COST & MANAGERIAL ACCOUNTING

SHAHAM AHMED

Overheads
According to CIMA, overhead costs are defined as, the total cost of indirect materials, indirect labor and indirect expenses. Overhead Accounting

The ultimate aim of overhead accounting is to absorb overhead in the product units produced by the firm. Absorption of overhead means charging each unit of a product with an equitable share of overhead expenses.

A. Collection, Classification and Codification of Overheads B. Allocation, Apportionment and Reapportionment of overheads C. Absorption of Overheads. Collection of Overheads i. Stores Requisition ii. Wages Sheet iii. Cash Book iv. Purchase Orders and Invoices Classification of Overheads Classification is defined by CIMA as, the arrangement of items in logical groups having regard to their nature ( subjective classification ) or the purpose to be Fulfilled. ( Objective classification )

Overheads
Classification of Overheads Classification is defined by CIMA as, the arrangement of items
in logical groups having regard to their nature ( subjective classification ) or the purpose to be Fulfilled. ( Objective classification ) Classification according to Elements Indirect Materials Indirect Labor Indirect Expenses Functional Classification Manufacturing Overheads Administrative Overheads : Selling and Distribution Overheads Classification according to Behavior Fixed Overheads Variable Overheads Semi-variable Overheads

Codification of Overheads

Overheads
Allocation, Apportionment and Reapportionment of Overheads
Departmentalization means creating departments in the firm so that the overhead expenses can be conveniently allocated or apportioned to these departments. Allocation is the process by which cost items are charged directly to a cost unit or cost center. Electricity charges can be allocated to various departments if separate meters are installed, Depreciation of machinery can be allocated to various departments as the machines can be identified Apportionment if overheads is not possible to charge the to a particular cost center or cost unit, they are to be apportioned to various departments on some suitable basis if separate meters are not provided, electricity expenses will have to be apportioned to the departments on some suitable basis like number of light points. Similarly rent will have to be apportioned to various departments on the basis of floor space Reapportionment of Overheads The departments are broadly divided into Production Departments the departments where actual production takes place Service Departments. the departments which render services to the Production Departments. Stores Department, Maintenance Department, Human Resource Department For the purpose of absorption it is necessary that the overheads of the service departments are reapportioned to the production departments. This process is called as preparation of Secondary Distribution Summary of overheads.

Overheads
Absorption of Overheads absorption means charging equitable share of overhead expenses to the products. overhead expenses are indirect expenses, the absorption is to be made on some suitable basis. The basis is the absorption rate which is calculated by dividing the overhead expenses by the base selected. Overhead Absorption Rate = Overhead Expenses/ Units of the base selected. Direct Material Cost Budgeted or Actual Overhead Cost/ Direct Material Cost X 100 Direct Labor Cost Method Budgeted or Actual Overheads/ Direct Labor Cost X 100 Prime Cost Method Budgeted or Actual Overheads/ Prime Cost X 100 Production Unit Method Overhead absorption rate = Budgeted or Actual Overheads/Production Units Direct Labor Hour Method Machine Hour Rate :Selling Price Method

Overheads
Illustration :- A manufacturing firm produces two products, A and B. The direct material cost for A is Rs. 5,00,000 and for B Rs. 3,00,000, direct labor cost is Rs. 3,00,000 and Rs. 2,00,000 respectively for A and B, direct expenses are Rs. 1,00,000 and Rs. 2,00,000 respectively for A and B. The overhead expenses are Rs. 9,60,000. The statement of cost will appear as follows.

Direct Materials Direct Labor Direct Expenses Prime Cost [ D.M.+ D.L.+ D.E. ] Overhead- Material Cost basis Overhead- Labor cost basis Overheads 60% of Prime Cost

Product A 500,000 300,000 100,000 900,000 600,000 576,000 540,000

Product B 300,000 200,000 200,000 700,000 360,000 384,000 420,000

Total 800,000 500,000 300,000 1,600,000 960,000 960,000 960,000

Overhead absorption rate is calculated as 9,60,000/16,00,000 100 = 60%

Overheads
Under/Over Absorption of Overheads
The rate of absorption may be either predetermined or historical. predetermined rate which is based on budgeted overhead expenses and budgeted units of base. Alternatively the rate may be based on historical data, i.e. actual overhead costs and actual units of the base. A manufacturing company uses direct material cost as the basis for absorption of overheads. The absorption rate is worked out as follows. Budgeted Overheads Rs. 50,000/ Budgeted Material Cost Rs. 1,00,000 100 i.e. 50% if the actual overheads are Rs. 70,000 and the actual direct material cost is Rs. 1,20,000, the overheads absorbed will be Rs. 60,000 i.e. 50% of the direct material cost there will be under absorption of Rs. 10,000 as the actual overheads incurred are Rs. 70,000.

Use of supplementary Rate Carrying forward to future period Writing off to Profit and Loss A/c

Service Department Expense allocation Dept A Dept B Department X % 22 33 Department Y % 45 33

Dept C 45 22

Overheads
. Primary Distribution Summary Items Basis of Apportionment Direct Wages Actual Rent and Taxes Floor Space General Lighting Light Points Indirect Wages Direct Wages Power Horse Power Depreciation on Machinery Cost of Machinery Sundries Direct Wages Total

Total 10,000 25,000 3,000 7,500 7,500 50,000 50,000 153,000

Dept A

Dept B

Dept C

Dept X

Dept Y

Secondary Distribution Summary Repeated Distribution Method Items Direct Wages Department X Department y Total

Total 153,000 153,000

Dept A 37,750

Dept B 36,000

Dept C 48,250

Dept X 23,125

Dept Y 7,875

37,750

36,000

48,250

23,125

7,875

Overheads
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Primary Distribution Summary Items Direct Wages Rent and Taxes General Lighting Indirect Wages Power Depreciation on Machinery Sundries Total

Basis of Apportionment Actual Floor Space Light Points Direct Wages Horse Power Cost of Machinery Direct Wages

Total 10,000 25,000 3,000 7,500 7,500 50,000 50,000 153,000

Dept A 5,000 500 2,250 3,000 12,000 15,000 37,750

Dept B 6,250 750 1,500 1,500 16,000 10,000 36,000

Dept C 7,500 1,000 2,250 2,500 20,000 15,000 48,250

Dept X 7,500 5,000 500 1,125 500 1,000 7,500 23,125

Dept Y 2,500 1,250 250 375 1,000 2,500 7,875

Secondary Distribution Summary Repeated Distribution Method Items Direct Wages Department X Department y Total

Total 153,000 153,000

Dept A 37,750 5,088 3,544 46,382

Dept B 36,000 7,631 2,598 46,229

Dept C 48,250 10,406 1,733 60,389

Dept X 23,125 (23,125) -

Dept Y 7,875 (7,875) -

Service Department Expense allocation Dept A Dept B Department X % 20 30 Department Y % 40 30

Secondary Distribution Summary Repeated Distribution Method Items Direct Wages Department X Department y Department X Department y Department x Total

Dept C 40 20

Dept X 10

Dept Y 10

Total 153,000 153,000

Dept A 37,750 4,625 4,075 204 41 2 46,697

Dept B 36,000 6,937 2,038 306 20 3 45,304

Dept C 48,250 9,250 3,056 407 31 5 60,999

Dept X Dept Y 23,125 7,875 (23,125) 2,313 1,019 (10,188) (1,019) 102 10 (102) (10) -

Overheads
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Direct Method :Particulars Prod. As per Primary Distribution Maintenance (Maintenance Hrs ) Power ( Kwh Consumed) Personnel (No. of employees) Total Costs Allocated Dept A Dept B Maintenance Service Dept. Power Service Dept. Personnel Service Dept. Total

Overheads

Specific Order Costing

Methods of Costing Job Costing: Batch Costing, Contract Costing, Multiple Costing. Process Costing: Unit or Single Output Costing, Operating Costing, Operation Costing Job Costing: This method of costing is used in Job Order Industries where the production is as per the requirements of the customer. In Job Order industries, the production is not on continuous basis, rather it is only when order from customers is received and that too as per the specifications of the customers. Consequently, each job can be different from the other one. Features of job costing. It is a specific order costing A job is carried out or a product is produced is produced to meet the specific requirements of the order Job costing enables a business to ascertain the cost of a job on the basis of which quotation for the job may be given. While computing the cost, direct costs are charged to the job directly as they are traceable to the job Indirect expenses i.e. overheads are charged to the job on some suitable basis. Each job completed may be different from other jobs and hence it is difficult to have standardization of controls and therefore more detailed supervision and control is necessary. At the end of the accounting period, work in progress may or may not exist.

Specific Order Costing

Methodology used in Job Costing Direct Material Costs Direct material cost is identifiable with the job and is charged directly. Direct Labor Cost: This cost is also identifiable with a particular job and can be worked out with the help of Job Time Tickets which is a record of time spent by a worker on a particular job. Calculation of wages can be done by multiplying the time spent by the hourly rate. Direct Expenses: Direct expenses are chargeable directly to the concerned job. Overheads: overheads cannot be identified with the job and so they are apportioned to a particular job on some suitable basis. Pre determined rates of absorption of overheads are generally used for charging the overheads. Work in Progress: If a job remains in complete at the end of an accounting period, the total cost incurred on the same becomes the cost of work in progress. The work in progress at the end of the accounting period becomes the closing work in progress and the same becomes the opening work in progress at the beginning of the next accounting period. A separate account for work in progress is maintained.

Specific Order Costing

Advantages of Job Costing Accurate information is available regarding the cost of the job completed and the profits generated from the same. Proper records are maintained regarding the material, labor and overheads so that a costing system is built up Useful cost data is generated from the point of view of management for proper control and analysis. Performance analysis with other jobs is possible by comparing the data of various jobs. However it should be remembered that each job completed may be different from the other. If standard costing system is in use, the actual cost of job can be compared with the standard to find out any deviation between the two. Some jobs are priced on the basis of cost plus basis. In such cases, a profit margin is added in the cost of the job. In such situation, a customer will be willing to pay the price if the cost data is reliable. Job costing helps in maintaining this reliability and the data made available becomes credible.

Limitations of Job Costing It is said that it is too time consuming and requires detailed record keeping. This makes the method more expensive. Record keeping for different jobs may prove complicated. Inefficiencies of the organization may be charged to a job though it may not be responsible for the same.

Specific Order Costing

Specific Order Costing

Amount [Rs] Particulars Company Job Direct Costs: Direct Materials Direct Labor Prime Cost [Direct Materials + Direct Labor] Factory Overheads Works Cost [Prime Cost + Factory Overheads] Administrative Overheads Cost of Production [Works Cost + Administrative Overheads] Selling and Distribution Overheads Cost of Sales [Cost of Production + Selling and Distribution Overhead] Profit Sales Revenue % of Factory Overheads to Direct Wages: % of Administrative Overheads to Works Cost: % of Selling and Distribution Overheads to Works Cost:

Specific Order Costing

Amount [Rs]

Particulars

Company

Job

Direct Costs: Direct Materials Direct Labor Prime Cost [Direct Materials + Direct Labor] Factory Overheads Works Cost [Prime Cost + Factory Overheads] Administrative Overheads Cost of Production [Works Cost + Administrative Overheads] Selling and Distribution Overheads Cost of Sales [Cost of Production + Selling and Distribution Overhead] Profit Sales Revenue % of Factory Overheads to Direct Wages: % of Administrative Overheads to Works Cost: % of Selling and Distribution Overheads to Works Cost: 1,800,000 1,500,000 3,300,000 900,000 4,200,000 840,000 5,040,000 1,050,000 6,090,000 1,218,000 7,308,000 2,400,000 1,500,000 3,900,000 900,000 4,800,000 960,000 5,760,000 1,656,000 7,416,000 1,483,200 8,899,200

Rs.9,00,000/15,00,000 X 100 = 60% Rs.840,000/420,0000 X 100 = 20% Rs.10,50,000/42,00,000 X 100 =25%