OVERHEAD Classification of overheads: 1. Functions 2. Elements 3.

Behavior or variability

1. Functions a. Production overhead b. Administrative overhead c. Selling overhead d. Distribution overhead 2. Elements a. Indirect Materials b. Indirect Wages c. Indirect Expenses 3. Behavior or variability a. Fixed overhead b. Variable overhead c. Semi-variable overhead

Collection of overhead:a. Stores requisition notes (indirect materials issued from stores) b. Invoices (payments made to outside parties) c. Wage analysis book (indirect wages) d. Journal entries (outstanding expenses and cashless overheads)

Departmentalization of overheads (act of distribution of overheads to various departments): 1. Allocation of overhead Charging full amount of overhead cost to a cost centre or cost unit. Allocation depends on the nature of cost. 2. Apportionment of overhead Charging proportion amount of overhead cost to a cost centre or cost unit. Allocation depends on the usage of the cost.

Bases of Apportionment of overhead: Sl. No. 1 Bases of apportionment Floor area, or volume of department No. of workers Overhead cost i. ii. iii. iv. i. ii. iii. iv. v. i. ii. iii. iv. i. Rent and other building expenses Lighting and heating Fire precaution services Air condition Fringe benefits Labour welfare expenses Time-keeping Personnel office Supervision Compensation to workers Holiday pay ESI and PF contribution Fringe benefits General overheads

Direct wages

Direct labour hours, or Direct wages, or Machine hours Capital values

i. ii. iii.

Depreciation of plant and machinery Repairs and maintenance of plant and machinery Insurance of stock

Technical estimates

7 8

No. of light points, or area Horse power of i. machines, or no. of machine hours, or values of machines Weight of i. materials, or ii. volume of materials, or value of materials

i. ii. iii. i.

Power/steam consumption Internal transport Managerial salaries Lighting expenses Electric power

Material handling Stores overhead

Apportionment of Service department costs to production departments only Sl. no. 1 2 Service department Purchase department Time office Personnel department Canteen Labour expenses Accounts office Laboratory Maintenance department Bases of apportionment a. Value of materials purchased b. No. of orders placed a. No. of employees b. Wages paid c. Labour hours a. No. of employees b. Wages paid a. No. of employees b. No. of time cards handled a. Testing laboratory hours b. Units of output a. No. of hours worked in each department

3 4 5 6

Overhead allocation and apportionment will require the preparation of a statement, Overhead distribution summary

Primary distribution Allocation and apportionment of overheads to production and service department Secondary distribution It refers to the re-apportionment of service departments costs to other service departments and production departments. This is because ultimately, overheads are charged to the respective cost centres and cost units which are all under the production departments. No cost unit passes through the service departments. Secondary distribution can be done in two different ways, viz., 1. Apportionment to production departments only 2. Apportionment to production departments and other service departments a. Reciprocal basis and b. Non-reciprocal basis.

Under reciprocal basis, the different service departments may be dependent on each other. Two methods are followed: 1a. Simultaneous Equation method and 1b. Repeated distribution method Under non-reciprocal basis, the various service departments are independent and they do not provide service to each other. Step ladder method is followed where the largest serviceable departments cost gets apportioned first and the least serviceable departments cost get apportioned last and it gets apportioned to production departments only.