OVERHEADS

According to Whelden

“ Overhead may be defined as the cost

of indirect material indirect labour and
such other expenses including services
as cannot conveniently be charged to a
specific unit. Alternatively overheads
are all expenses other than direct
expenses”.
Overheads are classified as follows:
Function wise classification
Behaviour wise classification

Element wise classification

Control wise classification

Normality wise classification

 FUNCTION WISE CLASSIFICATION

Manufacturing Overhead

Administration Overhead

Selling Overhead

Distribution Overhead

Research & Development Overhead

BEHAVIOUR WISE CLASSIFICATION

Fixed
Overheads Variable
Overheads
Semi variable
Overheads
ELEMENT WISE CLASSIFICATION

Indirect Material

Indirect Labour

Indirect Expenses
Control WISE CLASSIFICATION

Controllable
Cost

Uncontrollable
cost
Normality WISE CLASSIFICATION

Normal Overheads

Abnormal Overheads
PRIMARY
DISTRIBUTION
OF OVERHEADS
 PRIMARY DISTRIBUTION

Primary distribution of overheads is the

process of allocating and apportioning
the cost on suitable basis to all the
departments or cost centers . Primary
distribution is done without distinction
between production and service
departments.
 BASIS OF APPORTIONMENT
EXPENSES BASIS OF APPORTIONMENT
Factory rent Area in Sq meters or Sq feet
Power Kilowatt hours (K.W.H)
Indirect Material Direct Material
Indirect Wages Direct Wages
Repairs to Plant Plant Value
Depreciation Plant Value
Lighting Light points/Floor Area
Supervision No. of Employees
Fire insurance of Stock Stock Value
Fire insurance of Capital Assets Values of Capital assets
ESI/PF Contribution of Employer Wages of each department
Labour welfare expenses No. of Employees
General factory overheads Labour hours/ Direct wages.
Solution : Pg.No 5.83; Sum no 1

EXPENSES BASIS OF APPORTIONMENT

Purchases Materials Value
Accounts No. Of Employees
Stores Material Value
Canteen No. Of Employees
Repairs Asset Value
Tool Room Machine Hours
Solution : Pg.No 5.83; Sum no 2

EXPENSES BASIS OF APPORTIONMENT

Depreciation on machine Machinery Value

Canteen expenses No. Of Employees

Labour welfare Expenses No. Of Employees

Rent of Building Floor Area

Sales expenses Sales Value

Electric power K.W.H

Solution : Pg.No 5.83; Sum no 3

EXPENSES BASIS OF APPORTIONMENT

Indirect Material Direct material
Indirect Wages Direct wages
Depreciation Asset Value
Electricity for power purpose K.W.H
Lighting & Heating Light points
Crèche expenses No. Of Female workers
Materials handling charges Materials value
Recreation expenses No. Of Employees
Welfare Department expenses No. Of. Employees
Stores service Material consumed
Fire insurance of stock Stock value
Time keeping expenses No. Of Employees
Solution : Pg.No 5.83; Sum no 4
EXPENSES BASIS OF
APPORTIONMENT
Ratio
Rent & Rates Floor space 23:15
Insurance Plant value 4:1
Stores expenses Annual Direct labour hours 72:185
Fire Insurance Floor Space 23:15
General Factory Labour Annual Direct Labour hours 72:185

Depreciation Plant Value 4:1

Holiday pay Direct Wages 5:6
Plant Repairs Plant Value 4:1
Solution : Pg.No 5.83; Sum no 5
BASIS OF

EXPENSES APPORTIONM Ratio Amount Department

ENT

A B C D
Rent Area (Sq. Ft) 15:11:9:5 4,000 1500 1100 900 500
Repairs Value of Plant 4:3:2:1 2,400 960 720 480 240
Depreciation Value of Plant 4:3:2:1 1,350 540 405 270 135
Lighting Area (Sq. Ft) 15:11:9:5 300 112.5 82.5 67.5 37.5
Insurance of Value of stock 5:3:2
1,500 750 450 300 -
stock

Supervision No. of Workers 6:4:3:2 4,500 1800 1200 900 600

Power Value of Plant 4:3:2:1 2,700 1080 810 540 270

TOTAL 16,750 6742.5 4767.5 3457.5 1782.5

Solution : Pg.No 5.83; Sum no 6

Production Service
Basis of
Expenses Ratio Amount Dept Dept
Apportionment

A B C D E
Rent Area Occupied 4:5:6:4:1 2000 2500 3000 2000 500
10,000

Depreciation Value of Machine 12:16:20:1:1 20,000 4800 6400 8000 400 400
for Machine
Motive Horse Power 6:3:5:1:- 1200 600 1000 200 -
Power (K.W.H) 3000

Indirect Direct Wages 6:4:6:3:1 6900 4600 6900 3450 1150

23,000
Wages
Lighting Light Points 2:3:4:2:1 1,200 200 300 400 200 100

Total 57200 15100 14400 19300 6250 2150

Sum No: 7
BASIS OF Production Service
EXPENSES APPORTIONMENT Ratio Amount Dept Dept

A B C D

Rent Area (Sq. Meters) 15:11:9:5 1000 375 275 225 125

Repairs to Plant Value of Plant 4:3:2:1 600 240 180 120 60

Depreciation on Plant Value of Plant 4:3:2:1 450 180 135 90 45

Employers liability
for insurance No. of Employees 4:3:2:1 150 60 45 30 15

Supervision No. of Employees 4:3:2:1 1000 400 300 200 100

Fire insurance
(Stock) Value of Stock 5:3:2 500 250 150 50 -

Power H.P of Plant (K.W.H) 4:3:2:1 900 360 270 180 90

Lighting Area ( Sq. Meters) 15:11:9:5 120 45 33 27 15

Wages 2000

TOTAL 4720 1910 1388 972 2450

SECONDARY
APPORTIONMENT
SECONDARY APPORTION METHOD:
DIRECT STEP DISTRIBUTION STEP
RECIPROCAL
REAPPORTIONMENT Or DISTRIBUTION
SERVICES METHOD
STEP LADDER Or
STEP LADDER

SIMULTANEOUS
REPEATED
EQUATION
DISTRIBUTION
METHOD
METHOD
DIRECT

REAPPORTIONMENT
METHOD
 Secondary overhead distribution summary {Pg.No: 5.88; Sum :10}

Particulars Total Production Department Service Department

A B C X Y
Overheads as per 32000 10000 8000 6000 5000 3000
primary distribution
Service Department 2000 2000 1000 (-5000) -
‘X’ Overhead to
Dept A, B & C in
the ratio 2:2:1
Service Department 1000 1000 1000 - (-3000)
‘Y’ Overhead to
Dept A,B & C in
the ratio 1:1:1
Total 32000 13000 11000 8000 - -
 Secondary overhead distribution summary Pg.No: 5.88 Sum :11

Particulars Total Production Service

Department Department
P1 P2 P3 S1 S2
Overheads as per primary 32825 8850 7165 6285 4515 6010
distribution
Service Department ‘S1’ 2709 903 903 (-4515) -
Overhead to
Dept P1,P2& P3 in the ratio
3:1:1
Service Department ‘S2’ 1803 1803 2404 - (-6010)
Overhead to
Dept P1,P2 & P3 in the ratio
3:3:3
Total 32825 13362 9871 9592 - -
 Secondary overhead distribution summary Pg.No: 5.89;
Sum:12

Particulars Total Production Department Service

Department
A B C D E
Overheads as per 91800 22650 21600 28950 13875 4725
primary distribution
Service Department 5550 4440 3885 (-13875) -
‘D’ Overhead to
Dept A, B & C in the
ratio 10:8:7

Service Department 2362.5 945 1417.5 - (-4725)

‘E’ Overhead to
Dept A,B & C in the
ratio 5:2:3

Total 91800 30562.5 26985 34252.5 - -

Secondary overhead distribution summary
Sum No:13

Particulars Total Production Service

Department Department
A B C Stores Time Power Cante
keepin en
g
Overheads as per primary 57600 20000 18000 10000 4000 3000 1600 1000
distribution

Service Department 2000 1200 800 (-

‘Stores’ Overhead to 4000)
Dept A, B & C in the ratio
as per Value of stores
( 5:3:2)
Secondary overhead distribution summary
Service Department 1200 900 900 (-
‘Time Keeping’ Overhead 3000)
to
Dept A,B & C in the ratio
as per No. of Workers
(3:3:2)
Service Department 600 600 400 (-
‘Power’ Overhead to 1600)
Dept A,B & C in the ratio
as per K.W.H (3:3:2)

Service Department 400 300 300 (-

‘Canteen’ Overhead to 1000)
Dept A,B & C in the ratio
as per No of Workers
(4:3:3)

Total 57600 24200 21000 12400 - - - -

STEP LADDER
OR
STEP DISTRIBUTION
 Sum No:15

Statement showing secondary distribution of overheads

Department Cost as per

Primary
Apportionment

A(Service) 20,000 -20,000

B (Service) 15,000 5,000 -20,000

R (Production) 30,000 8,000 8,000 46,000

S (Production) 32,000 7,000 12,000 51,000

Statement showing secondary distribution of overheads

Department Cost as per

Primary
Apportionment
Time Keeping 4000 -4000
(S)
Stores (S) 5000 800 -
5800
Maintenance 3000 400 696 -4096
(S)
P1 (P) 16000 1600 2784 2457.6 22841.6
P2 (P) 10000 1200 2320 1638.4 15158.4
RECIPROC
AL
SERVICES
METHOD
SIMULTANEOUS
EQUATION
METHOD
Simultaneous Equation Method
x = a + by
y = a + bx
P = x; Q = y
x = 1,20,000 + 5%y (or) x = 1,20,000 + 0.05y
y = 1,00,000 + 15%x (or ) y = 1,00,000 + 0.15x
Multiple both the equation by 100 to remove the decimals
x = 1,20,000 + 0.05y X 100 ; 100x = 1,20,00,000+5y ---------(1)
y = 1,00,000 + 0.15x X100; 100y = 1,00,00,000+ 15x ------(2)
Multiply Equation 1 by 20 to cancell off Y
100x = 1,20,00,000+5y X 20; 2000x = 24,00,00,000 + 100y
100y = 1,00,00,000 +15x
Rearrange the formula
2000x -100y = 24,00,00,000
-15x+100y = 1,00,00,000
------------------------------------
1985x = 25,00,00,000
x = 25,00,00,000/1985 x = 125944.58
 x = 125944.58
Apply the value of x in equation 1
100x = 1,20,00,000+5y
100(125944.58) = 1,20,00,000+5y
125944258 = 1,20,00,000+5y
-5y = 12594458 - 12000000
-5y = 5,94,458
y = 5,94,458/5
y = 1,18,891.6

x = 1,25,944.58
y = 1,18,891.6
 Secondary Distribution Overhead
Particulars Total Production Department
A B C
Overhead as per 17,50,000 6,50,000 6,00,000 5,00,000
Primary Distribution
Service Department ‘X’ O/H
(85%)
1,25,944.58 x85%
1,07,052.89
30%, 40% & 15% 37,783 50,378 18,892
Service depat.’Y’.O.H (95% )
1,18,891.6 x 95%
1,12,947.02
40%, 30% 25% 47,557 35,667 29,723
Total 7,35,340 6,86,045 5,48,615
 Sum no 18; Pg.No: 5.92

Simultaneous equation method

x=a+by
y=a+bx
x = 6,000 + 0.5y
y = 1,200 + 0.05x
Multiply both the equation to eliminate decimals
X = 6,000 + 0.5y (X) 100
Y = 1,200 + 0.05x (X) 100
100x = 6,00,000 + 50y ---------- (1)
100y = 1,20,000 + 5x ------------ (2)
Multiply Equation 1 with 2
100x = 6,00,000 + 50y (X) 2
200x = 12,00,000 + 100 y ------- (3)
100y = 1,20,000 + 5x ----------- (4)
Rearrange the equation

200x – 100y = 12,00,000

-5x +100y = 1,20,000
195x = 13,20,000
X = 13,20,000
195
X = 6769.23
Substitute X value in equation 1
100 (6769.23) = 6,00,000 + 50y
6,76,923 = 6,00,000 + 50y
676923-600000 = 50Y
76923 = 50Y
Y = 76923/50
Y = 1538.46
 Secondary Distribution Overhead
Particulars Total Production
Department
A B
Overhead as per - -
Primary Distribution
Service Department ‘X’ O/H
(95%)
6769.23 X 95% = 6430.76 6,431 4062 2369
(A – 60% & B – 35%)

Service depat.’Y’.O.H (50% )

1538.46 X 50%
769.23
(A – 10% & B – 40%) 769 154 615
Total 7,200 4216 2984
 Sum no:19
x=a+by
Y=a+bx
x = 2,34,000 + 0.2y
Y = 3,00,000 + 0.1x
Multiply both the equations by 10 to eliminate decimals

X = 234000 + 0.2Y X 10
Y = 300000 + 0.1x X10
10x = 23,40,000 + 2y ------(1)
10y = 30,00,000 + 1x ------ (2)
multiply equation 1 with 5
10x = 23,40,000 + 2y X 5
50x = 1,17,00,000 +10y ------- (3)
10y = 30,00,000 +1x
rearrange the formula
50x -10y = 1,17,00,000
-1x +10y = 30,00,000
----------------------------
49x = 1,47,00,000
x = 1,47,00,000
------------- X = 3,00,000
49
substitute the value of X in equation 1
10x = 23,40,000 + 2y
10 (3,00,000) = 23,40,000 +2y
30,00,000 - 23,40,000 = 2y
6,60,000 = 2y
y = 6,60,000
__________ Y = 3,30,000
2
 Secondary Distribution Overhead
Particulars Total Production
Department
A B C
Overhead as per 20,00,000 800000 700000 500000
Primary Distribution
Service Department ‘X’ 2,70,000 60000 120000 90000
O/H
90% 300000X90%
270000 (2:4:3)
Service dept.’Y’. O.H 2,64,000 132000 66000 66000
80% - 330000X80%
264000 (4:2:2)

Total 25,34,000 992000 886000 656000

X=a+by
Y=a+bx
X = 20,000 + 0.05y
Y = 10,000 + 0.1x
Multiply both the equations by 100 to eliminate decimals
X = 20,000 + 0.05y X 100
Y = 10,000 + 0.1x X 100
100x = 20,00,000 + 5y ----------- (1)
100y = 10,00,000 + 10x ----------(2)
Multiply equation 1 with 20
100x = 20,00,000 + 5y X 20
2000x = 4,00,00,000 + 100y ------- (3)
100y = 10,00,000 + 10x -------- (4)
Rearrange the formula
2000x -100y = 4,00,00,000
-10x + 100y = 10,00,000
1990x = 4,10,00,000
X = 4,10,00,000

1990 X = 20603.01

Substitute value of x in equation 1

100(20603.01) = 20,00,000 +5y
2060301 – 20,00,000 = 5y
60301 = 5y
Y = 60301

5 Y = 12060.2
 Secondary Distribution Summary

Particulars Total Production Depatrment

A B C
Overheads as per Primary
1,40,000 80,000 40,000 20,000
Distribution
Service department O.H X
90% (20603.01 X 90%) =
18,524.7 4120.6 6180.9 8241.2
18,542.71
(20:30:40)

Service department O.H Y

95% (12060.3 X 95%) =
11457.28 2412.06 3015.07 6030.15
11457.29
(20:25:50)

Total
169981.98 86533 49196 34271
REPEATED DISTRIBUTION METHOD
 Sum no: 21; Pg.No: 5.94
Secondary Overhead Distribution Summary
Particulars Production Department Service Department
A B C X Y
Department Overhead as per
Primary Distribution 6300 7400 2800 4500 2000
Dept. X Overhead
Distributed in the ratio 4:3:2:1 1800 1350 900 (-4500) 450
Dept. Y Overhead
Distributed in the ratio 3:3:2:2 735 735 490 490 (-2450)
Dept. X Overhead
Distributed in the ratio 4:3:2:1 196 147 98 (-490) 49
Dept. Y Overhead
Distributed in the ratio 3:3:2:2 14.7 14.7 9.8 9.8 (-49)
Dept. X Overhead
Distributed in the ratio 4:3:2:1 3.92 2.94 1.96 (-9.8) 0.98
Total 9050 9650 4300
 Sum no: 22; Pg.No: 5.94
Secondary Overhead Distribution Summary
Particulars Production Department Service Department
A B C X Y
Department Overhead as per
Primary Distribution 6000 5500 4500 2100 2700
Dept. X Overhead
Distributed in the ratio 2:4:3:1 420 840 630 (-2100) 210
Dept. Y Overhead
Distributed in the ratio 4:2:2:2 1164 582 582 582 (-2910)
Dept. X Overhead
Distributed in the ratio 2:4:3:1 116.4 232.8 174.6 (-582) 58.2
Dept. Y Overhead
Distributed in the ratio 4:2:2:2 23.28 11.64 11.64 11.64 (-58.2)
Dept. X Overhead
Distributed in the ratio 2:4:3:1 2.33 4.66 3.49 (-11.64) 1.16
TOTAL 7726 7171 5902
TRIAL & ERROR METHOD
 Sum No: 26; Pg.No 5.97
Statement showing Total Overheads of Service Department
Particulars Service Department
Y
X
Overhead as per Primary Distribution 12,000 10,000
Share of Y in X’s O/H (12000X20%) (-2400) 2400
Share of X in Y’s O/H (12400X 10%) 1240 (-1240)
Share of Y in X’s O/H (1240 X 20%) (-248) 248
Share of X in Y’s O/H (248 X 10%) 24.8 (-24.8)
Share of Y in X’s O/H (24.8 X 20%) (-4.96) 4.96
TOTAL 13265 12653
 Secondary Overhead distribution Summary

Particulars Total Production Department

A B C
O/H as per Primary 9500 15000 7000
Distribution Summary
Service Department X O/H 3980 2653 3980
(13265 X 80%) 10612
(3:2:3)
Service Department Y O/H 5061 3796 2531
(12653 X 90%) 11388
(4:3:2)
TOTAL OVERHEAD 18541 21449 13511
PRIMARY AND
SECONDARY
APPORTIONMENT
S
 OVERHEAD DISTRIBUTION SUMMARY

ITEMS BASISOF TOTAL PRODUCTION SERVICES

APPORTIONMENT DEPARTMENT DEPARTMENT
A B X Y
Depreciation value of Assets 1,90,000 1,00,000 50,000 30,000 10,000
10:5:3:1
Rent, Rates Floor Area 36,000 15,000 12,000 3,000 6,000
& Taxes 5:4:1:2
Insurance value of Assets 15,200 8,000 4,000 2,400 800
10:5:3:1
Power H.P of Machines 20,000 10,000 5,000 4,000 1,000
10:5:4:1
Canteen No. of Workers 10,800 800 4,000 4,000 2,000
Expenses 2:10:10:5
Electricity Light & fan Points 4,800 2,000 1,200 800 800
5:3:2:2
Overhead as per 276800 135800 76200 44,200 20,600
Primary Distribution
 Secondary Overhead Distribution Summarywq
Particulars Total Production Service Department
Department

A B X Y

Overhead Distribution 276800 135800 76200 44,200 – 20,600+1

As per Primary Distribution 12000 2000
32,200 32,600

Service Department X O/H 32,200 19,320 12,880 -(32.200) -

3:2

Service Department Y O/H 32,600 29,340 3260 - (-32,600)

9:1

Total 3,41,600 184460 92,340 - -

ABOSORPTION
OF
OVERHEADS
Methods of Absorption of Overheads

1. Direct Material Percentage rate =

Factory overhead (Budgeted or Actual) X 100
Direct material cost (Estimated or Actual)

2. Direct Labour Cost Percentage rate =

Factory overhead (Budgeted or Actual) X 100
Direct Wages (Estimated or Actual)

3Prime Cost Percentage rate =

Factory overhead (Budgeted or Actual) X 100
Prime COst(Estimated or Actual)
Methods of Absorption of Overheads

4. Direct Labour Hour Method

Factory overhead (Budgeted or Actual)
Labour Hours (Estimated or Actual)

5. Machine Hour Rate =

Factory overhead (Budgeted or Actual)
Machine Hours (Estimated or Actual)
 Pg.No: 5.106; Sum No: 39

1. Direct Material Percentage rate = Factory O/H X 100

Direct Materials

15,000 X 100 = 20%

75000

2. Direct Wages Percentage rate = Factory O/H X 100

Direct Wages

15,000 X 100 = 50%

30,000
 Pg.No: 5.106; Sum No: 39

3. Prime cost Percentage rate = Factory O/H X 100

Prime cost

15,000 X 100 = 14.29%

105000

4. Labour Hour Rate= Factory O/H 5. Machine Hour Rate= Factory O/H
Labour Hours Machine Hours

15,000 = 0.30 per hour 15,000 = 0.75per hour

50,000 20,000
 Pg.No: 5.106; Sum No: 40

(a)Material Cost method: Factory O/H X100

Direct Material
2,00,000 X100
3,00,000 = 66.67%

(b) Labour Hour method: Factory O/H X100

Labour Hour
2,00,000
5,000 = Rs. 40 per Hour
 Pg.No: 5.106; Sum No: 40

(c) Labour Cost method: Factory O/H X100

Direct Labour
2,00,000 X100
1,00,000 = 200%

(d) Machine Hour Rate method: Factory O/H X100

Machine Hour
2,00,000
4,000 = Rs. 50 per Hour.
 Pg. No: 5.106; Sum No: 41

(a) Direct Material Cost method: Factory O/H X100

Direct Material
90,000 X100
45,000 = 200%

(b Direct Labour Cost method: Factory O/H X100

Direct Labour
90,000 X 100
60,000 = 150 %
(c) Prime Cost method: Factory O/H X100
Primary Cost
90,000 X100
1,05,000 = 85.71%

(d) Machine Hour Rate method: Factory O/H X100

Machine Hour
90,000
30,000 = Rs. 3 per hour
 Pg. No: 5.107; Sum No: 42

(i) Direct Labour Hour Rate Method:

58,000
1,34,600 = 0.43 per hour

(ii) Direct Labour Cost Method:

58,000 X 100
97800
= 59.3%

(iii) Machine Hour Rate Method:

58,000
50500
= Rs. 1.148.
 Pg. No: 5.107; Sum No: 43

Comparative Statement
Particulars Dir. Labour Hr Particulars Labour Cost
Direct Material 42 Direct Materials 42
Direct Labour 45 Direct Labour 45
Prime Cost 87 Prime Cost 87
Direct Labour Hour 12.9 Direct Labour Cost 26.69
0.43(30 X 0.43) 45 X 59.3/100
99.90 113.69

Particulars Machine Hour

Direct Materials 42
Direct Labour 45
Prime Cost 87
Direct Labour Cost 23
20 X 1.15
110
MACHINE HOUR RATE
 Pg.No: 5.111; Sum No: 50

Machine Hour rate

Particulars Rs Rs
Standing Charges:
0.30
Insurance
Machine Expenses:
0.75 1.775
Electric charges
0.275
Repairs
0.75
Depreciation

Machine Hour Rate 2.075

Workings:
1) Depreciation = Cost of machine
--------------------
Life time of machine
Cost of machine - scrap = 16000 - 1000
= 15000
-------- Depreciation = 1.5
10000
2) Standing charges allocated = Rs. 40 (4 weekly period)
Running time per 4 week = 160 hours
per hour = 40/ 160 = 0.25
3) Repairs and maintenance = Rs. 120 ( 4 weekly period)
per hour = 120/160 = 0.75
4) Power = 4 units per hr @ 0.05 per unit
4 X 0.05 = 0.2
 Pg.No: 5.111; Sum No: 51

Machine Hour rate

Particulars 4 Weekly period Per Hour
Rs (160) Rs
Standing Charges: 40 0.25
Machine Expenses:
1.5
Depreciation
120 0.75
Repairs
0.2
Power

Machine Hour Rate 2.72

Workings:
1) Depreciation = Cost of machine
--------------------
Life time of machine
Cost of machine - scrap = 19200 - 1200
= 18000
-------- Depreciation = 1.8
10000
2) Standing charges allocated = Rs. 50 (per month)
Running time per month = 166 hours
Per hour = 50/ 166 = 0.30
3) Repairs charges = Rs. 150 ( per month)
Per hour = 150/166 = 0.90
4) Power = 5 units per hr @ 0.19 per unit
5 X 0.19 = 0.95
 Pg.No: 5.111; Sum No: 52

Machine Hour rate

Particulars Per Month Per Hour
Rs (166) Rs
Standing Charges: 50 0.30
Machine Expenses:
1.8
Depreciation
150 0.90
Repairs
0.95
Power

Machine Hour Rate 3.95