Overheads

• All indirect expenses are termed as,

• Overheads
• Steps
• Classification
• Allocation
• Apportionment
• Absorption
CLASSIFICATION OF OVERHEADS

FUNCTIONAL CLASSIFICATION –
Production overheads
Administrative overheads
Selling overheads
Distribution overheads
Research and Development overheads
CLASSIFICATION OF OVERHEADS
• VARIABILITY
• Fixed
• Variable
• Semi- variable
• NORMALITY
• Normal overheads
• Abnormal overheads
CLASSIFICATION OF OVERHEADS
• CONTROLLABILITY
• Controllable overheads
• Uncontrollable overheads
PROCEDURE OF LINKING
OVERHEADS TO COST UNITS
• 1 Classification and collection of
overheads
• 2. Allocation and apportionment of
overheads
• 3. Absorption of overheads
ALLOCATION AND
APPORTIONMENT OF
OVERHEADS
• Departments in an organization
are divided into production depts
and service departments
• All overheads are first allocated
and wherever allocation is not
possible, they are apportioned to
the departments on some suitable
basis
ALLOCATION AND
APPORTIONMENT OF
OVERHEADS
• This distribution is called as
Primary Distribution of overheads
• The next step is that the
overheads of service departments
are reapportioned to the
production departments. This is
called as Secondary Distribution of
overheads.
ABSORPTION OF OVERHEADS
• Meaning- Deciding the share of each unit
of the product in the total overheads
• Basis of Absorption –
• Direct Material Cost - Overheads
• ---------------X 100
• Direct Material Cost
ABSORPTION OF OVERHEADS
• Direct Labor Cost - Overheads
• ----------------X 100
• Direct Labor Cost
• Prime Cost - Overheads
• ------------------X 100
• Prime Cost
ABSORPTION OF OVERHEADS
• Direct Labor Hours - Overheads
• -------------------
• Direct Labor Hrs
• Machine Hour Rate
• Production units - Overheads
• -----------------
• No. of units
ABSORPTION OF OVERHEADS
• Selling Price Method
• UNDER/OVER ABSORPTION OF
OVERHEADS
• Reasons
• Treatment – Applying
supplementary Rate
• Carrying forward to future period
Absorption of Overheads
• Writing off to Costing Profit and
Loss A/c
 Types of Overheads Rates
 Blanket Rate
 Multiple Rate
Examples
• A manufacturing company has three
production departments and two service
departments. The following overheads
are incurred in a particular financial
period.
• Rent Rs. 75,000, Electricity Rs. 45,000
• Depreciation Rs. 1,00,000,