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.

Classification of overheads

By function

Production overheads

Administration overheads

Selling overheads

Distribution overheads

By behavour

Fixed overheads

Variable overheads

Semi variable overheads

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.

Allocation of overheads:

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.

Overhead distribution statement step ladder

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

 

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