Overheads/Expenses

ADM
MBA I 2014

OVERHEADS
Function
Elements
Behaviour

Function
Production
Administration
Selling & Distribution

Elements
Indirect Material
Indirect Labour
Indirect Expenses

Behaviour
Variable
Fixed
Semi - Variable

Allocation, Apportionment, Absorption

Allocation & Apportionment:
1.Own expenses
2.Share of common expenses: factory
related expenses divided among the
departments (insurance, security, rent,
lighting)
3.Redistributed from service departments
Total of 1+2+3 = Production overheads

Absorption
How to absorb the Production
overheads?
To be absorbed by : It means the POH
to be added to the cost of the unit of
product
Total prodn.overheads
A suitable base

Methods of absorption
The base/denominator can be one of the
following
Direct :
1. Production units
Percentage:
2. Direct material cost
3. Direct labour cost
4. Prime cost
Per hour rate
5. Labour hours
6. Machine hours

Overhead Rate

1.Pre-determined overhead rate

2.Single( blanket )rate & department rate
3.Under or over absorption
( treatment )
4. Capacity costs
( Maximum, operating, capacity based on sales
expectancy, normal capacity, derated
capacity, idle, )