The departmentalisation is done at sources. The next service department is taken up and its cost is apportioned and this process goes on till the cost of the last service department is apportioned. Rent Area 2,000 2,500 3,000 1,500 1,000 2,500 12, The next service department is taken up and its cost is apportioned and this process is going on till the cost of last service department is apportioned. Primary Distribution of Overhead 2. Suppose the cost of service department X is Rs.4,000 and that of Y is 4,800; an analysis reveals that X department renders 20% of its service to Y and Y renders 30% of its service to X. This principle states that the apportionment of common overhead items should be based on the actual benefit received by the respective cost centers. charged wholly to a particular department or cost centre, but will have to be charged to all departments or So, whole of $3,000 can be charged to Department A and there is no need to apportion this between other Departments. Derived Benefit. Report a Violation, Inter-Departmental Services: 2 Methods (With Examples), Direct Labour Hour Rate: Cost Sheet and Calculations. Actual Actual Area Value of Machinery -do- H.P. Plagiarism Prevention 4. It deals with the whole items of cost. (i) Royalties if it is charged as a rate per unit. No. Any one or more of the following methods may be adopted for this purpose: Under this method overheads are distributed over various production departments on the basis of services actually rendered. Before uploading and sharing your knowledge on this site, please read the following pages: 1. Actualquantutyorvalueofthebasefortheperiod. Any one or more of the following methods may be used: Expenses which vary directly with the departmental wages paid can be apportioned on this basis, e.g., premium for workmens compensation insurance etc. Allocation is the process of identification of overheads with cost centres. ii. after sales service some special tools for utilisation in the main job orders, it is acting as a productive department <> activity. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. comparison of (a) the extra amount that would have to be spent if an additional activity is undertaken or an vii. Power Horse power multiplied by machine hours or KWH. Both metals are quite different in prices and by applying the same percentage for both will be obviously incorrect. After proper distribution the account of first service department will be closed. ArfpC]] N53OyHo2jMW. For endobj If the target is higher, the unit cost reduces indicating higher efficiency. For instance, suppose there are two This will relate to how the cost has been incurred. Area in Square Metres 200 250 300 150 100 250 1, Indirect wages of the maintenance department or inspection etc. 5. endobj Examples are indirect material and indirect labour. Production departments are those departments where actual process of manufacturing is carried on. latter department, which will then be distributed among production department. When workers are paid on a piece basis, this method will not give satisfactory results because the time factor is ignored. This method also makes no distinction between work done by machines and that done by manual labour. (iii) Depreciation, repairs Production Departments manufacture products while service departments help them in this process. After classification of overheads all the items of overheads are collected properly under suitable account heading. incurred during the accounting period by the actual quantum (quantity/value) of the base selected. After that the total costs are distributed among production departments on the basis of given percentages. 7 0 obj If we charge $5,000 to Department X and $5,000 to Department Y, this might be unfair as the Department Y is more production intensive than Department X. service department x will be distributed to service department y. Departmental overheads for the month of November 2003 are as under: Companys costing books for the year ended 30th June, 2004 furnish the following information: The method given above assumes that service is rendered by say, Repairs and Maintenance department to the Power House but not by the latter to the former. Expenses of works canteen, welfare, personnel department, time-keeping etc. Internal transport service Truck hours, truck mileage or tonnage. expenses other than the direct material or direct labour which are incurred for a particular product or process General expenses Direct Wages or No. A The methods are: 1. Thus it is indirect process of allotment. Some expenses such as power, lighting, heating, rent, etc. Generally overheads are classified on the following basis: (1) Functional analysis There are four steps of Absorption Costing: In this article, we are going to discuss Allocation and Apportionment. The line on the graph will, therefore, be represented by: y = mx + c Expenses, Accounting Treatment of Indirect Firstly, we can setup the overhead re-apportionment process as a set of equations. The next service department is taken up and its Following are the methods of re-distribution of service department costs to production departments: A companys production for the year ending 30.3.2013 is given below: Depreciation 15% of value of machinery. endobj Everything you need to know about Factory Overhead. . Uploader Agreement. 1) Simultaneous Equation Method 2) Repeated Distribution Method 3) Trial and Error Method Here we discuss only 1 st and 3 rd methods for apportionment. If first service department apportion its cost to production department and other service department and that other service department apportion its cost to production department and does not reapportion its cost to first service department or does not apportion back its cost to first service department. (iii) Partly producing departments: In every organisation a few departments such that it is not insurance of (c) Trial and error method: In this method the cost of one service department is apportioned to This method is not suitable if the workers are paid on piece rate basis. (iv) Sundry expenses Services used by other service departments are ignored. = 7,176 - 4, also be apportioned in part to another service department to arrive at the total expenses incurred on the These are then distributed among the apportionment and absorption of overheads. Based on the behavioual patterns, overheads can be classified into the following categories: (i) Fixed overheads iii. PRIMARY DISTRIBUTION OF OVERHEADS Primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. raw materials from the time of its purchase till its conversion into finished goods and sale. research center. Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. Allocation is the charging of overheads directly to one cost center i.e., a department, a production or service location. At the end of each month, the total of these All the indirect costs of the business are called overheads. Re-apportionment of service department overheads (Secondary Distribution). This can also apply to a company's overheads as a way to calculate the correct costs, especially when the business is spread across different departments, subsidiaries or countries of operation. Methods of Segregating Fixed and Variable Overhead Elements Selling and Distribution Overheads Administration Overheads Manufacturing Overhead Primary and Secondary Distribution of Overhead Single Overhead Rate and Multiple Overhead Rates Types of Capacity Levels Absorption Overheads Under-Absorption and Over-Absorption Treatment of Certain Items = 7,176 - (2,088 x 2) Supervisory Expenses No. Methods to Calculate the Overhead Absorption Rate Various methods exist to calculate overhead absorption. of little use. When only one kind of article is produced. Repairs & Maintenance Actual repairs or hours worked by the Machines. Methods of Apportionment of Service Department Overheads! Machine Hours Worked 10,000 20,000 15,000 - - 5,000 50. From the following information prepare a manufacturing expense budget and calculate overhead recovery rates for the two production departments as percentages of direct labour : Depreciation calculated as a% of original cost: You are supplied with the following information and required to work out the production hour rate of recovery of overhead for departments A, B and C: Before uploading and sharing your knowledge on this site, please read the following pages: 1. plant etc. This website uses cookies and third party services. Building service department Relative area of each department. Rent, Rates, taxes etc. Apportionment of Direct labour hours Works managers remuneration, general overtime and other fringe benefits, supervisions etc. groups. The following steps are involved in this method: (i) Apply the given percentages to distribute the primary total of first service department. The overhead rate of expenses for absorbing them to production products which pass through these departments. 2. For example, the cost of canteen can be apportioned as the basis of number of employees in each department which is a potential benefit. It may be on the basis of services rendered by a particular item of expense to different departments or by survey method. It deals with only proportion of items of cost. Direct expenses The apportionment method and its constant revamping is a true sign of a democracy trying to obtain equal representation for all of its citizens. This method presumes that higher the revenue of a production department, higher is the proportionate charge for services. staff Then the service departments may be ignored for apportioning the expenses. ii. 4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. Disclaimer 8. Secondary Distribution. total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their Primary Distribution of Overhead: Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. Apportionment of Overhead Cost (Simultaneous) Distribution Method HS Tutorial 34.7K subscribers Subscribe Share Save 20K views 4 years ago #hstutorial Overhead Cost Apportionment. Direct expenses is directly attributed to cost unit/cost center. are specific charges directly attributable while the indirect expenses are apportioned on suitable basis. Expenses such as depreciation and other Cost is apportioned when cost centres use only a proportion of the benefits of the whole expenses. A department may be either production department or service department depending upon the nature and function. Difference 1,320 2, Lesson 4 Direct Expenses and Overheads 157. ii. Machine hour rate is one of the methods of absorbing factory overhead. 1. the mean Methods of absorption of factory overheads 5. buildings. (vi) Operators Welfare department No. 8. consumers service, relation to the product. In other words, the departments which contribute more towards profit should get a higher proportion of overheads. Insurance on Plant and Machinery, Building; Depreciation on Plant and Machinery; Maintenance of Plant and Machinery. 2. i. This method is commonly used in those industries where machines are primarily used because in these industries overheads are mostly concerned with machines. It is to be carefully noted that at the time of making primary distribution, the distinction between production and service departments is ignored. Apportionment of Office O.H. Terms of Service 7. The process of redistributing the cost of service departments among production departments is known as secondary distribution. iv. 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