ACCOUNTING FOR OVERHEADS

BY- Dr. Kamlesh Khosla M.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 Overheads Step 2 -> Collection of Overheads Step 3 -> Allocation of Overheads Step 4 -> Apportionment of Overheads Step 5 -> Re-apportionment of service department overheads Step 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 Overheads
ITEMS OF OVERHEADS ALLOCATED Direct Materials Direct Wages Direct Expenses Direct Material Indirect Wages TOTAL OVERHEADS ALLOCATED ********* PRODUCTION DEPARTMENTS P1 P2 *********** SERVICE DEPARTMENTS S1 ********** S2 **********

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 Apportionment
COMMON ITEMS OF PRODUCTION OVERHEADS (a) Factory rent, rates & taxes (b) Insurance of factory building BASIS OF APPORTIONMENT Floor area occupied

(a) Insurance of Plant & Machinery (b) Depreciation of Plant & Machinery
(a) Insurance of Stock (a) Supervision (b) Canteen Staff Welfare Expenses

Capital Cost of Plant & Machinery

Insured Value of stock No. of workers

(a) Compensation to Workers (b) PF Contribution

(a) Stores Overheads/keeping expenses (a) Material Handling Charges (a) Lighting & Heating

Wages
Value of direct materials Weight of direct Materials 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
i. ii. iii. On Non Reciprocal Basis/Step ladder method On Reciprocal BasisSimultaneous Equation Method Repeated Distribution Method Trial & Error Method

Methods Of Absorption Of Overheads

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

METHODS 1. Percentage Of Direct Material Cost 2. Percentage of Direct Labour Cost 3. Percentage of Prime Cost 4. Direct Labour Cost 5. Machine Hour Rate 6. Rate Per Unit Of Production

How to calculate??
Percentage of Direct Material Cost
Factory Overhead Rate = Amount of Production overheads/ Direct Cost Material x 100

Percentage Of Direct Labour Cost

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

Percentage Of Prime Cost Method

Factory Overhead Rate = Amount Of Production Overheads/ Prime Cost x 100

Continued.
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 Hours

Rate Per Unit Of Production

Factory Overhead Rate = Amount Of Production Overheads/ No. of Units of Production

Computation Of Machine Hour Rate

I. Fixed/ Standing Charges TOTAL 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 (a) Depreciation (b) Repair & Maintenance (c) Power (d) Other Running Expenses

PER HOUR **** **** **** **** **********

III. Machine hour rate

THANK YOU !!!