1. 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 principle states that the apportionment of common overhead items should be based on the actual benefit received by the respective cost centers. Direct Wages 20,000 25,000 30,000 - - - 75, 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. The classification of overheads expenditure depends upon the type and size of a business and the nature of In other words, common expenses have to be apportioned or distributed over the departments items is charged or debited to Factory Overhead Control Account and credited to Stores Ledger Control is compared with the amount of expenses incurred at these different periods. 13 0 obj This method combines the limitations of both direct materials and direct labour methods. (ii) Apportionment of Service Departments overheads among Production Departments. Derived Benefit: According to this principle, the apportionment of common item of overheads should be based on the actual benefit received by the respective cost centers. on unit cost decreases as production increases and vice versa. As per summary 4,000 2, (b) the actual process of classification of the various items of expenses into one or another of the (2) Behavioural analysis. (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. Sometimes, the basis will be the Ability to pay method, i.e., ability of the department to bear such share of items of overheads. The direct method allocates costs of each of the service departments to each operating department based on each department's share of the allocation base. 15. Plagiarism Prevention 4. Direct expenses may be Prohibited Content 3. (x) Technical Estimates: This basis of apportionment is used for the apportionment of those expenses for which it is difficult, to find out any other basis of apportionment. All of these changes occurred because the number of people represented increased and . repairs and expenses, cost of inter-department transfers etc. centres or cost units in proportion to the estimated benefit received, using a proxy. (ii) Subscription to buildings. Lowest 1,500 6, Methods to Calculate the Overhead Absorption Rate Various methods exist to calculate overhead absorption. The primary distribution summary of March 1999 gives the following information: The service departments expenses are charged on a percentage basis which is as follows: A manufacturing company has two producing departments, Department A and Department B, and three service departmentsStores, Power house and Repair shop. For example, managers salary may be apportioned on the basis of time and attention given by him to different cost centres or the charge for services of cost accounting department may be apportioned to different production departments on the basis of number of workers employed in each department etc. indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. It deals with only proportion of items of cost. Indirect expenses or production departments on a suitable basis. (v) Light 1. 6. building, insurance of building, plant etc. Thus, the overhead allocation formula is: Cost pool Total activity measure = Overhead allocation per unit (v)Number of Workers: This method is used for the apportionment of certain expenses as welfare and recreation expenses, medical expenses, time keeping, supervision etc. [ 11 0 R] vary to the extent of 70%. expenses like This is used for distributing lighting, electric power, works managers salary, internal transport, steam, water charges etc. (i) It segregates factory overhead costs and computes the total cost of each service departments. is determined as follows: Actual overhead rate = units. 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. machine 877 1,169 1,462 - - 292 3, Allocation and Apportionment of Overheads, Cost Accounting Notes B.Com 4th Sem CBCS Pattern, Micro Economics Notes and Important Questions. i. drawing office of employees or wages of each The second step of absorption costing is apportionment. Expenses, Meaning, Collection and Classification of When the same quantity of materials is used for all units. Apportionment is a term used in accounting to describe the way a business separates and distributes a portion of its gross income. ), Macroeconomics (Olivier Blanchard; Alessia Amighini; Francesco Giavazzi), Fundamentals of Aerodynamics (John David Anderson), Pdf Printing and Workflow (Frank J. Romano), Environmental Pollution and Control (P. Arne Vesilin; Ruth F. Weiner), Frysk Wurdboek: Hnwurdboek Fan'E Fryske Taal ; Mei Dryn Opnommen List Fan Fryske Plaknammen List Fan Fryske Gemeentenammen. <> economically identified with a specific saleable cost unit. Service department P 4 5 3 12 5 0 obj Each item of overheads may be seen and proper estimate of the amount for the coming period may be endobj wages 3,373 4,217 5,060 ( - ) 12,650 - - Account. The example above can be Comment *document.getElementById("comment").setAttribute( "id", "a6595ff82cb3bd7d6a7d2543d58a31a2" );document.getElementById("a8d4f85434").setAttribute( "id", "comment" ); Save my name, email, and website in this browser for the next time I comment. Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. For example, Department A incurred $3,000 for the salary of a supervisor that is specifically related to Department A. apportioned over other departments, production as well as service according to the agreed endobj Indirect labour is obtained in the first place, from the time cards and pay rolls. such a manner so that each department represents a division of activity of the organisation such as repairs (i) Collection and Classification of Factory Overheads: All factory overheads would be collected and classified under appropriate accounting headings, e.g., factory rent, insurance, lighting, depreciation etc. Watch this Video upto the End to know Complete about Allocation and Apportionment of Overheads which includes-(i) Concept of Allocation and Apportionment of . Discuss the meaning and treatment of under-absorption and over-absorption of overheads and apply the same in cost computation. This rate 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. of Machinery Machine Hours Worked, 20,000 25,000 30,000 30,000 35,000 45,000 2,000 3,000 3,000 3,000 3,000 4,000 200 250 300 30,000 35,000 25,000 15 20 25 10,000 20,000 15,000, 75,000 1,10,000 13,000 35,000 1,250 1,05,000 65 50,000. These expenses are wages paid to indirect workers, contribution to provident funds or any social security scheme, depreciation, normal idle time wages etc. 11 0 obj Primary Distribution and Secondary Distribution. Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. 4.Efficiency method: According to this principle, the apportionment of overheads is made on the basis of the production targets. Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. (viii)Light Points: This is used for apportioning lighting expenses. Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 Electric lighting Number of light points or areas. (ii) Hire charges of plant if used for a specific job. //]]>. of hours devoted by Supervisor. actual cost or on the basis of estimated cost: This is also known as historical overhead rate. This method is known as cost apportionment. Services used by other service departments are ignored. Other registers, like, plant and machinery. Thus true overhead cost of each service department is ascertained. methods: (i) Graphical Presentation Method: Under this method, a good number of observations in respect of the These overhead costs are partly fixed and partly variable. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that uses the system. In the production departments, with the help of manual and or machine operations the raw materials are converted to finished goods. distribution, Methods Of Absorbing Production Apportionment is done in 1. Under this method specific criteria are laid down after careful survey for apportionment of charge for different service functions. good deal of attention has to be paid to them. department contribution, general welfare expenses, compensation and other fringe benefits, supervisions etc. Most of the manufacturing process functionally are different and performed by different departments in a (c) Indirect Expenses: Indirect Expenses: Indirect Expenses: Indirect Expenses: (i) Rent, rates and Apportionment refers to the distribution of overheads among departments or cost centers on an equitable basis. 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. <>/Font<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 15 0 R/Group<>/Tabs/S>> So, the term allocation means the allotment of the whole item without division to a particular department or cost centre. When classification of overheads on some scientific and consistent basis is complete, overheads are A company with only one electric meter might allocate the electricity bill to . This process of apportionment is also known as departmentalisation of overhead. Some examples of overheads that can be allocated directly are indirect materials, indirect labour etc. endobj For example, a business incurred $150,000 in a particular period for the light and heat of the entire factory, the wages of sales staff and supervisor, rent of the factory etc. Change in activity or quantity. For example, the salary paid to the works manager of the factory, factory rent, general managers salary etc. For example in a cotton textile mill, spinning, weaving and finishing departments are production departments. Direct labour hours Works managers remuneration, general overtime (iv) Salary or pay bills. Power Horse power multiplied by machine hours or KWH. Expenses, Accounting Treatment of Indirect etc. anticipated volume of production or activity. To understand the process of allocation and apportionment of overheads, let us take the example of High-five Limited, a manufacturing company. Each stores requisitions note specifies the standing order An. ii. Expenses such as depreciation and other element of cost per unit, c represents the total fixed cost, y represents the total cost and x represents the Such departments render services such as repairs, maintenance, electricity, etc. iii. Re-apportionment of service department overheads (Secondary Distribution). Generally, there are three methods to apportionment of overhead; they are: Direct distribution method Under this method, the costs of service department are distributed or apportioned to production department. Direct 9,500 15,000 7, For example, the cost of canteen can be apportioned as the basis of number of employees in each department which is a potential benefit. (vi) Employees of relation to the product. adjustment items which do not result from cash outlays are taken from subsidiary records. Explain the use of cost information in pricing decisions, including marginal cost pricing and the calculation of full cost endobj An Overhead Cost is a cost which cannot be traced directly to the level of activities. Internal transport service Truck hours, truck mileage or tonnage. wages analysis sheet is prepared each month and at the end of the month, the total is debited to Factory another service department. incurred during the accounting period by the actual quantum (quantity/value) of the base selected. are specific charges directly attributable while the indirect expenses are apportioned on suitable basis. On the basis of the above survey the apportionment is made. distribution the distinction between production departments and service departments disregarded since it is Because 2 nd method is same as the concept of 3 rd method. Once the overheads are allocated and apportioned into theproduction departments the overheads need to be related to or absorbedinto the units of product. <> labour welfare dept., canteen, time keeping, repairs and maintenance, tool room, hospital etc.

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