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COST ACCOUNTING

UNIT I

CH.4 - OVERHEADS

INTRODUCTION:

Total Cost includes two types of costs - Direct and Indirect. Direct cost is a specific cost and can be conveniently identified with particular product, job or process. It consists of direct materials, direct labour and direct expenses. Indirect cost is a general cost and cannot be identified to any product, job or process. This cost does not relate to any one specific cost unit or cost centre. It consists of all indirect material, indirect labour and indirect expenses. The total of direct cost is called as “Prime Cost” and total of indirect cost is called “Overheads”. Overhead Costs are also known as ‘non- productive cost’, ‘burden cost’, ‘on cost’, ‘supplementary cost’ etc.

cost’, ‘on cost’, ‘supplementary cost’ etc. As per Cost Accounting Standard – 3 , “Overheads co

As per Cost Accounting Standard 3, “Overheads comprise of indirect materials, indirect employee costs and indirect expenses which are not directly identifiable or allocable to a cost object in an economical feasible way”.

CLASSIFICATION OF OVERHEADS:

The overheads can be classified under different heads. Following are the important criteria of classification of overheads.

(A)

On the basis of Element:

1. Indirect Material

2. Indirect Labour

3. Indirect expenses

(B)

On the basis of Behaviour:

1. Fixed Overheads

2. Variable Overheads

3. Semi-variable Overheads

(C)

On the basis of Functions:

1. 2. 3.
1.
2.
3.

Production Overheads

Administration Overheads

Selling and Distribution Overheads

Administration Overheads Selling and Distribution Overheads DISTRIBUTION OF OVERHEADS Direct costs are charged directly

DISTRIBUTION OF OVERHEADS

Direct costs are charged directly to the cost centres or cost units without any difficulty. But distribution of overheads i.e. indirect costs to cost units is one of the most complex problem of cost accounting. This is because overhead cost cannot be identified with individual cost units.

Steps in Overhead Distribution:

1. Allocation and Apportionment of overheads to production departments and service departments. (i.e. Primary Distribution of Overheads)

2. Re-apportionment of service department costs to production departments. (i.e. Secondary Distribution of Overheads)

3. Absorption of overheads of each production department in cost units.

of overheads of each production department in cost units. S.Y.BBA - SEMESTER III PREPARED BY: ALKA
of overheads of each production department in cost units. S.Y.BBA - SEMESTER III PREPARED BY: ALKA

COST ACCOUNTING

UNIT I

I.

Allocation and Apportionment of Overheads to Production Departments and Service Departments (i.e. Primary Distribution of Overheads):

Allocation :

Allocation of overhead means assigning the whole item of cost to a cost centre or department for which the expenditure was incurred. When the exact amount of overhead incurred in a department is known, the entire amount of expenditure is allotted to that department or cost centre. This process of allotting the whole amount of an item of overhead directly to a department or cost centre is called allocation. For example, the cost of repairs of a machine in a department can wholly be charged to that department. Overheads, which can not be directly allocated, are apportioned.

Apportionment : BASIS OF APPORTIONMENT / DISTRIBUTION OF OVERHEADS TO PRODUCTION AND SERVICE DEPARTMENTS Overhead
Apportionment :
BASIS OF APPORTIONMENT / DISTRIBUTION OF OVERHEADS TO PRODUCTION AND SERVICE
DEPARTMENTS
Overhead Cost
Basis of Apportionment
Canteen Expenses
Number of Employees in each department
Time Keeping Expenses
.
Supervision, Hospital, Recreation Expenses
Labour Welfare Expenses and other Fringe benefits
Contribution to P.F., Employee State Insurance
Direct Wages
Depreciation, Repairs and Maintenance of Machine
Value of Machine
Insurance of Machine
Insurance of Stock
Value of Stock
Rent, Taxes, Repairs, Insurance and Depreciation of
Factory building , Fire Precaution Exp. of building
Floor Area Occupied.
Lighting or Heating Expenses
Number of Light Points
Or Floor Area Occupied.
Power/Steam Consumption
Horse Power of Machine or Machine
hours
Stores Keeping and Material Handling Expense
Weight or Value of Materials
Sundry Expenses/Other Miscellaneous Overheads
Direct Wages or Direct Labour Hours

Indirect expenses which can not be directly allocated or charged to various departments are apportioned. Apportionment refers to the distribution of overhead to more than one department or cost centre on an equitable basis. When the indirect costs are common to different departments or cost centres, they are apportioned to the different departments or cost centres on equitable basis. For example, the general manager’s salary has to be distributed on an equitable basis among various departments.

be distributed on an equitable basis among various departments. S.Y.BBA - SEMESTER III PREPARED BY: ALKA
be distributed on an equitable basis among various departments. S.Y.BBA - SEMESTER III PREPARED BY: ALKA

COST ACCOUNTING

UNIT I

EX.1. 20 Microns Ltd. has four departments: A, B, and C are Production Departments and D is a Service Department. The actual overheads for a period are as follows:

Overheads Rs. Indirect Materials : Department – A 900 Department – B 1,200 Department –
Overheads
Rs.
Indirect Materials :
Department – A
900
Department – B
1,200
Department – C
1,000
Department – D
2,000
Indirect Wages :
Department – A
1,000
Department – B
1,100
Department – C
900
Department – D
1,200
Repairs
: Machine
2,400
Depreciation : Machine
1,800
Light Expenses
1,400
Insurance of Stock
2,000
Employer’s Contribution to P.F.
1,700
Power / Energy
1,500
Supervision Charges
1,800
Fire Precaution Expenses
800
Canteen Expenses
1,500
Rent, Rates and Taxes
4,000
Sundry Expenses
3,400
The following data are also available in respect of four departments.
Basis
Departments
A
B
C
D
Number of Workers
48
32
24
16
Floor Area (Square Feet)
300
220
180
100
Value of Machine
Rs.
48,000
36,000
24,000
12,000
Value of Stock
Rs.
30,000
18,000
12,000
---
Direct Labour Hours
100
120
80
40
Horse Power of Machine
800
500
200
---
Number of Light Points
60
50
20
10
Apportion the above overheads to the various departments on the most equitable basis and
prepare a Statement of Primary Distribution of Overheads.
Answer:
Statement of Primary Distribution of Overheads

Items

Basis

Ratio

Total

 

Department

 

A

B

C

D

Indirect Materials

Allocation

--

5,100

900

1,200

1,000

2,000

Indirect Wages

Allocation

--

4,200

1,000

1,100

900

1,200

Repairs of Machine

Value of

4:3:2:1

2,400

960

720

480

240

Machine

Depreciation of

Value of

4:3:2:1

1,800

720

540

360

180

Machine

Machine

1,800 720 540 360 180 Machine Machine S.Y.BBA - SEMESTER III PREPARED BY: ALKA SHAH PAGE
1,800 720 540 360 180 Machine Machine S.Y.BBA - SEMESTER III PREPARED BY: ALKA SHAH PAGE

COST ACCOUNTING

UNIT I

Light Expenses Light 6:5:2:1 1,400 600 500 200 100 Points Insurance of Stock Value of
Light Expenses
Light
6:5:2:1
1,400
600
500
200
100
Points
Insurance of Stock
Value of
5:3:2
2,000
1,000
600
400
---
Stock
Employer’s
Contribution to P. F.
Direct
5:6:4:2
1,700
500
600
400
200
Wages
Power / Energy
H. P. of
Machine
8:5:2
1,500
800
500
200
---
Supervision Charges
No. of
6:4:3:2
1,800
720
480
360
240
Workers
Fire Precaution Exp.
Floor
15:11:9:
800
300
220
180
100
Area
5
Canteen Expenses
No. of
6:4:3:2
1,500
600
400
300
200
Employee
Rent, Rates & Taxes
Floor
15:11:9:
4,000
1,500
1,100
900
500
Area
5
Sundry Expenses
Direct
5:6:4:2
3,400
1,000
1,200
800
400
Lab.Hours
Total Rs.
31,600
10,600
9,160
6,480
5,360
II.
RE-APPORTIONMENT
OF
SERVICE
DEPARTMENT
COST
TO
PRODUCTION
DEPARTMENTS (SECONDARY DISTRIBUTION OF OVERHEADS)
The primary distribution of overheads apportions all overhead costs to the different departments –
Production and Service Departments – both. Service Departments do not themselves manufacture
anything but it is the Production Departments which are involved in manufacturing. Therefore, it is
necessary that overhead costs of Service Departments should further assign to Production
Departments. The process of re-assignment or re-apportionment of Service Departments overhead
to Production Departments is termed as Secondary Distribution. There are various methods for
secondary distribution of overheads.
various methods for secondary distribution of overheads. (A) METHODS OF RE-APPORTIONMENT OR RE-DISTRIBUTION: The

(A)

METHODS OF RE-APPORTIONMENT OR RE-DISTRIBUTION:

The following are the important methods of re-apportionment of Service Department costs to other Production Departments:

of Service Department costs to other Production Departments: Re-Apportionment to Production Department only: (Direct

Re-Apportionment to Production Department only: (Direct Redistribution Method)

In this method, Service Department costs are directly apportioned to various Production Departments only. This method does not consider the service provided by one Service

Department to another Service Department.

(B) Re-Apportionment to both Production and Service Department:

Following methods take into account the service rendered by one service department to other service department and vice versa in addition to the service rendered to the production department. These inter-departmental services are taken into consideration and are not ignored in redistributing expenses of the service departments.

1. Repeated Distribution Method

2. Trial and Error Method

3. Simultaneous Equation Method

2. Trial and Error Method 3. Simultaneous Equation Method S.Y.BBA - SEMESTER III PREPARED BY: ALKA
2. Trial and Error Method 3. Simultaneous Equation Method S.Y.BBA - SEMESTER III PREPARED BY: ALKA

COST ACCOUNTING

UNIT I

1. Repeated Distribution Method:

Steps for Distribution:

a. The costs of first service department are apportioned to other service department and production department according to the given percentages. This will close the account of first service department.

b. Then apply the given percentage for the apportionment of Second service department costs which includes its own costs plus share of first service department. This closes the account of second service department but re-opened the account of first service department.

c. The same procedure should be followed in case of all other service department. In the process of repeated distribution costs, the costs of each service department will reduce with each process of distribution because each time a substantial amount is charged to the production department. This is continued until the amounts become too small to be further apportioned to the departments.

2.

Under this method, the cost of first service department (S1) is apportioned to another service department (S2) in the given ratio. The cost of another service department (S2) plus its share in the cost of the first service department (S1) is again apportioned to first service department. The amount so apportioned to the first service department (S1) will again be apportioned to the second service department (S2) and this distribution process will continue till the amount to be distributed negligible.

3.

Under this method, the total costs of service departments are expressed in the form of algebraic equations. The equations are to be developed on the basis of the primary distribution overheads and the percentages of service rendered to each other. By solving the equations, total costs of service departments can be obtained. Then these total costs are distributed to production departments applying the percentage given.

to production departments applying the percentage given. Trial and Error Method : Simultaneous Equation Method :

Trial and Error Method :

Simultaneous Equation Method :

EX.2 ABB Ltd. had five department. A, B and C are Production Departments and D (Time Keeping Department) and E (Stores Department) are Service Departments. The actual cost for a period is as follows:

Overheads Rs. Repairs of Factory Building 4,000 Insurance of Machine 3,000 Depreciation of Machine 60,000
Overheads
Rs.
Repairs of Factory Building
4,000
Insurance of Machine
3,000
Depreciation of Machine
60,000
Lighting
1,000
Stores Overhead
4,000
Time Keeping Expenses
15,000
Power
5,500
Amenities to Staff
15,000
Other Overheads
6,000

The following information is available in respect of the five departments:

Basis

 

Departments

A

B

C

D

E

Area Sq. Meters

1,000

1,000

1,000

500

500

Number of Light Points

5

8

2

3

2

500 500 Number of Light Points 5 8 2 3 2 S.Y.BBA - SEMESTER III PREPARED
500 500 Number of Light Points 5 8 2 3 2 S.Y.BBA - SEMESTER III PREPARED

COST ACCOUNTING

UNIT I

Number of Employees

30

45

45

15

15

Direct Wages

Rs.

30,000

45,000

45,000

15,000

15,000

Value of Machine

Rs.

2,40,000

1,80,000

80,000

60,000

40,000

Value of Direct Material

Rs.

10,000

20,000

20,000

15,000

15,000

Machine Hours

4,000

3,000

2,000

1,000

1,000

Prepare a Statement of Primary Distribution of Overheads. Also prepare a statement of Secondary Distribution of Overheads as per Direct Distribution Method, by apportioning the expenses of Department ‘D’ in the ratio of 2:3:3 and that of Department ‘E’ in the ratio of 1:2:2 to production department A, B and C respectively. Answer :

Statement of Primary Distribution of Overheads Items Basis Ratio Total Departments A B C D
Statement of Primary Distribution of Overheads
Items
Basis
Ratio
Total
Departments
A
B
C
D
E
Direct Wages
Allocation
Actual
30,000
--
--
--
15,000
15,000
Direct Materials
Allocation
Actual
30,000
--
--
--
15,000
15,000
Building Repairs
Area Sq. Mt.
2:2:2:1:1
4,000
1,000
1,000
1,000
500
500
Insurance of
Value of
12:9:4:3:2
3,000
1,200
900
400
300
200
Machine
Machine
Dep. of Machine
Value of
12:9:4:3:2
60,000
24,000
18,000
8,000
6,000
4,000
Machine
Lighting
No. of Light
Points
5:8:2:3:2
1,000
250
400
100
150
100
Stores Overhead
Value of
2:4:4:3:3
4,000
500
1,000
1,000
750
750
Material
Time Keeping
No. of
2:3:3:1:1
15,000
3,000
4,500
4,500
1,500
1,500
Employees
Power
Machine Hours
4:3:2:1:1
5,500
2,000
1,500
1,000
500
500
Amenities to Staff
No. Employee
2:3:3:1:1
15,000
3,000
4,500
4,500
1,500
1,500
Other Overheads
Direct Wages
2:3:3:1:1
6,000
1,200
1,800
1,800
600
600
Total Rs.
1,73,500
36,150
33,600
22,300
41,800
39,650

Note: As service departments do not manufacture any goods but provides valuable services to production departments for the smooth functioning of production process. Thus, Direct Wages and Direct Material Costs directly allocated to Service Departments form part of total indirect costs i.e. overheads of these departments.

Statement of Secondary Distribution of Overheads (Direct Redistribution Method) Particulars Ratio of Re- Apportionment
Statement of Secondary Distribution of Overheads
(Direct Redistribution Method)
Particulars
Ratio of Re-
Apportionment
Production Department
Service
Department
A
B
C
D
E
Primary O/H
-
36,150
33,600
22,300
41,800
39,650
Distribution
Service Department-D
(Time Keeping)
2:3:3
10,450
15,675
15,675
-41800
-
Service Department-E
(Stores)
1:2:2
7,930
15,860
15,860
-
-39650
Total
54,530
65,135
53,835
--
--
15,860 15,860 - -39650 Total 54,530 65,135 53,835 -- -- S.Y.BBA - SEMESTER III PREPARED BY:
15,860 15,860 - -39650 Total 54,530 65,135 53,835 -- -- S.Y.BBA - SEMESTER III PREPARED BY:

COST ACCOUNTING

UNIT I

EX.3 Tushar Ltd. has three production departments and two service departments. For the month of
EX.3
Tushar Ltd. has three production departments and two service departments. For the month of
March 2015, the primary overhead distribution summary of each department is as follows:
Production Departments :
Service Departments :
Department – X
Department – Y
Department – Z
Rs. 6,300
Department – J
Rs. 4,500
Rs. 7,400
Department – K Rs. 2,000
Rs. 2,800
The expenses of the service departments are charged to the production and other service
departments on the basis of the following percentages :
Departments
X
Y
Z
J
K
J
40%
30%
20%
--
10%
K
30%
30%
20%
20%
--
Apportion
the
expenses
of
service
departments
to
production
departments
by
Repeated
Distribution Method.
Answer :
Statement of Secondary Distribution of Overheads
(Repeated Distribution Method)
Particulars
Production Department
Service Department
X
Y
Z
J
K
Primary Overhead
Distribution
6,300
7,400
2,800
4,500
2,000
Re-Apportionment of
cost of Service Dept. – J
(40 : 30 : 20 :10)
1,800
1,350
900
-4,500
450
Re-Apportionment of
cost of Service Dept.– K
(30 : 30 : 20 :20)
735
735
490
490
-2,450
Re-Apportionment of
cost of Service Dept. – J
(40 : 30 : 20 :10)
196
147
98
-490
49
Re-Apportionment of
cost of Service Dept. – K
(30 : 30 : 20 :20)
14
15
10
10
-49
Re-Apportionment of
cost of Service Dept. – J
(40 : 30 : 20 :10)
5
3
2
-10
--
Total Rs.
9,050
9,650
4,300
--
--
EX.4
Paras Ltd. has three production departments and two service departments. For the month of
January 2015, the primary overhead distribution summary of each department is as follows:

Production Departments :

Department A Department B Department C

7,810

Rs. 12,543

4,547

Rs.

Rs.

Service Department :

Department D Rs. 4,000 Department E Rs. 2,600

: Department – D Rs. 4,000 Department – E Rs. 2,600 S.Y.BBA - SEMESTER III PREPARED
: Department – D Rs. 4,000 Department – E Rs. 2,600 S.Y.BBA - SEMESTER III PREPARED

COST ACCOUNTING

UNIT I

The cost of the service departments X and Y are to be charged on the basis of the following percentages :

Departments

A

B

C

D

E

D

30%

40%

20%

--

10%

E

10%

20%

50%

20%

--

Prepare a Statement of Secondary Distribution of Overheads using following methods:

(1) Repeated Distribution Method (2) Trial & Error Method (3) Simultaneous Equation Method.

Earth Ltd. has three production departments and two service departments. For the month of April
Earth Ltd. has three production departments and two service departments. For the month of April
2015, the primary overhead distribution summary of each department is as follows:
Production Departments :
Service Department :
Department – A
Department – B
Department – C
Rs.6,50,000
Department – D
Department – E
Rs.1,20,000
Rs.6,00,000
Rs.1,00,000
Rs.5,00,000
The cost of the service departments D and E are to be charged on the basis of the following
percentages:
Departments
A
B
C
D
E
D
30%
40%
15%
--
15%
E
40%
30%
25%
5%
--
Apportion the expenses of service departments to production departments by using following
methods:
(1)
(2)
(3)
Repeated Distribution Method
Trial & Error Method
Simultaneous Equation Method.
Trial & Error Method Simultaneous Equation Method. EX.5 ABSORPTION OF OVERHEADS The main objective of primary

EX.5

ABSORPTION OF OVERHEADS

The main objective of primary and secondary distribution of overheads is to charge the costs to production department and then the total indirect costs of the production department should be charged to different cost units, which pass through the department. Charging the overheads to cost units or products is known as overhead absorption. Overhead absorption can also be called recovery of overheads. The basic purpose of absorption of overheads is to absorb total overheads of a production department in the products manufactured by that department, so that the cost of each unit of product produced by the department includes an equitable share of the total overhead of that department.

an equitable share of the total overhead of that department. Methods of Absorption: For the purpose

Methods of Absorption:

For the purpose of absorption (charging) of overheads of a production department to the products manufactured, the Overhead Absorption Rate is used.

There are several methods in use for determining overhead absorption rate, the important method are as under:

overhead absorption rate, the important method are as under: S.Y.BBA - SEMESTER III PREPARED BY: ALKA
overhead absorption rate, the important method are as under: S.Y.BBA - SEMESTER III PREPARED BY: ALKA

COST ACCOUNTING

UNIT I

1. Percentage on Direct Wages or Direct Labour Cost Method:

Overhead Absorption Rate =

Total Overheads Total Direct Wages

2. Direct Labour Hour Rate Method:

Overhead Absorption Rate =

Total Overheads Total Labour Hours

X 100

3. Direct Machine Hour Rate Method:

Overhead Absorption Rate =

Total Overheads Total Machine Hours

Total Overheads Total No. of Units Produced
Total Overheads
Total No. of Units Produced

4. Rate per unit of Production Method:

Overhead Absorption Rate =

EX.6 The following information relates to the Production Department - A in the factory for the month of May, 2015:

Direct Material Consumed: Rs.75,000 Direct Wages: Rs.50,000 Production Overheads: Rs.1,50,000 Labour Hours: 30,000 Hours Machine Hours: 25,000 Hours

The relevant data for one order (Order No. 51) carried out in the department during this month, are as under:

Direct Material consumed: Rs. 14,000 Direct Wages: Rs. 11,000 Machine Hours Worked: 5000 Hours Labour Hours Worked: 7000 Hours

You are required to:

(A)

Determine Overhead Absorption Rate using following methods:

1. 2. 3.
1.
2.
3.

Percentage on Direct Wages

Direct Labour Hour Rate

Direct Machine Hour Rate

Wages Direct Labour Hour Rate Direct Machine Hour Rate (B) Prepare a comparative statement of the

(B)

Prepare a comparative statement of the total cost of order No.51 under each of the above method of overhead absorption.

No.51 under each of the above method of overhead absorption. S.Y.BBA - SEMESTER III PREPARED BY:
No.51 under each of the above method of overhead absorption. S.Y.BBA - SEMESTER III PREPARED BY: