OVERHEADS II General overheads TOPICS TO BE COVERED
OVERHEADS II General overheads
TOPICS TO BE COVERED: Absorption Methods of Absorption of administrative and office overheads Absorption of selling & distribution overheads Under and over-absorption of overheads and its accounting treatment Activity Based Costing Comprehensive Problems and solution
QUICK RECAP What are overheads Treatment of special items How to absorb Factory overheads � Allocation � Apportionment � Reapportionment � Absorption Six methods
OVERVIEW General overhead � Absorb office and administrative overheads � Absorb selling and distribution overheads Activity Based Costing
OFFICE AND ADMINISTRATIVE OVERHEADS Methods of absorption � Percentage Overhead rate = [(admin. O. h) / works cost] *100 � Percentage of works cost: of sales Overhead rate = [(admin. O. h) / sales] *100
SELLING AND DISTRIBUTION OVERHEADS Selling cost? Distribution cost? Methods of absorption �A rate per unit sold (divide with units produced) � A percentage of selling price (divide with selling price) � A percentage on work cost
UNDER AND OVER ABSORPTION Meaning: when overheads absorbed () is not equal to amount of actual overhead incurred � Over absorption � Under absorption Root cause: actual rate versus pre-determined rate
CONT… Accounting treatment 1. use of supplementary rates: (difference is divided by the actual base and adjusted accordingly) 2. writing off to costing profit and loss account : when difference is not significant 3. carry over to next years account: largely criticised
PROBLEM 4. 13 M ( N ARORA) particulars x y z Actual factory o/h 48950 89200 64500 absorption 50000 90000 60000 Under absorption(over absorption) (1050) (800) 4500 Net over or 4500 -1050 -800= under absorption 2650
ACTIVITY BASED COSTING Modern approach to determine the total cost of production More refined approach for charging indirect costs to products and computing more accurate product cost Definition
CONT…. Terminology � Activity � Cost object � Cost deriver � Resource cost deriver Purchase of materials No. of orders placed No. of receipts of material No. of inspections
CONT… Steps � Identification of main activity � Creation of cost pool: Purchase of materials � Determination of the activity cost derivers � Calculation of the activity cost driver rate
PROBLEM 4. 15 Problem no. 17 (maheshwari & mittal) particulars Standing charges: Lubrication Consumable stores Wages amout Standing charges per machine hour 40 80 200 (320/8) 40 Variable costs: Depreciation Repair charges(75% of 40) Power consumed( 10 units @ rs 3 p. u) Variable cost per machine hour Rate per machine hour: 40 30 30 100 Rs. 140
WORKING NOTES Calculation of depreciation (450000+50000)/(5*2500)= 40 per machine hour
PROBLEM 13 (M N ARORA) Calculation of overhead absorption rates: (a) Direct material cost %: =(Factory overheads/ Direct material cost )*100 =(56000/ 84000)*100 66. 67% (b) Direct Labour cost %: =(Factory overheads/ Direct labour cost )*100 =(56000/ 112000)*100 50%
(C) Direct labour hour rate =(Factory overheads/ Direct labour hours ) =(56000/ 28000) Rs. 2 per hour (D) Direct Machine hour rate =(Factory overheads/ machine hours ) =(56000/ 56000) Rs. 1 per hour
COMPARATIVE STATEMENT FOR JOB ORDER NO. 707 particulars Material C% Labour C Lab Hr % Machi. Hr Direct mat cost 40 40 Direct lab. Cost 80 80 Prime cost 120 120 Factory overheads @material cost % (@66. 67% of 40) 26. 67 @labour cost% (50% of 80) 40 @labour hour rate (2 for 40 ) 80 @machine hour rate (1 for 45) Work Cost 45 146. 67 160 200 165
SUGGESTED READINGS “Cost Accounting” by M. N. Arora for B. com (prog. ) “Cost Accounting” by Maheshwari and Mittal “ overhead costing- Cost Accounting” Playlist by “grooming Education Academy” on you tube. “#1 Machine hour rate (overhead distribution) ~ Cost Accounting” by CA. Naresh Aggarval on you Tube channel “CA. Naresh Aggarval”
THANK YOU !!
- Slides: 19