BY- Dr. Kamlesh Khosla M.com, M.A.(Eco.), PH.D PG Diploma in PMIR & PG Diploma in Journalism and Mass Communication
INTRODUCTION
Accounting of Overheads is one of the most important & technical aspect of Cost accounting. From Cost reduction & Cost control point of view, overhead play a great role. So, proper understanding of computation and accounting of overhead is must for Students of commerce.
Meaning of OVERHEADS???
Overheads is the aggregate of indirect materials cost, indirect labour cost and indirect expenses which cannot be conveniently identified with and directly allocated to a particular cost centre or cost object.
Example- Indirect Material Cost Indirect Labour Cost Indirect Expenses
Distribution Of Overheads
Step 1 -> Classification of Overheads Step 2 -> Collection of Overheads Step 3 -> Allocation of Overheads Step 4 -> Apportionment of Overheads Step 5 -> Re-apportionment of service department overheads Step 6 -> Absorption of Overheads
Classification Of Overheads
By Function
Production Overheads Administrative Overheads Selling Overheads Distribution Overheads
By Behaviour
Fixed Overheads Variable Overheads
By Element
Indirect Materials Indirect Labour Indirect Expenses
Collection of Overheads
Collection of overheads means the collection of various items of overheads under suitable account heading and a unique Standing Order Number(S.O.N.) or Cost Account Number(C.A.N.).
Allocation Of Overheads
ITEMS OF OVERHEADS ALLOCATED Direct Materials Direct Wages Direct Expenses Direct Material Indirect Wages TOTAL OVERHEADS ALLOCATED ********* PRODUCTION DEPARTMENTS P1 P2 *********** SERVICE DEPARTMENTS S1 ********** S2 **********
Apportionment of overheads
It is the process of charging the proportion of common items of cost to two or more cost centres on some equitable basis.
PRINCIPLES FOR APPORTIONMENT OF OVERHEADS (a) Actual Benefit (b) Potential Benefit (c) Ability to pay (d) Specific Criteria/Survey method
Basis Of Apportionment
COMMON ITEMS OF PRODUCTION OVERHEADS (a) Factory rent, rates & taxes (b) Insurance of factory building BASIS OF APPORTIONMENT Floor area occupied
(a) Insurance of Plant & Machinery (b) Depreciation of Plant & Machinery
(a) Insurance of Stock (a) Supervision (b) Canteen Staff Welfare Expenses
Wages
Value of direct materials Weight of direct Materials No. of light points or floor area occupied
METHODS
i. ii. iii. On Non Reciprocal Basis/Step ladder method On Reciprocal BasisSimultaneous Equation Method Repeated Distribution Method Trial & Error Method
METHODS 1. Percentage Of Direct Material Cost 2. Percentage of Direct Labour Cost 3. Percentage of Prime Cost 4. Direct Labour Cost 5. Machine Hour Rate 6. Rate Per Unit Of Production
How to calculate??
Percentage of Direct Material Cost
Factory Overhead Rate = Amount of Production overheads/ Direct Cost Material x 100
Continued.
Direct Labour Hour Rate
Factory Overhead Rate = Amount Of Production Overheads/ Direct Labour Hours
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II. MACHINE EXPENSES PER HOUR (a) Depreciation (b) Repair & Maintenance (c) Power (d) Other Running Expenses