/r. Some examples of overheads are: This is a very brief list but it gives you a basic idea that overheads are not directly linked with the manufacturing of products but without these expenses, the production process is impossible. The process of redistributing the cost of service departments among production departments is known as secondary distribution. may not be solely applicable to factory overheads, (20% 3,000 of Q) 600 Rate of labour turnover or number of employees in each department, Direct labour hours, machine hours number of employees. factory In a hypothetical organisation no expenditure remains unchanged for all time. In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. After completing this chapter, one should be able to : 1. 5 0 obj When there is no variation in the wage rates of pay. for the benefit of other departments. research center. It is suitable when the production is not uniform. (iii) No. 3. output, hence it is more or less uncontrollable. (b) Repeated distribution method: According to this method service department costs are basis. <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> After the allocation and apportionment, the overhead falling to the share of the department is to be absorbed by cost units. *Direct expenses are defined as costs, other than materials or wages, which are incurred for a specific Administrative & Selling & distribution (c) Trial and error method: In this method the cost of one service department is apportioned to Fixed overheads expenses are those which remain fixed in total amount with increases or decreases in Disclaimer 9. Re-apportionment of service department overheads (Secondary Distribution). Apportionment is the method of sharing service charge costs between occupiers in multi-tenanted premises. (iv) Power 3, 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. 10p - 2q = 40,000 .(v) <> Cost is directly allocated to any cost centre or cost units. The cost of another service department plus the share received Your email address will not be published. This process of apportionment is also known as departmentalisation of overhead. The main principle is that if the price available is above the variable or marginal cost, profits would increase distribution the distinction between production departments and service departments disregarded since it is This is also known as departmentalization of overheads. Step method (20% 60 of Q) 12 After this is done, the cost of service department serving the next largest number of department is apportioned. Disclaimer 8. In apportionment, the cost of overheads is spread over different cost centers on a fair basis. comparison of (a) the extra amount that would have to be spent if an additional activity is undertaken or an when these are used for processes. Total H. of Machinery 15 20 25 - - 5 65 (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. <> Service department P 4 5 3 12 An. <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 4 0 R/Group<>/Tabs/S>> = 3. hour 2,765 5,530 4,147 - - (-)12,442 -, Apportionment of Direct 3 0 obj Various bases to absorb overheads have been developed. <> The overhead For example, Department A incurred $3,000 for the salary of a supervisor that is specifically related to Department A. It deals with only proportion of items of cost. Once the overheads are allocated and apportioned into theproduction departments the overheads need to be related to or absorbedinto the units of product. The next service department is taken up and its cost is apportioned and this process goes on till the cost of the last service department is apportioned. For instance in March 2013, the output of the factory is 2,000 units and the expenses are as follows: ` 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. In other words, departmentalisation of overhead means dividing the factory into several 15. Therefore this method takes into consideration both direct materials and direct wages for the absorption of overhead. staff The basis of Apportionment of Overheads. Therefore, it is logical that product cost should bear and equitable share of the cost of service departments. Highest 2,820 8, (i) Direct Allocation: Overheads are directly allocated to various departments on the basis of expenses for each department respectively. You are required to prepare an overhead analysis sheet for the departments showing clearly the basis of Horse power of machines or machine To understand the process of allocation and apportionment of overheads, let us take the example of High-five Limited, a manufacturing company. eg: rent on the basis of floor area. Because 2 nd method is same as the concept of 3 rd method. also be apportioned in part to another service department to arrive at the total expenses incurred on the apportioned over other departments, production as well as service according to the agreed ), Macroeconomics (Olivier Blanchard; Alessia Amighini; Francesco Giavazzi), Fundamentals of Aerodynamics (John David Anderson), Pdf Printing and Workflow (Frank J. Romano), Environmental Pollution and Control (P. Arne Vesilin; Ruth F. Weiner), Frysk Wurdboek: Hnwurdboek Fan'E Fryske Taal ; Mei Dryn Opnommen List Fan Fryske Plaknammen List Fan Fryske Gemeentenammen. Overheads relating to production cost centres and. This method is not suitable if the workers are paid on piece rate basis. cost centres on an equitable basis. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as . Expenses ArfpC]] N53OyHo2jMW. It includes all direct cost except the direct Image Guidelines 5. For example, the salary paid to the works manager of the factory, factory rent, general managers salary etc. of employees or wages of each Following points should be considered for primary distribution of items of overheads: (i) Basis for distribution should be equitable and practicable; (ii) Method adopted for distribution should not be time-consuming; (iii) Overhead expenses should be distributed among different departments on the basis of benefits received by departments; For the purpose of primary distribution, a departmental distribution summary is prepared in the following way: Basis of Apportionment of Factory Overhead: 1. The business incurs expenditure on overheads (like those mentioned above) because it is crucial for the production to take place. 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. Thus it is indirect process of allotment. When it is difficult to select a suitable basis in other methods, this method is adopted. Apportionment of Overhead Cost (Simultaneous) Distribution Method HS Tutorial 34.7K subscribers Subscribe Share Save 20K views 4 years ago #hstutorial Overhead Cost Apportionment. For example, a textile mill may apportion its overheads between superfine quality and controlled quality of cloth on this basis. can be apportioned on this basis. (iii) Actual cost is generally used for comparison with the predetermined figures for the purpose of Unlike materials prices, labour rates do not fluctuate so frequently. (4,612) (3,061). For instance, some semi-variable expenses may have 20% variability while others may <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 8 0 R/Group<>/Tabs/S>> 3. 2. overheads are not associated with individual jobs or products; they represent the cost of the facilities For example, while apportioning salary of foreman, a careful survey is made to know how much time and attention is given by him to different departments. Disclaimer 8. These service departments render service to each other. Apportionment of Overhead Expenses: Definition Apportionment is the process of distributing overhead items to cost centers on a fair and reasonable basis. The method is simple and easy to use as all data required is easily available without keeping any extra records. anticipated volume of production or activity. Suppose the cost of service department X is Rs.4,000 and that of Y is 4,800; an analysis reveals that X department renders 20% of its service to Y and Y renders 30% of its service to X. (i) Rent 12, For the purpose of absorption of overhead to individual jobs, processes or products, case of those overhead items which cannot be wholly allocated to a particular department. 8. to as departments. y = total cost, x = number of units. General expenses Direct Wages or No. 3. <> Insurance and depreciation of plants, machinery and Equipments. A department may be either production department or service department depending upon the nature and function. 22,588 29,434 30,328 - - - 82, Lesson 4 Direct Expenses and Overheads 165, By rearranging 2. 7 0 obj Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. vii. is compared with the amount of expenses incurred at these different periods. The Bengal Wholesale Co. is making a study of the relative profitability of the two products it handles. Thus, the overhead allocation formula is: Cost pool Total activity measure = Overhead allocation per unit J. In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. departments. labour welfare dept., canteen, time keeping, repairs and maintenance, tool room, hospital etc. A companys production for the year ending 30.3 is given below: Items Production Departments Office Stores Work- Total Rent Area 2,000 2,500 3,000 1,500 1,000 2,500 12, This process of apportionment is also known as departmentalisation of overhead. Production departments are those departments where actual process of manufacturing is carried on. Whereas spreading common overheads over different cost centers on a fair basis is called apportionment. endobj For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. Cost allocation is possible when we can identify a cost as specifically attributable to a particular cost centre. In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. of the use of owned assets. 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. Under this method specific criteria are laid down after careful survey for apportionment of charge for different service functions. 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. Commerce Common Syllabus, Odisha Paper Subject Paper Code Full Marks End-term Marks Mid-term Marks Credit Points Semester I 1.1 Environmental Science AECC -1 100 80 20 4 xSKk08 Methods of absorption of factory overheads 5. Group insurance, canteen expenses, E.S. You can take the exam ONLINE in this Covid situation Now! Derived Benefit: According to this principle, the apportionment of common item of overheads should be based on the actual benefit received by the respective cost centers. Insurance Value of The overhead rate of expenses for absorbing them to production For a period, the expenses in the various departments of a factory were as follows: // Wrko Advertisers List, Zivnost Odvody Vypocet, Kelly Ripa Supplements, Articles M