ACCOUNTING FOR OVERHEADS

BY- Dr. Kamlesh KhoslaM.com, M.A.(Eco.), PH.D

PG Diploma in PMIR &PG Diploma in Journalism and Mass Communication

INTRODUCTION Accounting of Overheads is one of the most

important & technical aspect of Cost accounting. From Cost reduction & Cost control point of view, overhead play a great role. So, proper understanding of computation and accounting of overhead is must for Students of commerce.

Meaning of OVERHEADS???

• Overheads is the aggregate of indirect materials cost, indirect labour cost and indirect expenses which cannot be conveniently identified with and directly allocated to a particular cost centre or cost object.

Example- Indirect Material Cost Indirect Labour Cost Indirect Expenses

Distribution Of Overheads

Step 1 -> Classification of OverheadsStep 2 -> Collection of OverheadsStep 3 -> Allocation of OverheadsStep 4 -> Apportionment of OverheadsStep 5 -> Re-apportionment of service department

overheadsStep 6 -> Absorption of Overheads

Classification Of Overheads

By Function

•Production Overheads•Administrative Overheads•Selling Overheads•Distribution Overheads

By Behaviour

•Fixed Overheads•Variable Overheads

By Element•Indirect Materials•Indirect Labour•Indirect Expenses

Collection of Overheads

Collection of overheads means the collection of various items of overheads under suitable account heading and a unique Standing Order Number(S.O.N.) or Cost Account Number(C.A.N.).

Sources -> Material Requisitions

-> Wages analysis Book -> Invoices -> Cost Journal -> Subsidiary Records

Allocation Of OverheadsITEMS OF OVERHEADS ALLOCATED

PRODUCTION DEPARTMENTS

SERVICE DEPARTMENTS

P1 P2 S1 S2

Direct Materials

- - - -

Direct Wages - - - -

Direct Expenses

- - - -

Direct Material - - - -

Indirect Wages - - - -

TOTAL OVERHEADS ALLOCATED

********* *********** ********** **********

Apportionment of overheads

• It is the process of charging the proportion of common items of cost to two or more cost centres on some equitable basis.

PRINCIPLES FOR APPORTIONMENT OF OVERHEADS(a) Actual Benefit(b) Potential Benefit(c) Ability to pay(d) Specific Criteria/Survey method

Basis Of ApportionmentCOMMON ITEMS OF PRODUCTION OVERHEADS

BASIS OF APPORTIONMENT

(a) Factory rent, rates & taxes(b) Insurance of factory building

Floor area occupied

(a) Insurance of Plant & Machinery(b) Depreciation of Plant & Machinery

Capital Cost of Plant & Machinery

(a) Insurance of Stock Insured Value of stock

(a) Supervision(b) Canteen Staff Welfare Expenses

No. of workers

(a) Compensation to Workers(b) PF Contribution

Wages

(a) Stores Overheads/keeping expenses Value of direct materials

(a) Material Handling Charges Weight of direct Materials

(a) Lighting & Heating No. of light points or floor area occupied

Secondary Distribution Of Overheads It means the apportionment of overheads of service

departments among the production departments on some suitable basis.

METHODS On Non Reciprocal Basis/Step ladder method On Reciprocal Basis-i. Simultaneous Equation Methodii. Repeated Distribution Methodiii. Trial & Error Method

Methods Of Absorption Of Overheads Overhead Absorption Rate = Total overheads of cost centre/ Total Quantum of base

METHODS1. Percentage Of Direct Material Cost2. Percentage of Direct Labour Cost3. Percentage of Prime Cost 4. Direct Labour Cost5. Machine Hour Rate6. Rate Per Unit Of Production

Percentage of Direct Material Cost Factory Overhead Rate = Amount of Production

overheads/ Direct Cost Material x 100Percentage Of Direct Labour Cost Factory Overhead Rate = Amount Of Production

Overheads/ Direct Labour Cost x 100Percentage Of Prime Cost Method Factory Overhead Rate = Amount Of Production

Overheads/ Prime Cost x 100

Direct Labour Hour Rate Factory Overhead Rate = Amount Of Production

Overheads/ Direct Labour Hours Machine Hour Rate Factory Overhead Rate = Amount of Production

Overheads/ Machine HoursRate Per Unit Of Production Factory Overhead Rate = Amount Of Production

Overheads/ No. of Units of Production

Computation Of Machine Hour RateI. Fixed/ Standing

ChargesTOTAL PER MACHINE (Rs) TOTAL PER HOUR(Rs)

(a)Rent & Rates ******

(b) Heating & Lighting *****

(c) Supervision ******

(d) Insurance ******

(e) Lubricating oil & Consumable Stores

******

(f) Sundry Shop Supplies ******

(g) Department & General Overheads

******

TOTAL FIXED CHARGES ----------------------------------

STANDING CHARGES PER HOUR* *******************

II. MACHINE EXPENSES PER HOUR PER HOUR

(a) Depreciation ****

(b) Repair & Maintenance ****

(c) Power ****

(d) Other Running Expenses ****

III. Machine hour rate **********

THANK YOU !!!