drawing office Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. stream
Content Filtration 6. Service department P 4 5 3 12 adjustment items which do not result from cash outlays are taken from subsidiary records. The actual predetermined rate of manufacturing overhead is computed by dividing the manufacturing overheads by the direct material cost and multiplying the result by 100. ii. responsibility for incurring this expenditure is determined in relation to output. Therefore, this method gives stable results. customer and during a slump or a period of depression, decision on make or buy, shut down or continue etc. Works managers remuneration, general overtime expenses, cost of inter-department transfers etc. endstream
Direct Wages Direct Materials Indirect Materials Indirect Wages Area in Square Metres Book value of Machinery Total H.P. Floor area occupied by the machines. endobj
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Floor area For rent, rates and maintenance of building. Under this method, service departments costs are apportioned to production departments only ignoring service rendered by one service department to another. Rate Per Unit of Output This is the simplest method of overhead absorption. Under this method service department overheads are charged to production departments on the basis of potential rather than actual services rendered. 6 0 obj
In apportionment, the cost of overheads is spread over different cost centers on a fair basis. Privacy Policy 9. of employees, etc. 8. Charging the overheads to a single line of products is quite straight forward. iii. (4,612) (3,061). and variable. In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, 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. Machinery 300 350 250 - - 150 1, (iii) No. Indirect Materials 2,000 3,000 3,000 1,000 2,000 2,000 13, on some equitable basis. into fixed and variable, Procedure For accounting and control of Where labour is not the main factor of production, absorption of overheads is not equitable. department, power department, tools department, stores department, cost department, cash department, etc. is compared with the amount of expenses incurred at these different periods. Apportionment of Overheads: Certain expenses such as General Manager's salary, rent of the factory etc. Variable overhead changes in total but its incidence on unit cost remains constant. The Bengal Wholesale Co. is making a study of the relative profitability of the two products it handles. both categories, i. producing and service departments. Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 <>
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AccountingNotes.net. Department X produces 10,000 units of product A and Department Y produces 90,000 units of product B in a particular period. In a manufacturing concern there can be broadly two categories of departments namely production departments and service departments. xOK0{ acP nm6Px;IZd`.BF')Ns&'F+).7jM
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The classification of overheads expenditure depends upon the type and size of a business and the nature of 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. 3 0 obj
machine 877 1,169 1,462 - - 292 3, segments called departments or cost centres to which expenses are charged. 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. For instance, suppose there are two In this case the budget or estimate expenses will apportionment and absorption of overheads. The functional classification divides the overheads in the following manner : 1. However, if it is not possible to charge the overheads to a particular cost centre or cost unit, they are to be apportioned to various departments on some suitable basis. Recognition of Direct Method (When Statement is used), Service department apportion their cost only to production departments. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. At the end of the 4. x. Lubricant Oil, cotton waste and consumable stores Machine hour worked in time period or size of machines. formula: Change in the amount of expenses basis. Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. because they contain both fixed and variable element. (iii) Reciprocal service method: This method gives cognizance to the fact that where there are two or When service department is giving its services to other service departments and production departments then following method are used. In this case the cost is shared out over two or more cost centres according to the estimated benefit received by each cost centre. After having collected the overheads under proper standing order numbers the next step is to arrive at the (ii) Service departments: These departments are not directly engaged in production but they render Fixed 10, 2 0 obj
A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. Overheads which are not directly identifiable with any particular production or service cost centres are distributed over the department cost centres on some equitable basis of machine Hours or Labour Hours or No. mean Indirect expense can come from several sources such as cash book, factory journals or vouchers. conditioning, etc. <>
The term refers to the allotment of expenses which cannot identify wholly with a particular department. endobj
Following is a list of basis, which are frequently used for apportionment of cost of service departments among production departments: Methods of Re-apportionment or Re-distribution. These three are meant for collection of indirect expenses including depreciation of plant and machinery. According to the depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. In this method we use equation to allocate the service departments expenses to production departments. 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 Direct Wages Actual 3,000 3,000 4,000 10,000 10,000 5,000 35, Unlike materials prices, labour rates do not fluctuate so frequently. cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or . Expenses which can be identified with a territory, a customer or product can (viii) Cost of any special process not forming part of the normal manufacture like water proofing for Therefore, it is logical that product cost should bear and equitable share of the cost of service departments. factory, (ii) Power, lighting It is to be carefully noted that at the time of making . of employees in each department. Sometimes, workers are employed with costly equipment and hand tools. Pre-determined overhead rate is determined in advance of the actual production and is computed by dividing (vii) Cost of making a design, pattern for a specific job. Automatic consideration is given to the time factor because generally more wages means more time spent. 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. An algebraical equation will be needed to ascertain the true expenses of a service department in such cases. viii. Direct expenses may be P 1 P 2 P 3 shop. defined as those expenses which are easily identifiable and attributable to the individual units or jobs. Because 2 nd method is same as the concept of 3 rd method. wages analysis sheet is prepared each month and at the end of the month, the total is debited to Factory Under this backdrop, the second step is to distribute the total cost of service departments among the production departments. CHAPTER 4 Service department Q 6 12 30 12 60. and heating of A and B, and two service departments X and Y: the expenses of departments X and Y are respectively 3,000 and 2,000 and are to be apportioned as: You are supplied with the following information and required to work out the production hour rate recovery of overhead in departments A, B and C reapportioning service department expenses by simultaneous equation method as well as by repeated distribution method: Instead of having an algebraic equation, the expenses of one service department may be apportioned to all other departments (production as well as service) and then the expenses of other service departments may be similarly treated until the amount apportioned to a service department becomes insignificant. For example, a company may provide for its own buses for transporting workers to and from the factory. 1. research equipment, The term direct expenses has been excluded from prime cost as per latest CIMA terminology, i. according to CIMA, prime cost is some special tools for utilisation in the main job orders, it is acting as a productive department iv. hour 2,765 5,530 4,147 - - (-)12,442 -, Apportionment of Direct Service department P 1,200 1,600 800 4,000 400 (ii) Hire charges of plant if used for a specific job. relation to the product. 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. Each item of overheads may be seen and proper estimate of the amount for the coming period may be (c) Indirect Expenses: Indirect Expenses: Indirect Expenses: Indirect Expenses: (i) Rent, rates and iii. vary to the extent of 70%. (ii) Departmentalisation of factory overheads. Both metals are quite different in prices and by applying the same percentage for both will be obviously incorrect. You can take the exam ONLINE in this Covid situation Now! Indirect costs are those costs that cannot be charged directly to a specific product. Fundamentally, therefore, there are only two types of expensesfixed after sales service But there are some service departments which occasionally engaged in production apart from rendering services. (ii) Subscription to endobj
So, the business needs to include $15 ($150,000/10,000 units) to each unit to be able to recover the overheads cost and to avoid a loss. This criterion has the greatest applicability in cases where overheads costs can be easily and directly traced to departments receiving the benefits, e.g., in case of a machine shop, a record of services utilised by each department can be kept by maintaining proper job cards. (iv) Power 3, From the following information prepare a manufacturing expense budget and calculate overhead recovery rates for the two production departments as percentages of direct labour : Depreciation calculated as a% of original cost: You are supplied with the following information and required to work out the production hour rate of recovery of overhead for departments A, B and C: Before uploading and sharing your knowledge on this site, please read the following pages: 1. Suppose there are two in this Covid situation Now endobj < > Floor Area for rent, rates and of... 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