1 / 16

OVERHEADS

OVERHEADS. Any expenditure in excess of Prime Costs is known as Overheads. In other words- Overheads = Indirect materials+ Indirect Labour+ Indirect expenses Classification of overheads On the basis of elements- Indirect materials Indirect labour Indirect Expenses

apopp
Download Presentation

OVERHEADS

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. OVERHEADS Any expenditure in excess of Prime Costs is known as Overheads. In other words- Overheads = Indirect materials+ Indirect Labour+ Indirect expenses Classification of overheads On the basis of elements- Indirect materials Indirect labour Indirect Expenses On the basis of behaviour- Fixed Overheads Variable Overheads Semi-variable Overheads

  2. On the basis of function- • Factory Overhead • Office & Administrative Overhead • Selling & Distribution Overhead. • Steps in Overhead costing- • Collection of overheads under standing order • Allocation of Overheads • Apportionment of Overhead • Absorption of Overhead • Over/Under absorption of overhead • Accounting for over/under absorption of overheads

  3. Apportionment of overheads • Distinction between allocation and Apportionment • Apportionment of overheads- When costs are incurred for a particular cost centre then it is called allocation of overhead. • Apportionment of Overheads-On the other hand when costs are common to all department, then the costs are apportioned to the department on some equitable basis. • Basis of Apportionment Common ExpensesBasis of apportionment • Factory Rent, Rates& taxes Floor area Occupied • Insurance of Building Costs of building/Floor area

  4. 3) Depreciation of Building Cost of building/Floor area 4) Depreciation Of plant & Machinery Cost of Plant & machinery 5) Insurance of Stock Stock Value 6) Supervisor’s salary No of Workers 7) Canteen expenses/ Staff Welfare Exp No of Workers 8) Indirect Wages Direct Wages 9)Electric charges No of light point x wattages/ no of light point/Floor area 10) Stores Overhead Value of Material 11) General Expenses Working Hours/Direct wages. 12) Power H.P. of machine x Wattage H.P. of Machine

  5. Re-distribution of Overheads: • Re-distribution of service department costs to production department. This may be • Direct service to Production Department • Reciprocal services • Methods of Re-distribution • Repeated method • Simultaneous equation.

  6. Absorption of Overheads • Production Unit method • Direct material Costs Method • Direct labour Costs method • Percentage of Prime costs method • Labour Hour rate method. • Machine Hour rate method

  7. Illustration: X.Ltd. has three production departments A, B and C and two service departments D and E. Following information relates to the month of January 2015: Rent-Rs 10000; Depreciation of machine- Rs 20000; Motive Power- Rs 3000; Indirect wages – Rs 23000; lighting- Rs 2400; Supervisor’s salary- Rs 16000. Additional Information: A B C D E Area Occupied (Sq. Ft) 2000 2500 3000 2000 500 Light points 10 15 20 10 5 Direct wages (Rs) 3000 2000 3000 1500 500 H.P. machine 60 30 50 10 -- No of workers 50 40 60 30 20 Value of Machines (Rs) 60000 80000 100000 5000 5000 Services rendered by department D and E to production department are in the ratio of 5:3:2 and 4:4:2 respectively

  8. Statement Showing Distribution of Overheads Basis of di

  9. Statement Showing Re-distribution of Overheads

  10. ABSORPTION OF OVERHEADS • Absorption of overheads means estimation of overheads on some reasonable basis. • Various methods of overhead absorption are- (i) Percentage of Direct Material. (ii) Percentage of Direct Wages. (iii) Percentage of Prime Costs. (iv) Labour Hour Rate method. (v) Machine Hour Rate Method.

  11. Estimated/ Budgeted Overhead Overhead absorption rate = ---------------------------------------- Absorption Base Overhead absorbed = Actual base x Absorption rate • Machine Hour Rate Method: It is basically an absorption rate of overheads under which factory overheads are absorbed in case where the production is pre-dominantly carried on through machines and the products are not uniform.

  12. Computation of Machine Hour Rate

  13. OVER/UNDER ABSORPTION OF OVERHEADS • Over Absorption- An over absorption occurs when overhead absorbed is more than the actual overheads incurred. • Under Absorption- an under absorption occurs when overhead absorbed is less than the actual overheads incurred. Treatment of Over/under absorption of Overheads • Transfer to Costing Profit & Loss account. • Carried to the next accounting year. • Adjusted the overhead absorption rate with a supplementary rate.

  14. Overhead absorption for the departments Deptt A= Machine Hour x Machine hour rate = 14000 hrs x Rs 1.50 = Rs 21000 Deptt B = Direct Labour Hour x Hourly Rate = 3000 hrs x Rs 1.30 = Rs 3900 Deptt C = Direct Wages x Overhead % = Rs 6000 x 80% = Rs 4800 Deptt D = No. of Pieces x Overhead Rate = 950 x Rs 2.00 = Rs 1900

  15. Statement showing Over/Under Absorption of Overhead

More Related