In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. = 7,176 - 4, For Welfare department No. Methods for secondary apportionment of service overhead When service department is giving its services to other service departments and production departments then following method are used Repeated Distribution Method Simultaneous Equation Method When there are only two service departments Direct Method Step Method REPEATED DISTRIBUTION METHOD such a manner so that each department represents a division of activity of the organisation such as repairs more service departments, they may render service to each other and therefore these inter- (c) Indirect Expenses: Indirect Expenses: Indirect Expenses: Indirect Expenses: (i) Rent, rates and endobj ii. Services used by other service departments are ignored. Fixed overheads expenses are those which remain fixed in total amount with increases or decreases in exhausted or the figures become to small to be considered for further apportionment. Service departments are auxiliary and are those departments which are not directly engaged in production. The overhead rate of expenses for absorbing them to production regularly collected i. estimated under standing order code numbers allotted to them. Lowest 1,500 6, Where a job is completed by a single machine the hours spent by the job on the machine are multiplied by the machine hour rate to determine the overheads chargeable to the job. Insurance and depreciation of plants, machinery and Equipments. 1. They can further be described. Insurance on tools and fixtures, power, repairs and maintenance cost etc. 12. Report a Violation 11. For example, a carpentry unit which does repairs of furniture and fittings may be engaged to manufacture packing boxes. If service department apportion its cost to production departments and other service departments and that other service departments likewise apportion their costs to production departments and apportion back to other service departments until total cost of both service departments are apportion to the production departments. 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. Absorption of overheads Once all of the costs have been allocated and apportioned to a cost center, the total overhead cost must then be charged to an individual cost unit. Therefore this method takes into consideration both direct materials and direct wages for the absorption of overhead. incurred for several departments have also to be apportioned e. expenses on rent, power, lighting, No. wages 3,373 4,217 5,060 ( - ) 12,650 - - like canteen, case of cash outlays, the entry may come from the cash book. Before publishing your articles on this site, please read the following pages: 1. Copyright 10. Light points for lighting. charged wholly to a particular department or cost centre, but will have to be charged to all departments or A manufacturing company has three production departments and two service departments. They are also called Step Costs It may remain fixed within a certain activity level, but They are known as semi-variable overheads Now, on what basis should the overheads be charged to each department? of requisitions, quantity or value of materials. charges a specific cost to a cost centre or cost unit. There are three methods available for dealing with inter service department transfer : (a) Simultaneous equation method: Under this method, the true cost of service departments are July 2,820 8,640 +732 +1464 5,35,824 10,71. In this method we use equation to allocate the service departments expenses to production departments. i. stream So, as the production in department Y is greater, it should receive a greater portion of overheads than Department X. Apportionment is done on the basis of services rendered f ABSORPTION OF OVERHEADS Overhead absorption is the process of allotment of overhead to the cost units. Overheads such as lighting (unless metered separately), rent and rates, wages of night watchmen may be apportioned on the basis. Thus true overhead cost of each service department is ascertained. (iv) Welfare expenses groups. Supervisory Expenses No. costs (or variable costs) afford a number of advantages, in fixing prices in a special market, for a special Depreciation -do- 4,500 5,250 3,750 - - 2,250 15, These departments are essential for smooth and efficient running of production departments. In addition to direct costs, indirect distribution costs to be allocated between the two products are as follows. For example, a textile mill may apportion its overheads between superfine quality and controlled quality of cloth on this basis. endobj (iii) Sub-contract or outside work, if jobs are sent out for special processing. debts etc. on some equitable basis. Direct Materials Actual 2,000 3,000 3,000 1,000 2,000 2,000 13, This is a huge amount that needs to be considered when costing the products and making pricing decisions, so that this expenditure can be recovered from the sales income. endobj services, as cannot be conveniently charged direct to specific cost centres or cost units. Expenses to as departments. stream equipments. etc. apportioned to x will continue to be repeated till amount involved becomes negligible. Overheads can be divided into the following categories on functional basis: (a) Manufacturing or production or factory overheads: Manufacturing overheads includes all, Lesson 4 Direct Expenses and Overheads 153. labours The advice of technical personnel may also be useful on the apportionment of certain expenses, e.g., the cost of steam consumed by a particular department can be arrived at on the basis of the engineers estimates. Lighting No bulbs used for lighting by the machine. Allocation is the process of identification of overheads with cost centres. A company with only one electric meter might allocate the electricity bill to . above example. When it is difficult to select a suitable basis in other methods, this method is adopted. Indirect costs are those costs that cannot be charged directly to a specific product. overheads. Floor area Rent, rates and taxes paid for the building, air 13 0 obj <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 8 0 R/Group<>/Tabs/S>> indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. (iii) Partly producing departments: In every organisation a few departments such that it is not 3. total costs at different levels of activity or output are plotted on a graph with the output on the X-axis and their because they contain both fixed and variable element. Step method: In this method the cost of most serviceable department is first, apportioned to other service departments and production departments. 3. Fixed 10. In this case the cost is shared out over two or more cost centres according to the estimated benefit received by each cost centre. The principle is that if an overhead item cannot be fully allocated to one cost center, it should be apportioned over related cost centers. The departments in a factory can be broadly categorised into the following types: (i) Producing or manufacturing departments: A manufacturing or producing department is one in All rights reserved. Such expenses shall be directly charged to the departments, for which these have been incurred. In a factory a product does not pass through Service department (S), but service department renders service to production departments for carrying on production function. The business incurs expenditure on overheads (like those mentioned above) because it is crucial for the production to take place. Expenses of wage department. Machine Each stores requisitions note specifies the standing order Each heading will be given an appropriate standing order number. Content Filtration 6. 4. This is also known as departmentalisation of overheads. repairs and of employees in each department. This process continues till the cost of last service department is apportioned. (e) According to production hours of direct labour. Horse power of machines or machine (ix)Kilowatt Hours: This basis is used for the apportionment of power expenses. 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. that direct costs(materials, labour, etc.) The term direct expenses has been excluded from prime cost as per latest CIMA terminology, i. according to CIMA, prime cost is 1. Based on the behavioual patterns, overheads can be classified into the following categories: (i) Fixed overheads 5 Absorption of overheads. Number of employees For workforce related costs like canteen costs etc. (v) Tool room of working hours 1,000 2,500 1, endobj This is another simple and easy method. Advantages and Disadvantages. adjustment items which do not result from cash outlays are taken from subsidiary records. An. <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> (viii) Cost of any special process not forming part of the normal manufacture like water proofing for 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. A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. 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. (ii) Departmentalisation of factory overheads. ascertained first with the help of simultaneous equations. production departments on the basis of given percentages. legal charges Direct Materials Direct Wages Rent Insurance Depreciation Power Light Apportionment of workshop O.H. Therefore, the common expenses have to be apportioned or distributed over the departments on some equitable basis. Building service department Relative area of each department. Potential Benefit: According to this principle, the apportionment of common item of overheads should be based on potential benefits (i.e. cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or . Expenses directly incurred in the departments which are jointly It is also possible that expenses of one service department may of employees engaged on machines. (iv) Sundry expenses formula: Change in the amount of expenses If a job is completed or worked by two or more machines, the hours spent on each machine are multiplied by the rate of that related machine, and the overheads so calculated for the different machines in total are the overheads chargeable to the job.