When service department is giving its services to other service departments and production departments then following method are used. iii. equipments. appropriate word: Royalties payable on use of Patents, Copyrights etc. These three are meant for collection of indirect expenses including depreciation of plant and machinery. or losses would decrease because of additional units sold. Distribution of factory overheads involves three stages: (i) Collection and classification of factory overheads. (iii) Ascertainment of cost of different departments helps in computing the cost of different jobs or This is used for distributing lighting, electric power, works managers salary, internal transport, steam, water charges etc. CIMA, London defines overhead as Expenditure on labour, materials or services which can not be (iv) Salesmans commission if it is based on the value of units sold. and cleaning of Because 2 nd method is same as the concept of 3 rd method. According to the Wages paid to workers against Primary distribution of overhead involves allocation or apportionment of different items of overhead to all Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. As per summary 4,000 2, 7 0 obj No. Light Area 200 250 300 150 100 250 1, 12,877 15,519 15,762 12,650 13,100 12,442 82, It is to be carefully noted that at the time of making . xii. An analytical study thus can make it possible for all semi-variable Image Guidelines 5. production departments on the basis of given percentages. Copyright 10. (2) Behavioural analysis. Lesson 4 Direct Expenses and Overheads 163. staff units. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. (iv) Sundry For instance, some semi-variable expenses may have 20% variability while others may <> (iii) The overhead rate for the year may be determined on the basis of normal volume of output or Machinery 300 350 250 - - 150 1, As per summary 7,810 12,543 4,547 4,000 2. Various bases to absorb overheads have been developed. When labour forms the predominant part of the total cost. = 7,176 - (2,088 x 2) The process of redistribution of the cost of service departments among the production departments is known as secondary distribution. Overhead may be defined as the cost of indirect material, indirect labour and such other expenses, including 27. Expenses such as depreciation and other y = 2x + 3,000 where, endobj Floor area occupied by each department. The following basis are most commonly used for apportioning items of overhead expenses among production and service departments. Allocation is the charging of overheads directly to one cost center i.e., a department, a production or service location. Apportionment is done in An expense which is directly identifiable with a specific cost centre is allocated to that centre. (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. 1. When it is difficult to select a suitable basis in other methods, this method is adopted. Apportionment of overheads: are cost which can't be attributable to a specific department, cost center or activity. 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. ascertained first with the help of simultaneous equations. (viii)Light Points: This is used for apportioning lighting expenses. Items Basis of Production Departments Service Departments Total Floor area For rent, rates and maintenance of building. The incidence of fixed overhead would not possible to prepare a flexible budget in a given period on the basis of different levels of activity. This rate is determined by dividing the overhead expenses by the total number of direct labour hours. building, insurance of building, plant etc. Distinctive features of indian and western political thought. v. The estimated hours forming the base for calculation should often be compared with the actual hours worked and necessary adjustments affected. methods: (i) Graphical Presentation Method: Under this method, a good number of observations in respect of the endobj Material prices are often subject to considerable fluctuations which are not accompanied by similar changes in overheads. 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. Methods for secondary apportionment of service overhead When service department is giving its services to other service departments and production departments then following method are used Repeated Distribution Method Simultaneous Equation Method When there are only two service departments Direct Method Step Method REPEATED DISTRIBUTION METHOD <> These overhead costs are partly fixed and partly variable. is an example of, Correct answer: Direct (chargeable) Expenses, Lesson 4 Direct Expenses and Overheads 151, (iii) Invoices or purchase voucher When workers are paid on a piece basis, this method will not give satisfactory results because the time factor is ignored. AccountingNotes.net. 12 0 obj (4,612) (3,061). 4. Indirect expense can come from several sources such as cash book, factory journals or vouchers. In such case it will be a partly producing department. Under this method, costs of one service department are apportioned to other service departments and production departments on agreed percentages and this process is repeated till the figures of service departments are too small to be reckoned for further apportionment. 3. Variable 8, (ii) Subscription to x. Lubricant Oil, cotton waste and consumable stores Machine hour worked in time period or size of machines. distribution, Methods Of Absorbing Production distribution the distinction between production departments and service departments disregarded since it is This criterion has the greatest applicability in cases where overheads costs can be easily and directly traced to departments receiving the benefits, e.g., in case of a machine shop, a record of services utilised by each department can be kept by maintaining proper job cards. apportioned to x will continue to be repeated till amount involved becomes negligible. U.G. segments called departments or cost centres to which expenses are charged. Cost apportionment is the allotment of proportions of items to cost centres or cost units on an equitable basis. iii. An. (iv) Stop the process at the point where it is felt that the remaining figure of service department to be redistributed is too small for further distribution. production in the current year. Production Departments manufacture products while service departments help them in this process. Thus, the overhead allocation formula is: Cost pool Total activity measure = Overhead allocation per unit (iii) Depreciation, 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. 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. iii. department, power department, tools department, stores department, cost department, cash department, etc. For example, a textile mill may apportion its overheads between superfine quality and controlled quality of cloth on this basis. anticipated volume of production or activity. (iii) No. hour 2,765 5,530 4,147 - - (-)12,442 -, Apportionment of Direct legal charges 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. Indirect expenses or total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their Under this method the cost of most serviceable department is first apportioned to other service departments and production departments. Expenses of wage department. For the efficient working, a factory is divided into a number of sub-divisions. Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. control. This is also known as departmentalization of overheads. Estimated or actual time spent. i. Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. stream (ii) Departmentalisation of factory overheads. Wages analysis book for indirect wages. Now, on what basis should the overheads be charged to each department? Insurance on tools and fixtures, power, repairs and maintenance cost etc. Rate Per Unit of Output This is the simplest method of overhead absorption. like canteen, This method ignores the importance of time factor so that two jobs using the same raw materials would work done by skilled and unskilled workers. Image Guidelines 4. While making primary raw materials from the time of its purchase till its conversion into finished goods and sale. apportioned to production departments, without taking into consideration any service from one Sometimes, the basis will be the Ability to pay method, i.e., ability of the department to bear such share of items of overheads. capacity of the business. Report a Violation, Inter-Departmental Services: 2 Methods (With Examples), Direct Labour Hour Rate: Cost Sheet and Calculations. Algebraic approach. 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. endobj Expenses in relation to a department may be direct but are indirect in volume of activity. The following problem will exemplify the method. office, furniture, In the production departments, with the help of manual and or machine operations the raw materials are converted to finished goods. Required fields are marked *. Suitable bases have to be found out for apportioning the items of overhead cost to production and service departments and then for reapportionment of service departments costs to other service and production departments. 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. from the This process of apportionment is also known as departmentalisation of overhead. Apportionment of Office O.H. The distribution of different items of overhead in different departments is attempted on some D, JaSB)Mll;rM-D&^8K0vmY(zPh{R_1BhY]o>*Vz[s_P/\.B}&Oefhw_z 1Co4-Fy ic owZ,"vl7i*!i7|6}:ZT1Xu]~<>&e1QS2EJN ;9{4wc'dnMj[jm9iNi6/`ex7E6\]{v-W[x@XLgLQ[UIFIgj*&ezN:xM It does not require any special accounting records to be kept for its operation. 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. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. The second step of absorption costing is apportionment. Other registers, like, plant and machinery. conditioning, etc. Swill Co. Ltd. has three production departments and two service departments. An algebraical equation will be needed to ascertain the true expenses of a service department in such cases. endobj comparison of (a) the extra amount that would have to be spent if an additional activity is undertaken or an The process through which overheads are absorbed in the cost of the product is called absorption costing. No. indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. <> There are three methods available for dealing with inter service department transfer : (a) Simultaneous equation method: Under this method, the true cost of service departments are Lighting, heating, rent, rates and taxes, depreciation on building, repair cost of building, caretaking etc. endobj Repairs & Maintenance Actual repairs or hours worked by the Machines. Note 3 On the last reapportionment, D's overheads are apportioned on the basis of 75/95 to A and 20/95 to B. (ii) Apply the given percentages to the second service department whose total is made up of primary charges plus amount apportioned from Service Department 1. based prices to generate a specified return factory furniture 6 0 obj Expenses of works canteen, welfare, personnel department, time-keeping etc. Insurance and depreciation of plants, machinery and Equipments. Such expenses require division and apportionment over two or more cost centres or units. The apportionment method and its constant revamping is a true sign of a democracy trying to obtain equal representation for all of its citizens. Examples are: overtime premium of workers engaged in a particular department, power (when separate meters are available), jobbing repairs etc. instance, if the output increases by 5%, the variable expenses also increase by 5%. 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. This method does not distinguish between work done by skilled and unskilled workers, as unskilled workers take more time and thus give rise to more factory expense than skilled workers. Which method of departmental accounting applies to apportionment of expenses? Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books. 13 0 obj This method must be compliant with the terms of the lease. (i) Collection and Classification of Factory Overheads: All factory overheads would be collected and classified under appropriate accounting headings, e.g., factory rent, insurance, lighting, depreciation etc. The indirect nature of overheads means that they need to be shared out among the cost units as fairly and as accurately as possible. 3. except when they are deliberately changed, e. increments granted to staff. Apportionment is the allotment of proportions of items of cost to cost centres or cost units on suitable basis after they are collected under separate standing order numbers. viii. 1st Example. (Laws of Torts LAW 01), Three externally touching/kissing circles (Geometry of Circles by H.C. 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