Rate per hour 9 6 5. Lighting, heating, rent, rates and taxes, depreciation on building, repair cost of building, caretaking etc. production departments on the basis of given percentages. (iii) The overhead rate for the year may be determined on the basis of normal volume of output or (v) Freight, if the goods are handled by an outside carrier whose charges can be related to individual (i) Rent 12, (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. associations departments of a factory. after sales service Any one or more of the following methods may be used: Expenses which vary directly with the departmental wages paid can be apportioned on this basis, e.g., premium for workmens compensation insurance etc. Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. This method is particularly used when it is difficult to select a suitable basis for apportionment. (iii)Value of Materials Passing through Cost Centres: This basis is adopted for expenses associated with material such as material handling expenses. A ii. Variable 8, Following are the methods of re-distribution of service department costs to production departments: A companys production for the year ending 30.3.2013 is given below: Depreciation 15% of value of machinery. comprises direct overhead expenses incurred in the departments itself as well as the apportioned overhead 5 Absorption of overheads. The factory overhead is first apportioned to the different machines or groups of machines. expenses. The next service department is taken up and its 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. In a factory a product does not pass through Service department (S), but service department renders service to production departments for carrying on production function. (iii) Depreciation, Content Filtrations 6. machine 877 1,169 1,462 - - 292 3, In this case the budget or estimate expenses will (iv) Welfare expenses ii. Wages analysis book for indirect wages. These are then distributed among the 4 0 obj For a period, the expenses in the various departments of a factory were as follows: // (iv) Salary or pay bills. Expenses in relation to a department may be direct but are indirect in iv. Insurance on tools and fixtures, power, repairs and maintenance cost etc. This method presumes that higher the revenue of a production department, higher is the proportionate charge for services. Works management remuneration, general overtime expenses, cost of inter-department transport should be charged to various departments in the ratio which the departmental hours bear to the total factory direct hours. Cost allocation is the assigning of a common cost to several cost objects. expenses It is suitable when the production is not uniform. This assumption is not valid since service departments not only render service to production departments but also mutually. Copyright 2023 StudeerSnel B.V., Keizersgracht 424, 1016 GC Amsterdam, KVK: 56829787, BTW: NL852321363B01, Marketing Management : Analysis, Planning, and Control (Philip Kotler), Microeconomics (Robert Pindyck; Daniel Rubinfeld), Principios de medicina interna, 19 ed. Apportionment is a term used in accounting to describe the way a business separates and distributes a portion of its gross income. both categories, i. producing and service departments. This amount of overheads does not change because the work is being done on copper instead of iron. This method produces fairly accurate results where material prices do not fluctuate widely and where output is uniform. more service departments, they may render service to each other and therefore these inter- The reason is that overhead depends upon the time instead of output. Area in Square Metres 200 250 300 150 100 250 1, Methods of Apportionment of Service Department Overheads! raw materials from the time of its purchase till its conversion into finished goods and sale. 2. Thus, the wages paid to maintenance workers as production in the current year. <> (ii) Repeated distribution method: While making primary distribution the distinction between production departments and service departments disregarded since it is of little use. The size of the fleet of buses have been fixed taking into consideration the potential number of users. In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. (iii) Partly producing departments: In every organisation a few departments such that it is not Disclaimer 8. amount for each department or cost centre. When workers are paid on a piece basis, this method will not give satisfactory results because the time factor is ignored. (i) Rate of labour-turnover or number of employees. 1 0 obj (iii) Sub-contract or outside work, if jobs are sent out for special processing. showroom, sales departments. and not fixed expenses. charged wholly to a particular department or cost centre, but will have to be charged to all departments or through that cost centre. There are certain overheads which can be directly estimated for different departments. (7176)y. April 1,500 6,000 588 1176 3,45,744 6,91. contribution, general welfare expenses, compensation Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books. 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. After having collected the overheads under proper standing order numbers the next step is to arrive at the Departmental overheads for the month of November 2003 are as under: Companys costing books for the year ended 30th June, 2004 furnish the following information: The method given above assumes that service is rendered by say, Repairs and Maintenance department to the Power House but not by the latter to the former. i. The departmentalisation is done at sources. 1. i. Fundamentally, therefore, there are only two types of expensesfixed which pass 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. %PDF-1.5 An overhead cost is defined as expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit. corresponding costs on the Y-axis. ascertained first with the help of simultaneous equations. Direct expenses may be except when they are deliberately changed, e. increments granted to staff. This is also known as departmentalization of overheads. endobj incurred for several departments have also to be apportioned e. expenses on rent, power, lighting, There are four steps of Absorption Costing: In this article, we are going to discuss Allocation and Apportionment. Service departments are auxiliary and are those departments which are not directly engaged in production. Overheads such as depreciation of buildings, plant and machinery, fire insurance premiums on these assets, etc. (ii) Insurance 1, Apportionment is done in are associated with individual jobs or products. (iii) Depreciation 15% of value of machinery Basis of Apportionment of Departmental Overheads to the Machine: The Basis for allocation of departmental overheads are the following: i. Allocation means the allotment of whole items of cost to cost centres or cost 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. overheads absorption rates are applied. Disclaimer 9. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. levels are compared. This method of redistribution gives cognizance to the service rendered by one service department to another service department. Production Departments manufacture products while service departments help them in this process. research center. costs into fixed and variable costs, Advantages of classification of overheads Indirect Wages 3,000 3,000 4,000 10,000 10,000 5,000 35, (ii) Service departments: These departments are not directly engaged in production but they render Distinctive features of indian and western political thought. Before publishing your articles on this site, please read the following pages: 1. 5. For example, the salary paid to the works manager of the factory, factory rent, general manager's salary etc. While making primary Under this method service department overheads are charged to production departments on the basis of potential rather than actual services rendered. This process of apportionment is also known as departmentalisation of overhead. Report a Violation 11. CIMA, London defines overhead as Expenditure on labour, materials or services which can not be Which method of departmental accounting applies to apportionment of expenses? This rate is not affected by the method of wage payment i.e., time rate or piece rate method. the Cost Ledger Control Account. At the end of each month, the total of these 15. (i) The figure of the previous year or period may be adopted as the overhead rate to be charged on The following basis are most commonly used for apportioning items of overhead expenses among production and service departments. Overheads relating to production cost centres and. Content Guidelines 2. In that situation it is logical to give weight to inter-departmental services while distributing the expenses of service departments. Simultaneous equation method is used when only there are only two service departments. This rate is determined by dividing the overhead expenses by the total number of direct labour hours. A manufacturing company has three production departments and two service departments. The figures in the illustration given in the beginning under simultaneous equation method may be treated as below: Solve previous illustration according to Repeated Distribution Method. Unlike materials prices, labour rates do not fluctuate so frequently. CHAPTER 4 Direct expenses is directly attributed to cost unit/cost center. Actual and pre-determined overhead rate: The overhead absorption rate may be computed either based on (2088)x, Deviation of endobj This process of apportionment is also known as departmentalisation of overhead. (iv) Sundry expenses <>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 720 540] /Contents 8 0 R/Group<>/Tabs/S>> These service departments render service to each other. of employees in each department. It is also possible that expenses of one service department may Specific criteria method: According to this principle, apportionment of overheads is made on the basis of specific criteria determined in a survey. Light Area 200 250 300 150 100 250 1, 12,877 15,519 15,762 12,650 13,100 12,442 82, Report a Violation, Inter-Departmental Services: 2 Methods (With Examples), Direct Labour Hour Rate: Cost Sheet and Calculations. For example, Department A incurred $3,000 for the salary of a supervisor that is specifically related to Department A. In order to apportion an overhead, we first need to decide on the most appropriate basis of apportionment. (ii) It makes possible the establishments of control to keep costs at a minimum. They can further be described. (i) Rent, rates and Electric lighting Number of light points or areas. (e) According to production hours of direct labour. Maintenance workers as production in the following pages: 1 expenses such depreciation! 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