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PA302 COST ACCOUNTING OVERHEAD BY : PUAN WAN MAIMUNAH WAN ISHAK COMMERCE DEPART. POLISAS.

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Presentation on theme: "PA302 COST ACCOUNTING OVERHEAD BY : PUAN WAN MAIMUNAH WAN ISHAK COMMERCE DEPART. POLISAS."— Presentation transcript:

1 PA302 COST ACCOUNTING OVERHEAD BY : PUAN WAN MAIMUNAH WAN ISHAK COMMERCE DEPART. POLISAS

2 WHAT IS OVERHEAD COST ? Any indirect cost Cost which is cannot be allocated directly to unit of production. Including indirect raw materials, indirect labour and indirect expenses.

3 THE CLASSIFICATION OF OVERHEAD FACTORY OVERHEAD * includes all indirect cost incurred by the manufacturing department from the receipt of raw materials until the product is finished and placed in saleable state until they are sold and delivered. ADMINISTRATION OVERHEAD * Includes indirect costs incurred in directing and controlling general company policies and programmes for the operation of the manufacturing SELLING AND DISTRIBUTION OVERHEAD * Are also known as general business overhead, such as sales expenses, promotion and the salesmen salaries.

4 ALLOCATION AND APPORTIONMENT OF OVERHEAD Departmentalization of overhead means dividing the company into segments called cost centers to which expenses are incurred. * Productions department = represents a subunit of the company where manufacturing activity takes place. * Service departments =represent cost centers which provide support for the production department. Primary Distribution Some overhead costs can be directly identified with a particular department or cost center and can be allocated specifically to the department. However, there are some overhead costs that cannot be identified and charged directly to a department. The costs must be apportioned to any department using such items. Cost apportionment is the process of charging expenses in an equitable proportion to the various cost center or department. Further about apportionment…

5 Bases of apportionment, which are common in use: COST ITEMBASES OF APPORTIONMENT lighting and heating, rent and rates, depreciation on building, building repairs. Floor area occupied Depreciation an plant and machinery, insurance on building, and maintenance of plant and machinery. Capital values tools and fixtures, power and work management remuneration. Direct labour hour/machine hour Canteen, accident insurance, medical, personnel department expenses, supervision and wage department. Number of workers employed PowerKilowatt hours/capacity of machinery

6 RM Indirect materials: Depart. A B C D 950 1200 200 1500 Indirect Wages Depart. A B C D 900 1100 300 1000 Rent2000 Repair1200 Depreciation of plant900 Light200 Supervision3000 Insurance for stock1000 Employee’s insurance300 Power1800 Example 7.1 The Elegant Company has four departments.A, B and C are the production departments and D is a servicing department. The actual costs for a period are as follows:

7 The following data are also available in respect of the four departments: Dept. ADept. BDept. CDept. D Area(sq.feet)1501109050 No. of workers2416128 Total WageRM8000RM6000RM4000RM2000 Value of plantRM24,000RM18,000RM12,000RM6000 Value of stockRM15,000RM9000RM6000- You are required to apportion the above costs to the various departments on the most equitable method.

8 LETS CHECK OUT THE ANSWER…. TOTAL COST : DEPT ADEPT BDEPT CDEPT D

9

10 Secondary Distribution The overhead costs of service department should be further assigned to production Departments. WHY ? Service departments do not themselves manufacture anything. The reassignment or reapportionment of service departments overhead to production department is termed secondary distribution.

11 2 METHODS OF APPORTIONMENT OF OVERHEAD CONTINUOUS METHOD: In this method, the process of apportioning service departments overhead is continued until the figure becomes immaterial DIRECT METHOD This is the most common method of allocating service department cost to production departments because of its mathematical simplicity and ease of application. It involves allocation and ignores any services provided by one service department to another.

12 Eg.1 (secondary distribution) : Assume the following data for A. Azim Industries: The departmental distribution (primary distribution) summary has the following totals: Production DepartmentService department ABCXY 800700500234300 The expense of the service departments is charged out on a percentage basis as following: You are required to show the reapportionment of overhead using continuous method. ABCXY X20%40%30%-10% Y40%20% -

13 Solution : ABCXY overhead costs (Primary Distribution) 800700500234300 X – 234 (20:40:30:- :10) 479470(234)23 323 Y – 323 (40:20:20:20: -) 12965 (323) X – 65 (20:40:30:- :10) 132620(65)6 Y-6 (40:20:20:20: -) 2.4=21.2=1 (6) X0.20.40.3(1)0.1 Total overhead 99188665600

14 Example 2 : Assume the following data for A. Azim Industries: The departmental distribution ( primary distribution ) summary has the following totals: The expenses of the service departments is charged out on a percentage basis as follows: You are required to show the reapportionment of overhead using direct method. Production DepartmentService department ABCXY 800700500234300 ABCXY X20%40%30%-10% Y40%20% -

15 Solution : ABCXY Overhead costs (Primary Distribution) 800700500234300 X – (20:40:30) 479470(234)23_ 323 Y – (40:20:20) (323) Total Overhead

16 ABSORPTION OF OVERHEAD COSTS After all service departments overhead costs have been apportioned to production departments, the next step is to spread factory overhead to different products or job produced. This is termed as ‘overhead absorption’.

17 Methods of Absorption Some method of overhead absorption has to be applied to absorb factory overhead to individual product or jobs on some equitable basis. The rate, which is used to charge overhead costs to the products job, is known as absorption rate. The following are the generally recognized methods of absorption rate The activity level that should be used are base on items such as direct labour hours, direct labour costs, machine hours, direct material costs and unit of output.

18 PREDETERMINED OVERHEAD RATES Predetermined OH Rate = Budgeted OH Budgeted activity level Under and over absorption occurred when: the amount of overhead expenditure incurred differs from the amount budgeted; and the actual production volume differs from the budgeted production

19 Example 1: The following data was collected for MM factory: Production overheadsRM10000 Direct labour hours2000 hours Direct labour costsRM8000 Machine hours4000 hours Direct materials costsRM5000 Production2500 units Calculate OAR using the following bases: a. Direct labour hours; b. Direct labour costs c. Machine hours; d. Direct material costs; and e. Production output.

20 Solution : a) OAR=Budgeted Overhead Budgeted Direct labour hours =10,000 2000 DLH =RM5 per direct lab. hour. b) OAR=Overhead Direct labour costs = 10000 8000 = 125% of direct labour costs

21 Solution : c)OAR=Overhead Machine hours =10000 4000 machine hours =RM2.50 per machine hour d)OAR=Overhead Direct material costs =10000 5000 =200% of direct material costs e)OAR=Overhead Production output =10000 2500 =RM4 per unit

22 Example 2: Turn to page 3 eg 8.3 ( your module) Lets try out that example Experience is not what happens to you. It is what you do with what happens to you

23 (b)


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