Dr.

Parminder Bajaj

Dr. Parminder Bajaj

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

Dr. Parminder Bajaj

According to controllability Controllable overheads Uncontrollable overheads According to variability Fixed overheads Variable overheads Semi-variable overheads According to function Factory overheads Administrative overheads Selling and distribution overheads

Dr. Parminder Bajaj

Provision of obsolescence: 1) If provision for obsolescence is created because actual life is less than estimated life, it is like additional depreciation and is charged to factory overheads. 2) If provision for obsolescence is only for precautionary measure, it is simply an appropriation of profits. Hence excluded from cost accounts

Dr. Parminder Bajaj

Cost of defective work Cost of normal defective work is treated as works overhead whereas abnormal defective work is transferred to costing profit and loss account. Idle capacity Idle capacity is that part of capacity which is not actually utilized. Treatment 1) When idle time is due to normal and unavoidable reasons, it is included in the works overhead 2) When idle time is due to abnormal reasons like trade depression, it is charged to costing profit and loss account 3) When idle time is avoidable, it is charged to costing profit and loss account

Dr. Parminder Bajaj

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 misleading results. Stock held for maturing like timber, Whisky and beer cost more on account of rent and interest 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 problem 3) It is very difficult to determine the exact capital on which interest is to be calculated 4) If interest is allowed on capital which is not borrowed, it will unnecessarily inflate the cost of production

Dr. Parminder Bajaj

Expenses on erection of machinery - debited to profit and loss account Experimental expenses charged to factory overheads Royalties if it is paid on output then it is treated as direct expense, if it is pain on unit sold it is treated as indirect expense Development cost development cost is putting the results of research on practical basis . It may be charged to specific product . In case if it is heavy it may be charged as deferred expenditure. Leave travel assistance leave travel assistance provided to production labour is direct cost. And LTC provided to others may be treated as factory, office or selling as the case may be

Dr. Parminder Bajaj

Research costa) basic research relates to knowledge of technical know how. Therefore charged to production process b) Applied research relates to improvement in product or production techniques. Therefore charged as deferred expenditure Fringe benefits- in case if these are substantial it may be charged as direct cost otherwise as a part of overhead Tool cost- large tools are capitalized while small tools may be treated as overheads Data processing cost- This cost should be apportioned to the deptt. using the services of this department on the basis of computer hours, No. of reports processes, no. of cards punched

Dr. Parminder Bajaj

Market research- it involves systematic study of market conditions. Therefore it is a selling expense. In case if the research is for particular product it should be charged to that product. If it is significant it should be charged as deferred expenditure. Discounts- trade discount is deducted from purchases, while cash discount is purely a financial 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
Dr. Parminder Bajaj

Dr. Parminder Bajaj

Allocation allocation is the process of charging full amount of overhead cost to a particular cost centre Apportionment it is the process of splitting of overhead cost and charging it to a cost centre on some equitable basis. Absorption- the term absorption refers to charging of overhead of overhead to different cost unit in such a way that each cost unit bears an appropriate portion of its share of overhead. This is done by means of overhead rate. For eg. Overhead of a dep't are 10,000, the total wages of different jobs completed in the dep't are 40,000 and the overhead are to be charged as percentage of direct wages , the overhead rate will be 25% of direct wages

Dr. Parminder Bajaj

Overhead Factory rent Depreciation Heating and lightening

Basis of apportionment Floor area occupied Capital value of asset No. of light points

Insurance Electric power Supervision Stores overhead

Material handling charges

Capital value of asset Kwh No. of employees Direct material

Weight of material

Dr. Parminder Bajaj

Service dept overhead Maintenance dept Payroll or time keeping dept Personnel dept Store keeping dept Purchase dept Welfare dept Internal transport service

Apportionment Actual service utilized or working hours Direct labour hours No. of employees no. of requisitions No. of purchase order No, of employees Weight or value of material

Dr. Parminder Bajaj

Q-1 Following have been extracted from a manufacturing concern for month of dec. Indirect material : Production deptt x 950 Production deptt y 1200 Production deptt z 200 Maintenance deptt P 1500 Stores deptt Q 400 Indirect wages : Production deptt x 900 Production deptt y 1100 Production deptt z 300 Maintenance deptt P 1000 Stores deptt Q 650 Power and light 6000 Rent and rates 2800 Insurance on asset 1000 Meal charges 3000 Depreciation @6% on assets contd

Dr. Parminder Bajaj

Contd.

particulars
Area Capital value of asset No. of employees Kwh

production dept
x 4000 1,00,000 90 4000 y 4000 1,20,000 120 4400 z 3000 80,000 30 1600

Service dept
P 2000 60,000 40 1500 Q 1000 40,000 20 500

Direct labour hours

No, of material requisition

3600
900

3200
600

2200
500

Prepare overhead distribution summary from above information

Dr. Parminder Bajaj

Q-2 The following data is obtained from the books of ABC co. for half year ending 30th sept,05. Calculate the departmental overhead rate for each of production deptt. assuming that overheads are recovered as percentage of direct wages.
particulars Direct wages Staff Electricity Asset value production dept A 2000 B 3000 C 4000 Service dept D 1000 E 2000

Direct material
No.s Kwh

1000
100 4000 10 60,000 150

2000
150 3000 16 40,000 250

2000
150 2000 4 30,000 50

1500
50 1000 6 10,000 50

1500
50 1000 4 10,000 50

Light point No.s Area occupied sq.yd

contd

Dr. Parminder Bajaj

The expenses for six months were: Stores overhead 400 Motive power 1,500 Electric lightening 200 Labour welfare 3,000 Depreciation 6,000 Repairs and maintenance 1,200 General overheads 10,000 Rent and taxes 600
Dr. Parminder Bajaj

The entire amount of a servicing department is to be distributed to only the producing departments. Services provided by some servicing departments are used partly by other servicing department. That is, many service department serve each other. This is known as interdepartmental service. There are three methods available for interdepartmental service. 1) Simultaneous equation method 2) Repeated distribution method 3) Trial and error method
Dr. Parminder Bajaj

Q-3 The following data find out the production hour rate
particulars Rent Electricity Fire insurance Plant depreciation production dept A 200 50 80 1000 B 400 80 160 1500 30 60 1000 C 150 20 60 300 Service dept D 150 20 40 200 E 100

Transport
Estimated working hours

50
1000

50
2500

50
1800

100

150

Expenses of service deptt are apportioned as under: A B C D E D 30% 40% 20% -10% E 10% 20% 50% 20% ---

Dr. Parminder Bajaj

Q-3The New Enterprise Ltd. has production Depts. A, B and C and two service department D and E. the following figures are extracted from the records of the company: Rent and rates 5,000 General Lighting 600 Indirect wages 1,500 Power 1,500 Depreciation of machinery 10,000 Sundries 10,000 The following further details are available:

Dr. Parminder Bajaj

Dr. Parminder Bajaj

Percentage method Hourly rate method Percentage method 1) Direct material cost method

Factory overhead rate = Amount of factory overhead x100 cost of direct material used
2)

Factory overhead rate = Amount of factory overhead x100 cost of direct labour 3) Prime cost method Factory overhead rate = Amount of factory overhead x100 prime cost

Direct labour cost method

Dr. Parminder Bajaj


1)

Hourly rate method

Machine hour rate method

Factory overhead rate = Amount of factory overhead machine hours

Labour hour rate method Factory overhead rate = Amount of factory overhead
2)

direct labour hours

3)

Dual hour rate method

Where in a shop both manual labour play an equally important role

Dr. Parminder Bajaj

Expenses Standing charges 1. Rent and rates 2. Heating and lightening 3. Supervision 4. Lubricating oil & consumable stores 5. Insurance

Basis Floor area occupied by each machine No of light points Time devoted to each machine Capital value or machine hours Capital value

Machine or running expenses 1. Depreciation 2. Power 3. Repairs Machine hours or capital value KWH Machine hours
Dr. Parminder Bajaj

Q- A manufacturing company uses two identical large and four identical small machine. Each large machine occupies one quarter of the workshop and fully employed three workers. Each small machine occupies half the space 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 large machine and 9000 working hours for each small machine. Large machine cost 20,000 each and small machine 4000 each. Scrap values are 4000 and 100 respectively. Repairs, maintenance and oil are estimated to cost for each large machine 4000 and each small machine 1200 during its effective working life. Power consumption cost 5 P. per unit, and amounts for large machine 20 units per hour, and for small machine 2 units per hour. The manager is paid 4800 a year, and the workshop supervision occupies half his time which is divided equally among the six machine. Details of other expenses are :Rent and rates of the workshop : 6400 year Lightening ( to be apportioned in the ratio of workers employed ) 1820 a year Taking the period of three months as basis, calculate the machine hour rate for a large and a small machine respectively.

Dr. Parminder Bajaj

Actual overhead rate The rate is calculated by dividing the total overheads to be absorbed by actual quantity or value of basis selected. The rate can only be calculated after the overheads have actually been incurred Actual overhead rate = Actual overhead expenditure during a month x100 actual base for month Predetermined overhead rate The rate is determined in advance of incurrence of overhead rate Predetermined overhead rate = Budgeted overhead expenditure during a month x100 Budgeted base for month

Dr. Parminder Bajaj

Where the overheads are charged to different cost unit on the basis of predetermined overhead rate , at the end of the accounting period the total overhead charged will be roughly equal to actual overhead incurred during that period. In case if the overhead recovered from production is more than actual overhead it is said to be over absorption of overhead in reverse case it is termed as under absorption of overhead

Dr. Parminder Bajaj

Carrying over of overheads- the amount of under or over absorption of overhead may be carried over to the next period Use of supplementary rates Use of supplementary rates

Dr. Parminder Bajaj