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Overheads:

Apportionment and
Absorption

07/09/09 Chandrakant@SOM,KIIT University 1


Overhe
admore names
few

•Overhead expenses
•Overhead Cost
•Overhead Charges
•Overhead expenditure
•On cost
•Supplementary costs
•Non-productive costs
•Burden Costs
•Loading Costs
•Indirect Cost
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OVERHEAD

SUM OF INDIRECT MATERIALS,INDIRECT WAGES


AND INDIRECT EXPENSES

Cost of Indirect materials, indirect labour and


such other Expenses including services which
cannot be conveniently charged to specific unit

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Features of
Overhead
Expenses

•OHEs are indirect Costs


•They are common Costs
•They include both escapable and
inescapable costs
•They comprise of cash expenses (rent) and
book expenses (Depreciation)
•They include Both Production &
non- production expenses (AOH &SDOH)
•They both fixed and variable
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CONTOL OF
OVERHEAD

1 CLASSIFICATION

2 CODIFICATION

3 COLLECTION

4 ALLOCATION & APPORTIONMENT TO COST CENTRES

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Function Behavio
al ur

Overhead
Classificati
on
Element Controllabil
s ity

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Collection of Overheads
• Stores Requisition
• Wage Sheets
• Cash Book
• Purchase Orders and Invoices
• Journal Entries
• Other Registers and Records

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Departmentali
zation
1 Process of dividing the factory into
number
of Segments Is called

P1 P2 P3 S1 S1

Prod Departments Service Dept.

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Departmentali
zation
2 Process of allocating and apportioning
POHEs to different departments or
cost centers (Prod & ServiceFactory
)
Overheads

P1 P2 P3 S1 S1

Prod Departments Service Dept.

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Departmentalizati
on
Factory
Overheads
Allocation &
Apportionment

P1 P2 P3 S1 S1

Prod Departments Service Dept.

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Service
Repair
Departments
Maintenance
Department Department Power House

Cante Purchas Fire


en e Protection

Personnel
Tool Room Departme Stores
nt

Boiler Time-
House Keeping Transport

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Distribution
of
Overhead
ALLOCATION APPORTIONMENT

Specific Common
Costs Costs

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Distribution
of
Overhead
ALLOCATION
Allocating whole
amount Of an item
of POHs to the
department for which
The expenditure was
incurred
Specific
Costs

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Distribution
of
Overhead
APPORTIONMENT

Common costs are apportioned


Amongst different departments
or cost centers on some basis
Common
Costs

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Principal Basis of Apportionment Of
Overheads

üFloor Area

üCapital Value Of Assets

üNumber Of Employees

üMachine Hours

üDirect Labour Hours

üLight Points

üKilowatt Hours

üTechnical Analysis

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BASIS FOR APPORTIONMENT

Rent, Rates & Taxes, Lighting & Heating Floor Area


Insurance & depreciation of Building,
Cost of repairs & maintenance of Occupied
Building, Air Conditioning

Insurance & Depreciation on


Capital
Plant & Value
Machinery, maintenance of PM,
Insurance on building, etc

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BASIS FOR APPORTIONMENT

No. Of
Welfare Expenses, time-Keeping Employee
,pay-roll
Office, Canteen, Recreation, s
Supervision

Machine
Repairs & Maintenance of Plant
& Hours
Machinery

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BASIS FOR APPORTIONMENT

Direct Work’s Manager’s Remuneration,


Salary of
Labour Supervisors etc
Hrs

Light Points
Or Electricity Charges
Kilowatt
Hours

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BASIS FOR APPORTIONMENT

Technical Where not possible to apportion on


some
Estimate Bases Technical estimate is made

Horse
Motive Power
Power Expenses

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BASIS FOR APPORTIONMENT

Value or
Weight
of Store Keeping
Materials Expenses

Truck
Mileage
Tonnage
Transport Service
Truck Hours Expenses
No. Of

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PRINCIPLES OF APPORTIONMENT
When Difficult to
Service or select Basis
Benefits Production
received Manager’s Salary
By the (Time spent in Each
department Dept)

Utility or Survey Method


Service
Principle Out put as
the basis
What the Traffic Higher Production
can bear Low Overhead Rate
Basis of Sales Low Production
or Profit High OH Rate

Efficiency
Ability To Pay Principle
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üQuick
Check
Identify the Basis for following
Overheads
Rent üFloor Area
Plant Repairs üValue of Plant
Power üMachine
Depreciation of Hours/HP/VM
Building üValue Of Building
Building Repairs üValue Of Building
Insurance Of Building üFloor Area
Fire Insurance of üValue Of Stock
Stock üNo. Of Light Points
Lighting Expenses üNo. Of Employees
Supervision üKilowatt/Value of
Power Plant
ESI üDirect Wages
Employer’s Cont. to üDirect Wages
PF üNo. Of
Amenities To Staff Employees/Wages

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Secondary Distribution Of
• Service dept. costs are to be
apportioned to the production depts.
or the cost centers where production
is going on.
• This process of apportionment of
overhead is called as ‘Secondary
Distribution’.

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The Need for Cost
Apportionment
First Stage Apportionment
Service department costs are
Service apportioned to operating
Departm departments.
ent Operatin
(Cafeteri g
Service Departm
Departm ent The
ent Operatin Produ
(Account g cts
Service Departm
Departm ent
ent
(Personn
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The Need for Cost
Apportionment
Second Stage Apportionment
Operating department overhead
costs and apportioned service
Service department costs are applied to
Departm products.
ent Operating
(Cafeteri Departme
Service nt
Departm (Machinin The
ent Operating Produ
(Account cts
Departme
Service
nt
Departm
ent
(Personn
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Methods of Re-
apportionment
Problem
Re- Apportioning costs of service
departments to
different production departments
Solutions
Direct Method
Step method
Reciprocal
method
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Direct Method
Interaction
s Service Operatin
between Departm g
service ent Departm
departmen (Cafeteri ent
ts are
ignored
and all
costs are Service Operatin
allocated Departm g
directly ent Departm
to (Custodi ent

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Step Method
Service Operatin
Custodial will Departme g
have a new nt Departm
total to (Cafeteria ent
Apportion
to operating
departments
; its
Service Operatin
own costs
Departme g
plus
nt Departm
those costs
(Custodial ent

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Reciprocal Services
Method
Service Operatin
Departm g
Interdepartm ent Departm
ental (Cafeteri ent
services are
given
full
recognition Service Operatin
rather than Departm g
ent Departm
(Custodi ent
Because of its mathematical
complexity,
the reciprocal method is rarely
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Reciprocal Services Methods

Trial & Error


Method

Repeated
Distribution
Method

Algebraic
Simultaneous
Equation
Method
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Reciprocal Services
Methods
Trial & Error
Method

üCost Of one Service Dept (Say A ) is apportioned


To another Service Dept (Say B) based on
service rendered

üThe cost of another dept (B) plus its share


In the cost of first service department (A)
Is again apportioned to first service department

üThe amount so apportioned to A will again be


apportioned
to the service department B

üThe process continues till amount becomes


negligible
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Reciprocal Services
Methods Repeated
Distribution
Method

1 Distribute the cost of a service Dept . to the


Production
and service department Using the percentage

2 Apportion the cost of 2nd service department


(Aggregate)
to production and other service department as
per % given

3 Use the same procedure with other service


departments
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Reciprocal Services
Methods
Algebraic
Simultaneou
s
Equation •Total Costs of Service
Method Departments are
Expressed in algebraic equation

•Equations are developed on the


basis of
Primary distribution & % of
service rendered to each other

•Total Costs of Service

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Overhead
Absorption
•It is a systematic process of distributing
the
OH, (allocated, apportioned and
reapportioned)
to production department) among the
units
produced by them (by production
department)
OVERHEAD ABSORPTION
RATE

Multiple/plant Each Unit/Division


wise Has Separate Rate
Absorption Rate
Methods Of Overhead
Absorption

% Hourly
Methods Rate
Production Methods
Unit % Direct DL Hour
Materials
Method
Method
% Direct
Rate
Wages Machine
Hour
Methods Of Overhead
Absorption

Production
Unit OHAR=POHEs for the
period
Method
Method
No. Of Units Of

üSuitable when only one product is


produced
or

üSimilar type of products are produced


Methods Of Overhead
Absorption

%
Methods
% Direct
Materials
OHAR=POHEs
Period
For the

Cost of Direct
Materials

Where materials Cost is a major


Component
Methods Of Overhead
Absorption

%
Methods
% Direct
OHAR=POHEs
Period
For the

Wages Direct Wages

üPopular in Labour intensive industry

üNot suitable where labour paid according to


piece rate
Methods Of Overhead
Absorption

%
Methods

% Prime Cost
OHAR=POHEs
Period
For the

Prime Cost

üEnsures Advantages of previous two


methods

üSuffers from their limitations too


Methods Of Overhead
Absorption

Hourly
Rates
Machine
Hour
OHAR= POHEs for the period
No. Of Machine Hours
Rate

üMost Popular Method

üCan be fixed for a Machine or Group Of


Machines
Computing Machine Hour
Rate
Machine Running Standing Expenses
Expenses Or
Or Fixed Expenses
Variable Expenses
Cost Of
Rent & Rates
Cost of
Lighting &
Heating
Power
Supervision
Steam
Insurance
Oil
Cotton Waste
Repairs
Indirect Labour
Maintenance
Consumable
Depreciation
Stores
Lubricants
Over / Under Absorption
• The amount of overhead absorption
in costs is the total amount of the
overhead costs allotted to individual
cost units by application of overhead
rate.
• If the amount absorbed is less than
the amount incurred, the difference
is known as under-absorption and
vice versa.
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