overheads copy signed
TRANSCRIPT
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Dr. Parminder Bajaj
Dr. Parminder Bajaj
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All indirect costs are known as overheads.Overheads can be classified in following ways:
According to nature:
Indirect material Indirect labour
Indirect expenses
According to normality Normal overheads
Abnormal overheads
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According to controllability Controllable overheads
Uncontrollable overheads
According to variability Fixed overheads
Variable overheads Semi-variable overheads
According to functionFactory overheads
Administrative overheads
Selling and distribution overheads
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Provision of obsolescence:1) If provision for obsolescence is created
because actual life is less than estimatedlife, it is like additional depreciation and ischarged to factory overheads.
2) If provision for obsolescence is only forprecautionary measure, it is simply an
appropriation of profits. Hence excludedfrom cost accounts
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Cost of defective workCost of normal defective work is treated as works
overhead whereas abnormal defective work istransferred to costing profit and loss account.
Idle capacityIdle capacity is that part of capacity which is not
actually utilized.Treatment
1) When idle time is due to normal andunavoidable reasons, it is included in the worksoverhead
2) When idle time is due to abnormal reasons liketrade depression, it is charged to costing profit
and loss account3) When idle time is avoidable, it is charged tocosting profit and loss account
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Interest on capital Argument for inclusion-:1) Interest is a reward for capital like wages are
reward for labour. Therefore it should be included
2) The comparison of operations, processes etc.without consideration of interest give misleadingresults. Stock held for maturing like timber,Whisky and beer cost more on account of rent andinterest
Argument against inclusion-:1) Payment of interest is a matter of internal finance
and is no way connected to cost of manufacturing.2) Determination of fair rate of interest is a problem3) It is very difficult to determine the exact capital on
which interest is to be calculated4) If interest is allowed on capital which is not
borrowed, it will unnecessarily inflate the cost ofproduction
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Expenses on erection of machinery - debited toprofit and loss account
Experimental expenses charged to factoryoverheads
Royaltiesif it is paid on output then it is treatedas direct expense, if it is pain on unit sold it istreated as indirect expense
Development cost development cost is puttingthe results of research on practical basis . It maybe charged to specific product . In case if it isheavy it may be charged as deferred expenditure.
Leave travel assistanceleave travel assistanceprovided to production labour is direct cost. AndLTC provided to others may be treated as factory,office or selling as the case may be
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Research costa) basic research relates to knowledge of technicalknow how. Therefore charged to production
processb) Applied research relates to improvement in
product or production techniques. Thereforecharged as deferred expenditure
Fringe benefits- in case if these are substantial itmay be charged as direct cost otherwise as a partof overhead
Tool cost large tools are capitalized while smalltools may be treated as overheads
Data processing cost This cost should beapportioned to the deptt. using the services ofthis department on the basis of computer hours,No. of reports processes, no. of cards punched
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Market research it involves systematic study ofmarket conditions. Therefore it is a sellingexpense. In case if the research is for particularproduct it should be charged to that product. If itis significant it should be charged as deferredexpenditure.
Discounts- trade discount is deducted frompurchases, while cash discount is purely afinancial matter therefore it should not be
included in cost accounts Donations it is not included in cost accounts After sale service included in selling overhead
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Allocationallocation is the process of charging fullamount of overhead cost to a particular cost centre
Apportionment it is the process of splitting ofoverhead cost and charging it to a cost centre onsome equitable basis.
Absorption the term absorption refers to charging ofoverhead of overhead to different cost unit in such away that each cost unit bears an appropriate portionof its share of overhead. This is done by means ofoverhead rate. For eg. Overhead of a dep't are10,000, the total wages of different jobs completed
in the dep't are 40,000and the overhead are to becharged as percentage of direct wages , the overheadrate will be 25% of direct wages
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Overhead Basis of apportionmentFactory rent Floor area occupied
Depreciation Capital value of asset
Heating and lightening No. of light points
Insurance Capital value of assetElectric power Kwh
Supervision No. of employees
Stores overhead Direct material
Material handling charges Weight of material
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ervice dept overhead ApportionmentMaintenance dept Actual service utilized or working
hours
Payroll or time keeping dept Direct labour hours
Personnel dept No. of employees
Store keeping dept no. of requisitions
Purchase dept No. of purchase order
Welfare dept No, of employees
Internal transport service Weight or value of material
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Q 1Following have been extracted from a manufacturing concernfor month of dec.
Indirect material : Production deptt x 950
Production deptt y 1200Production deptt z 200
Maintenance deptt P 1500
Stores deptt Q 400
Indirect wages :Production deptt x 900
Production deptt y 1100Production deptt z 300Maintenance deptt P 1000
Stores deptt Q 650
Power and light 6000
Rent and rates 2800
Insurance on asset 1000Meal charges 3000
Depreciation @6% on assets
contd
Dr. Parminder Bajaj
C td
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Contd.
Prepare overhead distribution summary from above information
Dr. Parminder Bajaj
particulars production dept ervice deptx y z P Q
Area 4000 4000 3000 2000 1000
Capital value ofasset
1,00,000 1,20,000 80,000 60,000 40,000
No. of employees 90 120 30 40 20
Kwh 4000 4400 1600 1500 500
Direct labourhours
3600 3200 2200
No, of materialrequisition
900 600 500
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Q 2 The following data is obtained from the books of ABC co. for halfyear ending 30thsept,05. Calculate the departmental overhead ratefor each of production deptt. assuming that overheads are recoveredas percentage of direct wages.
contd
Dr. Parminder Bajaj
particulars production dept ervice deptA B C D E
Direct wages 2000 3000 4000 1000 2000
Direct material 1000 2000 2000 1500 1500
Staff No.s 100 150 150 50 50
Electricity Kwh 4000 3000 2000 1000 1000
Light point No.s 10 16 4 6 4
Asset value 60,000 40,000 30,000 10,000 10,000
Area occupied sq.yd 150 250 50 50 50
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The entire amount of a servicing department is tobe distributed to only the producingdepartments. Services provided by someservicing departments are used partly by other
servicing department. That is, many servicedepartment serve each other. This is known asinterdepartmental service. There are threemethods available for interdepartmental service.
1) Simultaneous equation method2) Repeated distribution method
3) Trial and error method
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Q 3 The following data find out the production hour rate
Expenses of service deptt are apportioned as under:
A B C D ED 30% 40% 20% -- 10%
E 10% 20% 50% 20% ---
Dr. Parminder Bajaj
particulars production dept ervice deptA B C D E
Rent 200 400 150 150 100Electricity 50 80 30 20 20
Fire insurance 80 160 60 60 40
Plant depreciation 1000 1500 1000 300 200
Transport 50 50 50 100 150Estimated workinghours
1000 2500 1800
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Q 3The New Enterprise Ltd. has productionDepts. A, B and C and two service departmentD and E. the following figures are extracted
from the records of the company:
Rent and rates 5,000General Lighting 600
Indirect wages 1,500Power 1,500Depreciation of machinery 10,000Sundries 10,000
The following further details are available:
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Percentage method
Hourly rate methodPercentage method1) Direct material cost methodFactory overhead rate = Amount of factory overhead x100
cost of direct material used
2) Direct labour cost methodFactory overhead rate = Amount of factory overhead x100
cost of direct labour
3) Prime cost methodFactory overhead rate = Amount of factory overhead x100prime cost
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Hourly rate method1) Machine hour rate methodFactory overhead rate = Amount of factory overhead
machine hours
2) Labour hour rate methodFactory overhead rate = Amount of factory overhead
direct labour hours
3) Dual hour rate method
Where in a shop both manual labour play an equally importantrole
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Expenses BasisStanding charges1. Rent and rates Floor area occupied by each
machine
2. Heating and lightening No of light points
3. Supervision Time devoted to each machine
4. Lubricating oil & consumablestores
Capital value or machine hours
5. Insurance Capital value
Machine or running expenses1. Depreciation Machine hours or capital value
2. Power KWH
3. Repairs Machine hours
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Q- A manufacturing company uses two identical large and four identical
small machine. Each large machine occupies one quarter of the workshopand fully employed three workers. Each small machine occupies half thespace of a large machine and fully employed two workers
Each of the six machine is estimated to work 1440 hours per year, while the
effective working life is taken as 12,000 working hours for each largemachine and 9000 working hours for each small machine. Large machinecost 20,000 each and small machine 4000 each. Scrap values are 4000and 100 respectively.
Repairs, maintenance and oil are estimated to cost for each large machine4000 and each small machine 1200 during its effective working life.
Power consumption cost 5 P. per unit, and amounts for large machine 20units per hour, and for small machine 2 units per hour.
The manager is paid 4800 a year, and the workshop supervision occupieshalf his time which is divided equally among the six machine. Details ofother expenses are :-
Rent and rates of the workshop : 6400 year
Lightening ( to be apportioned in the ratio of workers employed ) 1820 ayear
Taking the period of three months as basis, calculate the machine hour ratefor a large and a small machine respectively.
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Actual overhead rateThe rate is calculated by dividing the total overheads to
be absorbed by actual quantity or value of basisselected. The rate can only be calculated after theoverheads have actually been incurred
Actual overhead rate =Actual overhead expenditure during a month x100
actual base for month Predetermined overhead rateThe rate is determined in advance of incurrence of
overhead rate
Predetermined overhead rate =Budgeted overhead expenditure during a month x100
Budgeted base for month
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Where the overheads are charged to differentcost unit on the basis of predeterminedoverhead rate , at the end of the accountingperiod the total overhead charged will be
roughly equal to actual overhead incurredduring that period. In case if the overheadrecovered from production is more thanactual overhead it is said to be overabsorption of overheadin reverse case it istermed as under absorption of overhead
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Carrying over of overheads- the amount ofunder or over absorption of overhead may becarried over to the next period
Use of supplementary rates
Use of supplementary rates
Dr Parminder Bajaj