#hstutorial Overhead Cost Apportionment. Area in Square Metres 200 250 300 150 100 250 1, Unlike materials prices, labour rates do not fluctuate so frequently. 4. total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their At first expenses of all departments are compiled without making a distinction between production and 7. (viii)Light Points: This is used for apportioning lighting expenses. 2 0 obj The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. The two together make The cost of last service department is apportioned among production departments The relationship between fixed and variable cost can be illustrated on the basis of the goods, godown, etc. of requisitions, quantity or value of materials. Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. building and Office O. Rent Area 2,000 2,500 3,000 1,500 1,000 2,500 12, Marginal Service department P 1,200 1,600 800 4,000 400 increase. only. Direct Materials Actual 2,000 3,000 3,000 1,000 2,000 2,000 13, ii. incurred during the accounting period by the actual quantum (quantity/value) of the base selected. The distribution of different items of overhead in different departments is attempted on some The business also has to recover the cost of these overheads and needs to include them in the cost of the product. <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 4 0 R/Group<>/Tabs/S>> 5 0 obj This can also apply to a company's overheads as a way to calculate the correct costs, especially when the business is spread across different departments, subsidiaries or countries of operation. indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. In the It includes all direct cost except the direct When workers are paid on a piece basis, this method will not give satisfactory results because the time factor is ignored. 60 (10% of 600 of P) 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. both categories, i. producing and service departments. Service department Q (80% of 3,061) 306 612 1, insurance etc. These three are meant for collection of indirect expenses including depreciation of plant and machinery. production departments on the basis of given percentages. groups. <> Under this method, service departments costs are apportioned to production departments only ignoring service rendered by one service department to another. This is called fair allocation of overheads to each department and ultimately to each unit. <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> factory furniture Insurance Value of Plagiarism Prevention 4. Firstly, we can setup the overhead re-apportionment process as a set of equations. Direct Wages Actual 3,000 3,000 4,000 10,000 10,000 5,000 35, 5. logical and reasonable basis. 15. 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. Overhead Control Account and credited to the Wages account. This will relate to how the cost has been incurred. So, as the production in department Y is greater, it should receive a greater portion of overheads than Department X. insurance of Apportionment refers to the distribution of overheads among departments or cost centres on an equitable Such departments render services such as repairs, maintenance, electricity, etc. 2. Departmental overheads for the month of November 2003 are as under: Companys costing books for the year ended 30th June, 2004 furnish the following information: The method given above assumes that service is rendered by say, Repairs and Maintenance department to the Power House but not by the latter to the former. endobj Indirect Materials 2,000 3,000 3,000 1,000 2,000 2,000 13, service departments x and y. Light points for lighting. ii. Swill Co. Ltd. has three production departments and two service departments. This website uses cookies and third party services. So cost apportionment will arise in case of expenses common to more than one cost centre or unit. (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. Terms of Service 7. anticipated volume of production or activity. There are four steps of Absorption Costing: In this article, we are going to discuss Allocation and Apportionment. The apportionment method and its constant revamping is a true sign of a democracy trying to obtain equal representation for all of its citizens. Image Guidelines 4. Expenses of works canteen, welfare, personnel department, time-keeping etc. The overhead rate of expenses for absorbing them to production Separation of semi-variable cost into fixed and variable can be done by applying any of the following 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. % ii. Your email address will not be published. Semi-variable expenses usually have two partsone fixed and other variable. (i) Rent, rates and When only one kind of article is produced. 3. <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 8 0 R/Group<>/Tabs/S>> 1. All This rate is determined by dividing the overhead expenses by the total number of direct labour hours. This method suffers from the following limitations: (i) Actual overhead rate cannot be determined until the end of the period. 12. overheads absorption rates are applied. The example above can be Depreciation Actual depreciation as per Plant Register. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. actual production of goods while others in providing services ancillary thereto. This method is applicable when the actual benefits are measurable. and variable. The following steps are involved in this method: (i) Apply the given percentages to distribute the primary total of first service department. departments of a factory. Expenses, Meaning, Collection and Classification of equipment and (ii) Apportionment of Service Departments overheads among Production Departments. Apportionment of Heating Floor area occupied or technical estimate. When there is no variation in the wage rates of pay. Various bases to absorb overheads have been developed. Privacy Policy 9. (iii)Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses. Under this method, expenses of one service department (generally the one which received the least service and gives the maximum service from and to other service departments) are apportioned to all other departments in the proportion of benefit derived by them; then expenses of the next service department are apportioned to the remaining departments and so on till expenses of all service departments are dealt with. product or salable service.. y = 2x + 3,000 where, It needs a suitable basis for subdivision of cost by cost centres or cost units. Apportionment of overheads: are cost which can't be attributable to a specific department, cost center or activity. factory 12 0 obj From the following information show the distribution of service departments cost under the repeated distribution method: Under this method, the true costs of service department are ascertained first with the help of simultaneous equations. Let: A = the total overhead $ apportioned to department A stream on some equitable basis. 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. The line on the graph will, therefore, be represented by: y = mx + c (iii) Ascertainment of cost of different departments helps in computing the cost of different jobs or Service departments are auxiliary and are those departments which are not directly engaged in production. ii. customer and during a slump or a period of depression, decision on make or buy, shut down or continue etc. insurance of General expenses Direct Wages or No. This process is called as 'Apportionment'of overheads. There are three methods for dealing with the distribution of inter-departmental services: Under this method, the cost of one service department is apportioned to another service department and the cost of another service department plus the share received from first service department is again apportioned to first service department and this process is continued till the balancing figure is negligible. of the use of owned assets. Disclaimer 8. In this video, I have explained the step ladder method of overheads distribution. Primary Distribution and Secondary Distribution. apportionment when necessary. (ii) Subscription to Terms of Service 7. 6. <> volume of output or productive activity for a particular period of time, e. managerial remuneration, rent of that too before the concerned period begins (since it is only continuous costing that is found useful) and that, Indirect labour is obtained in the first place, from the time cards and pay rolls. The number of such departments will depend upon the nature of industry, type of work 4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. Fixed overhead costs remain the same from one period to another (iv) Sundry Simultaneous equation method is used when only there are only two service departments. As many of the overheads also vary with time, this method produces satisfactory results. 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