PA302 COST ACCOUNTING

OVERHEAD

BY : PUAN WAN MAIMUNAH WAN ISHAKCOMMERCE DEPART.

POLISAS

WHAT IS OVERHEAD COST ?

Any indirect cost

Cost which is cannot be allocated directly to unit of production.

Including indirect raw materials, indirect labour and indirect expenses.

THE CLASSIFICATION OF OVERHEAD

FACTORY OVERHEAD * includes all indirect cost incurred by the manufacturing department from the receipt of raw materials until the product is finished and placed in saleable state until they are sold and delivered.

ADMINISTRATION OVERHEAD* Includes indirect costs incurred in directing and controlling general company policies and programmes for the operation of the manufacturing

SELLING AND DISTRIBUTION OVERHEAD * Are also known as general business overhead, such as sales expenses, promotion and the salesmen salaries.

ALLOCATION AND APPORTIONMENT OF OVERHEAD

Departmentalization of overhead• means dividing the company into segments called cost centers to which expenses are incurred.

* Productions department = represents a subunit of the company where manufacturing activity takes place.

* Service departments =represent cost centers which provide support for the production department.

Primary Distribution• Some overhead costs can be directly

identified with a particular department or cost center and can be allocated specifically to the department.

• However, there are some overhead costs that cannot be identified and charged directly to a department. The costs must be apportioned to any department using such items.

• Cost apportionment is the process of charging expenses in an equitable proportion to the various cost center or department.

• Further about apportionment…

Bases of apportionment, which are common in use:

COST ITEM BASES OF APPORTIONMENT

lighting and heating, rent and rates, depreciation on building , building repairs.

Floor area occupied

Depreciation an plant and machinery, insurance on building, and maintenance of plant and machinery.

Capital values

tools and fixtures, power and work management remuneration.

Direct labour hour/machine hour

Canteen, accident insurance, medical, personnel department expenses, supervision and wage department.

Number of workers employed

Power Kilowatt hours/capacity of machinery

RMIndirect materials: Depart. A B C D

9501200

2001500

Indirect Wages Depart. A B C D

9001100300

1000Rent 2000Repair 1200Depreciation of plant 900Light 200Supervision 3000Insurance for stock 1000Employee’s insurance 300Power 1800

Example 7.1The Elegant Company has four departments.A, B and C are the production departments and D is a servicing department. The actual costs for a period are as follows:

The following data are also available in respect of the four departments:

Dept. A Dept. B Dept. C Dept. DArea(sq.feet) 150 110 90 50No. of workers 24 16 12 8Total Wage RM8000 RM6000 RM4000 RM2000Value of plant RM24,000 RM18,000 RM12,000 RM6000Value of stock RM15,000 RM9000 RM6000 -

You are required to apportion the above costs to the various departments on the most equitable method.

Do not fear of opposition and challenges…remember a kite

rise against the wind…LETS CHECK OUT THE ANSWER….

TOTAL COST : DEPT A DEPT B DEPT C DEPT D

Secondary Distribution

The overhead costs of service department should be further assigned to production Departments.

WHY ?Service departments do not themselves manufacture anything. The reassignment or reapportionment of service departments overhead to production department is termed secondary distribution.

2 METHODS OF APPORTIONMENT OF OVERHEAD

CONTINUOUS METHOD:

• In this method, the process of apportioning service departments overhead is continued until the figure becomes immaterial

DIRECT METHOD

• This is the most common method of allocating service department cost to production departments because of its mathematical simplicity and ease of application. It involves allocation and ignores any services provided by one service department to another.

Eg.1 (secondary distribution) :• Assume the following data for A. Azim Industries:• The departmental distribution (primary distribution) summary

has the following totals:Production Department Service department

A B C X Y

800 700 500 234 300

The expense of the service departments is charged out on a percentage basis as following:

You are required to show the reapportionment of overhead using continuous method.

A B C X YX 20% 40% 30% - 10%

Y 40% 20% 20% 20% -

Solution :A B C X Y

overhead costs (Primary Distribution)

800 700 500 234 300

X – 234 (20:40:30:-:10)

47 94 70 (234) 23

323

Y – 323 (40:20:20:20:-)

129 65 65 65 (323)

X – 65 (20:40:30:-:10)

13 26 20 (65) 6

Y-6 (40:20:20:20:-)

2.4=2 1.2=1 1.2=1 1.2=1 (6)

X 0.2 0.4 0.3 (1) 0.1

Total overhead

991 886 656 0 0

Example 2 :• Assume the following data for A. Azim Industries:• The departmental distribution ( primary distribution ) summary

has the following totals:

• The expenses of the service departments is charged out on a percentage basis as follows:

• You are required to show the reapportionment of overhead using direct method.

Production Department Service departmentA B C X Y

800 700 500 234 300

A B C X YX 20% 40% 30% - 10%

Y 40% 20% 20% 20% -

Solution :A B C X Y

Overhead costs (Primary Distribution)

800 700 500 234 300

X – (20:40:30)

47 94 70 (234) 23_

323

Y – (40:20:20)

(323)

Total Overhead

ABSORPTION OF OVERHEAD COSTS

After all service departments overhead costs have been apportioned to production departments, the next step is to spread factory overhead to different products or job produced.

This is termed as ‘overhead absorption’.

Methods of Absorption Some method of overhead absorption has to be applied to absorb factory overhead to individual

product or jobs on some equitable basis. The rate, which is used to charge overhead costs to the products job, is known as absorption rate.

The following are the generally recognized methods of absorption rate

The activity level that should be used are base on items such as direct labour hours, direct labour costs, machine hours, direct material costs and unit of output.

PREDETERMINED OVERHEAD RATES

Predetermined OH Rate = Budgeted OH Budgeted activity level

Under and over absorption occurred when:the amount of overhead expenditure incurred differs from the amount budgeted; andthe actual production volume differs from the budgeted production

Example 1:• The following data was collected for MM factory:

Production overheads RM10000Direct labour hours 2000 hoursDirect labour costs RM8000Machine hours 4000 hoursDirect materials costs RM5000Production 2500 units

Calculate OAR using the following bases:

a. Direct labour hours;b. Direct labour costsc. Machine hours;d. Direct material costs; ande. Production output.

Solution :a) OAR = Budgeted Overhead

Budgeted Direct labour hours= 10,000

2000 DLH= RM5 per direct lab. hour.

b) OAR =OverheadDirect labour costs

= 10000 8000

= 125% of direct labour costs

Solution :• c) OAR = Overhead

Machine hours = 10000

4000 machine hours= RM2.50 per machine hour

• d) OAR = Overhead

Direct material costs= 10000

5000= 200% of direct material costs

• e) OAR = Overhead

Production output= 10000

2500= RM4 per unit

Example 2:

• Turn to page 3 eg 8.3 ( your module)

Lets try out that exampleExperience is

not what happens to

you. It is what you do with

what happens to you

(b)