Overheads

• All indirect expenses are termed as, • Overheads • Steps • Classification • Allocation • Apportionment • Absorption

CLASSIFICATION OF OVERHEADS
FUNCTIONAL CLASSIFICATION – Production overheads Administrative overheads Selling overheads Distribution overheads Research and Development overheads

CLASSIFICATION OF OVERHEADS
• VARIABILITY • Fixed • Variable • Semi- variable • NORMALITY • Normal overheads • Abnormal overheads

CLASSIFICATION OF OVERHEADS
• CONTROLLABILITY • Controllable overheads • Uncontrollable overheads

PROCEDURE OF LINKING OVERHEADS TO COST UNITS
• 1 Classification and collection of overheads • 2. Allocation and apportionment of overheads • 3. Absorption of overheads

ALLOCATION AND APPORTIONMENT OF OVERHEADS
• Departments in an organization are divided into production depts and service departments • All overheads are first allocated and wherever allocation is not possible, they are apportioned to the departments on some suitable basis

ALLOCATION AND APPORTIONMENT OF OVERHEADS
• This distribution is called as Primary Distribution of overheads • The next step is that the overheads of service departments are reapportioned to the production departments. This is called as Secondary Distribution of overheads.

ABSORPTION OF OVERHEADS
• Meaning- Deciding the share of each unit of the product in the total overheads • Basis of Absorption – • Direct Material Cost - Overheads ---------------X 100 • Direct Material Cost •

ABSORPTION OF OVERHEADS
• Direct Labor Cost - Overheads • ----------------X 100 • Direct Labor Cost • Prime Cost Overheads • ------------------X 100 • Prime Cost

ABSORPTION OF OVERHEADS
• Direct Labor Hours - Overheads • ------------------• Direct Labor Hrs • Machine Hour Rate • Production units Overheads • ----------------• No. of units

ABSORPTION OF OVERHEADS
• Selling Price Method • UNDER/OVER ABSORPTION OF OVERHEADS • Reasons • Treatment – Applying supplementary Rate • Carrying forward to future period

Absorption of Overheads
• Writing off to Costing Profit and Loss A/c  Types of Overheads Rates  Blanket Rate  Multiple Rate

Examples
• A manufacturing company has three production departments and two service departments. The following overheads are incurred in a particular financial period. • Rent Rs. 75,000, Electricity Rs. 45,000 • Depreciation Rs. 1,00,000,

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