## Accounting for overheads

Meaning :

It is the aggregate of indirect material,indirect labour and indirect expenses which cannot be identified with particular job, product or cost centre.

By function

By behavour

By element

Indirect labour

Indirect material

Indirect expenses

Classification of cost due to behavour

Fixed cost – in total will be same

Per unit will decrease

Variable cost – per unit will be same

Total variable cost will increase

Semi variable cost – it is changed level wise, e.g.

upto 1000units – per unit – Rs. 5000

above 1000 upto 2000  – Rs. 9000 …

Methods of segregation semi variable overheads into fixed and variable overheads

1 comparison by level of activity method

2 high and law point range method

In above 2 methods

Variable element per unit = change in               amount of semi variable overheads/change in level of activity

Fixed overhead =  total semi variable overheads – total variable elements at this level

3 least squre method like byx

Analytical method:

Under this method, decide proportion of variable and fixed cost on the basis of past experience

Graphical method: under this method x axis and y axis will be drawn. Plot various points on graph at different level of output draw a line which covers maximum points which is a variable overheads line and balance will be fixed overheads

In practice first two methods are used.

Common overheads will be allocated to different production as well as service department

Distribution of common expenses on some bases is called apportionment :

 Item Base Factory rent, repairs, maintenance, insurance, Depreciation of factory Floor area of machine Repairs, insurance, dep of plant and machinery Capital cost- P & M Insurance of stock Value of stock Superannuation, canteen, time keeping, personal office exp. No of workers Compensation, ESI, PF to workers wages Stores and stock Value of Direct mat. Material handling Weight of direct material Lighting and heating No of light points Power or steam consumption Hoarse power of machine *hours worked if  given

Ans. 4

Statement of apportionment of overheads

 Particulars Base Total I II III iv Rent,rate and taxes Floor area 5:4:3:2 14000 5000 4000 3000 2000 Dep,insurance, repairs Value of P&M 5:6:2:1 28000 10000 12000 4000 2000 Insurance of stock Value  stock 7:5:1:1 700 350 250 50 50 Supervision, staff welfare No of worker4:2:1:1 2000 1000 500 250 250 Stores o/hs Value materi 4:3:2:1 1000 400 300 200 100 Lighting and heating No of  points 8:2:1:1 3000 2000 500 250 250 Power No of machines10:5:3:2 1000 500 250 150 100 Total 49700 19250 17800 7900 4950

Distribution of service department overheads to production department when no inter service departments use their services for each other.

Step ladder method – it is known as a non reciprocal method.

Under this method distribute overheads of service department to other service and production department.

Give priority in distribution to such service department  which provides service to highest no of departments and then next highest so on…

Ans 6 Distribution of service department to production department :

First distribute s2 because it provides service to 4 departments.

second distribute s1 because it provides service to 3 departments.

Third  distribute s3 because it provides service to 2 departments.

 Particulars P1 P2 S1 S2 S3 Given 53000 7000 17000 30000 13000 S2 in remaining dep. 3:5:1:1 9000 15000 3000 (30000) 3000 S1 in remaining dep 5:3:2 1000 6000 (20000) – 4000 S3 in P1 and P2 (4:6) 8000 12000 – – (20000) Total 80000 40000

Distribution of service department overheads to production department when inter service department are used.

1 simultaneous equation method

2 Repeated distribution method

3 trial and error method

Ans 7  simultaneous equation method

 P1 P2 S1 –  x S2 –  y S1 – x 50% 40% – 10% S2 – y 30% 50% 20%

While utilization of service based on raw

While forming  equation see column

S1 – X, S2 – y,

X = 40000+0.2y,  Y = 16000+0.1x

From solving above equations,

x = 44081, Y= 20408

Distribution of service department overheads to production department

 Particulars P1 P2 Own department 51837 12163 S1 – 44081 (50%&40%) 22041 17632 S2 – 20408 (30% & 50%) 6122 10205 Total 80000 40000

Extra practice  simultaneous equation method

 P1 P2 S1 –  x S2 –  y S1 – x 40% 40% – 20% S2 – y 60% 30% 10%

P1 = 60000, P2=30000, S1=20000, S2=10000

While utilization of service based on raw

While forming  equation see column

S1 – X, S2 – y,

X = 20000+0.1Y,  Y = 10000+0.2x

From solving above equations,

x = 21425, Y= 14285

Distribution of service department overheads to production department

 Particulars P1 P2 Own department 60000 30000 S1 – 21428 (40%&40%) 8571 8571 S2 – 14285 (60% & 30%) 8571 4285 Total 77144 42856

Repeated  distribution method or (reciprocal method )

Under this method services are used internally, hence distribute in given ratio to each other up to it becomes small amount below 10.

 particulars P1 P2 S1 S2 Given 51837 12163 40000 16000 S1 to p1,p2,and s2 5:4:1 20000 16000 (40000) 4000 S2 to p1,p2,and s1 3: 5:2 6000 10000 4000 (20000) S1 to p1,p2,and s2 5:4:1 2000 1600 (4000) 400 S2 to p1,p2,and s1 3: 5:2 120 200 80 (400) S1 to p1,p2,and s2 5:4:1 40 32 (80) 8 S2 to p1 and p2 3 5 – (8) total 80000 40000

Trial and error method :

Under this only statement of service department is prepared. It distribute to other service department in given % then total of service department will be distributed in production department in simultaneous method

 Particulars S1 S2 Given 40000 16000 10% of s1 used by s2, 10% of 40000 – 4000 20% of s2 used by s1, 20% of 20000 4000 – 10% of s1 used by s2, 10% of 4000 400 20% of s2 used by s1, 20% of 400 80 10% of s1 used by s2, 10% of 80 8 Total 44080 20408

Distribution of service department overheads to production department

 Particulars P1 P2 Own department 51837 12163 S1 – 44081 (50%&40%) 22041 17632 S2 – 20408 (30% & 50%) 6122 10205 Total 80000 40000

Ans10

Step 1

statement showing allocation of overheads

 Particulars P1 P2 S1 S2 Direct material – – 200 700 Direct wages – – 100 350 Direct exp – – 50 175 Indirect material 6160 12320 100 350 Indirect wages 3090 6180 50 175 Total allocated o/hs 9250 18500 500 1750

Step 2 apportionment of common expenses

 Pariculars base total P1 P2 S1 S2 Staff welfare No of workers 37:74:2:7 3600 1110 2220 60 210 Supervision No of workers 37:74:2:7 3600 1110 2220 60 210 Power H. P. Points 7200 2220 4440 120 420 Lighting Light points 3600 1110 2220 60 210 depreciation Value of asset 7200 2220 4440 120 420 Insurance Value of asset 600 185 370 10 35 Rent & rate Floor area 600 185 370 10 35 Repairs Floor area 2400 740 1480 40 140 ESI Direct wages 600 185 370 10 35 General o/h Direct wages 480 148 290 8 28 Stores o/hs Direct material 120 37 74 2 7 Total 30000 9250 18500 500 1750

Total department overheads :

 Particlulars P1 P2 S1 S2 Allocated 9250 18500 500 1750 Apportionment 9250 18500 500 1750 Total 18500 37000 1000 3500