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ACCOUNTING FOR OVERHEADS

BY- Dr. Kamlesh Khosla M.com, M.A.(Eco.), PH.D PG Diploma in PMIR & PG Diploma in Journalism and Mass Communication

overhead play a great role. From Cost reduction & Cost control point of view. . proper understanding of computation and accounting of overhead is must for Students of commerce.INTRODUCTION Accounting of Overheads is one of the most important & technical aspect of Cost accounting. So.

Meaning of OVERHEADS??? • Overheads is the aggregate of indirect materials cost. Example.Indirect Material Cost Indirect Labour Cost Indirect Expenses . indirect labour cost and indirect expenses which cannot be conveniently identified with and directly allocated to a particular cost centre or cost object.

Distribution Of Overheads Step 1 -> Classification of Overheads Step 2 -> Collection of Overheads Step 3 -> Allocation of Overheads Step 4 -> Apportionment of Overheads Step 5 -> Re-apportionment of service department overheads Step 6 -> Absorption of Overheads .

Classification Of Overheads By Function • Production Overheads • Administrative Overheads • Selling Overheads • Distribution Overheads By Behaviour • Fixed Overheads • Variable Overheads By Element • Indirect Materials • Indirect Labour • Indirect Expenses .

N.Collection of Overheads Collection of overheads means the collection of various items of overheads under suitable account heading and a unique Standing Order Number(S.A. Sources -> Material Requisitions -> Wages analysis Book -> Invoices -> Cost Journal -> Subsidiary Records .O.).N.) or Cost Account Number(C.

Allocation Of Overheads ITEMS OF OVERHEADS ALLOCATED Direct Materials Direct Wages Direct Expenses Direct Material Indirect Wages TOTAL OVERHEADS ALLOCATED ********* PRODUCTION DEPARTMENTS P1 P2 *********** SERVICE DEPARTMENTS S1 ********** S2 ********** .

Apportionment of overheads • It is the process of charging the proportion of common items of cost to two or more cost centres on some equitable basis. PRINCIPLES FOR APPORTIONMENT OF OVERHEADS (a) Actual Benefit (b) Potential Benefit (c) Ability to pay (d) Specific Criteria/Survey method .

Basis Of Apportionment COMMON ITEMS OF PRODUCTION OVERHEADS (a) Factory rent. rates & taxes (b) Insurance of factory building BASIS OF APPORTIONMENT Floor area occupied (a) Insurance of Plant & Machinery (b) Depreciation of Plant & Machinery (a) Insurance of Stock (a) Supervision (b) Canteen Staff Welfare Expenses Capital Cost of Plant & Machinery Insured Value of stock No. of light points or floor area occupied . of workers (a) Compensation to Workers (b) PF Contribution (a) Stores Overheads/keeping expenses (a) Material Handling Charges (a) Lighting & Heating Wages Value of direct materials Weight of direct Materials No.

ii. On Non Reciprocal Basis/Step ladder method On Reciprocal BasisSimultaneous Equation Method Repeated Distribution Method Trial & Error Method . iii.Secondary Distribution Of Overheads It means the apportionment of overheads of service departments among the production departments on some suitable basis. METHODS   i.

Direct Labour Cost 5. Machine Hour Rate 6. Percentage of Prime Cost 4. Rate Per Unit Of Production .Methods Of Absorption Of Overheads Overhead Absorption Rate = Total overheads of cost centre/ Total Quantum of base METHODS 1. Percentage Of Direct Material Cost 2. Percentage of Direct Labour Cost 3.

How to calculate?? Percentage of Direct Material Cost Factory Overhead Rate = Amount of Production overheads/ Direct Cost Material x 100 Percentage Of Direct Labour Cost Factory Overhead Rate = Amount Of Production Overheads/ Direct Labour Cost x 100 Percentage Of Prime Cost Method Factory Overhead Rate = Amount Of Production Overheads/ Prime Cost x 100 .

Direct Labour Hour Rate Factory Overhead Rate = Amount Of Production Overheads/ Direct Labour Hours Machine Hour Rate Factory Overhead Rate = Amount of Production Overheads/ Machine Hours Rate Per Unit Of Production Factory Overhead Rate = Amount Of Production Overheads/ No. of Units of Production .Continued……….

Fixed/ Standing Charges TOTAL PER MACHINE (Rs) ****** TOTAL PER HOUR(Rs) (a)Rent & Rates (b) Heating & Lighting (c) Supervision (d) Insurance (e) Lubricating oil & Consumable Stores (f) Sundry Shop Supplies (g) Department & General Overheads TOTAL FIXED CHARGES STANDING CHARGES PER HOUR* ***** ****** ****** ****** ****** ****** ---------------------------------******************* .Computation Of Machine Hour Rate I.

MACHINE EXPENSES PER HOUR (a) Depreciation (b) Repair & Maintenance (c) Power (d) Other Running Expenses PER HOUR **** **** **** **** ********** III.II. Machine hour rate .

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