Overhead Accounting and Allocation Process
Overhead Accounting
Allocation & Apportionment of Overheads
After the overheads costs are collected & codified the
next step is Allocation ands Apportionment.
Departmentalization or Primary Distribution
It is the process of allocation & apportionment of
overhead cost to different departments or cost
centres.
Cost centres/ departments are divided into
:
1.
Production deptt.
2.
Service Deptt
Production Department
A
production deptt/ cost centre:
is engaged in
production activity by conversion of raw material into
finished production.
The number of such departments and their number
will depend upon the nature of industry, type of work
performed and the size of the factory.
For example, in Steel Rolling Mill, Hot Mill, Cold Mill,
Pickling Shop, Annealing Shop, Hardening, Polishing
and Grinding are the producing departments.
Service Department
A Service Deptt/ costcentre
: are those which are
ancillary to and render service to other production and
service cost centres.
The number of departments in a factory and the
names to be assigned to them depends upon size of
the factory, nature of industry and the nature of
service rendered.
The service departments, common to most concerns
are stores, cost office, personnel department, planning
and progress department, tool room, hospital and
dispensary, machine maintenance and electrical
maintenance section
Allocation of overheads
Allocation is the
process of assigning the whole
item of cost directly to a cost centre
Allocation can be done only when the exact item of
overhead cost in a cost centre is definitely known.
For example, the whole of overtime wages paid to
the workers relating to a particular department
should be charged to that department or the cost
of repairs and maintenance of a particular
machine should be charged to that particular
department wherein the machine is located
Apportionment of Overheads
Apportionment
refers to proportionate
distribution of overheads to more than one cost
centre on a suitable basis.
Thus where a overhead cost is common to different
cost centres, it is charged to them on a suitable
basis.
For eg. factory rent, insurance, factory lighting etc.
may benefit a number of departments. The need to
be apportioned (i.e. distribution to various
departments in the factory)
Distinction between allocation & apportionment
Basis of Apportionment
Primary Distribution of Overheads
Primary distribution of overheads
refers to allocation
and apportionment of overhead expenses among
production and service departments
of an
organization.
This process involves allocation of overheads which
can be directly identified with a particular department
and apportionment of common item of overheads on
appropriate basis among all the departments.
The entire process of allocation and apportionment is
systematically presented in a perform which is known
as primary distribution overhead summary
or
overhead distribution summary.
Primary distribution Overhead summary
While preparing overheads distribution summary, it is
important to note:
that the direct costs of the service departments should be
considered as overheads. Hence the direct material, direct
labour and direct expenses of the service departments are
allocated directly and recorded in the overheads
distribution summary since these are overheads from
production point of view.
But the direct material, direct labour and direct expenses of
the production departments need to be excluded from this
summary since these are not overheads.
Re-apportionment of Service Department
cost (secondary distribution)
Once the overheads have been allocated or
apportioned to production & service department the
next step is to
reapportion the total cost of service
department to production department
.
The ultimate objective is to charge the entire
overheads to cost units as cost units are produced in
the production deptt. Thus the cost of the service
deptt must be charged to the production deptt.
This is known as
Secondary distribution
Basis for Secondary Distribution
Apportionment of service department
overheads
Re-apportionment of service deptt
cost
Re-app to prod.
Deptt only
Re app to prod. &
service deptt
Non-reciprocal
basis
Reciprocal
basis
Repeated
distribution
method
Trial & error
method
Simultaneous
equation method
Reapportionment to production
department only
This method is adopted when the various service
departments render services only to the production
department and there is no exchange of services
among them.
Do eg. 3 from S. singh pg 5.15
OR
Do illustration 4.3 from MN Arora pg 4.14
Reapportionment to production as well as
service deptt.
This method is followed when the service department
provides services not only to the production deptt but
also to other service deptt.
For eg. Power house service deptt provides electricity
service to both production and other services
department like maintenance deptt, canteen deptt.,
warehousing deptt etc.
This type of inter-service deptt apportionment may be
either reciprocal or non-reciprocal.
Reciprocal and non-reciprocal basis of
apportionment
Non- Reciprocal basis: is when the service deptt
renders service to the production and other service
deptt but does not receive services of other deptts i.e
one-way flow.
Service department are not inter-dependent
We follow the step- ladder method: Do eg. 4 from S.
singh. Pg 5.17 or ills 4.4 mn arora pg 4.16
Reciprocal and reciprocal basis of
apportionment
This method of apportionment is used when the
service department renders service to production as
well as other service departments and in turn also
receives services from other service department.
Service departments are inter-dependent on one
another.
For eg:
Power house provides electricity to
maintenance deptt and in turn receives maintenance
from them.
Methods of reciprocal basis
Repeated distribution method: refer- eg. 5 S. singh
book pg 5.18
Trial and Error method: refer eg 6 S. singh book pg
5.19
Simultaneous equation method: refer eg 7 s. singh
book pg 5.21
Overhead accounting involves allocating and apportioning overhead costs to different departments or cost centers in a company. This process includes dividing cost centers into production and service departments, assigning overhead costs accurately, and distributing common overhead costs proportionately. Allocation assigns specific costs directly to a cost center, while apportionment distributes shared costs among multiple cost centers.
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Presentation Transcript
Allocation & Apportionment of Overheads After the overheads costs are collected & codified the next step is Allocation ands Apportionment. Departmentalization or Primary Distribution It is the process of allocation & apportionment of overhead cost to different departments or cost centres. Cost centres/ departments are divided into: Production deptt. Service Deptt 1. 2.
Production Department A production deptt/ cost centre: production activity by conversion of raw material into finished production. The number of such departments and their number will depend upon the nature of industry, type of work performed and the size of the factory. For example, in Steel Rolling Mill, Hot Mill, Cold Mill, Pickling Shop, Annealing Shop, Hardening, Polishing and Grinding are the producing departments. is engaged in
Service Department A Service Deptt/ costcentre : are those which are ancillary to and render service to other production and service costcentres. The number of departments in a factory and the names to be assigned to them depends upon size of the factory, nature of industry and the nature of service rendered. The service departments, common to most concerns are stores, cost office, personnel department, planning and progress department, tool room, hospital and dispensary, machine maintenance maintenance section and electrical
Allocation of overheads Allocation is the process of assigning the whole item of cost directly toa cost centre Allocation can be done only when the exact item of overhead cost in a costcentre is definitely known. For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department or the cost of repairs and maintenance of machine should be charged to that particular department wherein the machine is located a particular
Apportionment of Overheads Apportionment refers to proportionate distribution of overheads to more than one cost centre on a suitable basis. Thus where a overhead cost is common to different cost centres, it is charged to them on a suitable basis. For eg. factory rent, insurance, factory lighting etc. may benefit a number of departments. The need to be apportioned (i.e. distribution to various departments in the factory)
Primary Distribution of Overheads Primary distribution of overheads refers to allocation and apportionment of overhead expenses among production and service departments of an organization. This process involves allocation of overheads which can be directly identified with a particular department and apportionment of common item of overheads on appropriate basis among all the departments. The entire process of allocation and apportionment is systematically presented in a perform which is known as primary distribution overhead summary or overhead distribution summary.
Primary distribution Overhead summary While preparing overheads distribution summary, it is important to note: that the direct costs of the service departments should be considered as overheads. Hence the direct material, direct labour and direct expenses of the service departments are allocated directly and recorded distribution summary since these are overheads from production point of view. in the overheads But the direct material, direct labour and direct expenses of the production departments need to be excluded from this summarysince these are not overheads.
Re-apportionment of Service Department cost (secondary distribution) Once apportioned to production & service department the next step is to reapportion the total cost of service departmenttoproductiondepartment. The ultimate objective is to charge the entire overheads to cost units as cost units are produced in the production deptt. Thus the cost of the service deptt must becharged to the productiondeptt. This is known as Secondarydistribution the overheads have been allocated or
Apportionment of service department overheads Re-apportionment of service deptt cost Re-app to prod. Deptt only Re app to prod. & service deptt Non-reciprocal basis Reciprocal basis Repeated distribution method Simultaneous equation method Trial & error method
Reapportionment to production department only This method is adopted when the various service departments render services only to the production department and there is no exchange of services among them. Do eg. 3 from S. singh pg 5.15 OR Do illustration 4.3 from MN Arora pg 4.14
Reapportionment to production as well as service deptt. This method is followed when the service department provides services not only to the production deptt but also to other service deptt. For eg. Power house service deptt provides electricity service to both production and other services department like maintenance deptt, canteen deptt., warehousing deptt etc. This type of inter-service deptt apportionment may be either reciprocal or non-reciprocal.
Reciprocal and non-reciprocal basis of apportionment Non- Reciprocal basis: is when the service deptt renders service to the production and other service deptt but does not receive services of other deptts i.e one-way flow. Service department are not inter-dependent We follow the step- ladder method: Do eg. 4 from S. singh. Pg 5.17 or ills 4.4 mn arora pg 4.16
Reciprocal and reciprocal basis of apportionment This method of apportionment is used when the service department renders service to production as well as other service departments and in turn also receives services from other service department. Service departments are inter-dependent on one another. For eg: Power house provides electricity to maintenance deptt and in turn receives maintenance from them.
Methods of reciprocal basis Repeated distribution method: refer- eg. 5 S. singh book pg 5.18 Trial and Error method: refer eg 6 S. singh book pg 5.19 Simultaneous equation method: refer eg 7 s. singh book pg 5.21
