ACCOUNTING FOR OVERHEADS BY Dr Kamlesh Khosla M

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 v 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 PRODUCTION DEPARTMENTS P 1 Direct Materials - SERVICE DEPARTMENTS P 2 S 1 S 2 - - - 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 Apportionment COMMON 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 Ø Ø i. iii. On Non Reciprocal Basis/Step ladder method On Reciprocal Basis. Simultaneous 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

q. Percentage of Direct Material Cost Factory Overhead Rate = Amount of Production overheads/ Direct Cost Material x 100 q. Percentage Of Direct Labour Cost Factory Overhead Rate = Amount Of Production Overheads/ Direct Labour Cost x 100 q. Percentage Of Prime Cost Method Factory Overhead Rate = Amount Of Production Overheads/ Prime Cost x 100

q. Direct Labour Hour Rate Factory Overhead Rate = Amount Of Production Overheads/ Direct Labour Hours q. Machine Hour Rate Factory Overhead Rate = Amount of Production Overheads/ Machine Hours q. 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) (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* TOTAL PER HOUR(Rs) -----------------**********

II. MACHINE EXPENSES PER HOUR (a) Depreciation **** (b) Repair & Maintenance **** (c) Power **** (d) Other Running Expenses **** III. Machine hour rate *****

THANK YOU !!!