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OVERHEADS On the basis of behaviour-

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1 OVERHEADS On the basis of behaviour-
Any expenditure in excess of Prime Costs is known as Overheads. In other words- Overheads = Indirect materials+ Indirect Labour+ Indirect expenses Classification of overheads On the basis of elements- Indirect materials Indirect labour Indirect Expenses On the basis of behaviour- Fixed Overheads Variable Overheads Semi-variable Overheads

2 On the basis of function-
Factory Overhead Office & Administrative Overhead Selling & Distribution Overhead. Steps in Overhead costing- Collection of overheads under standing order Allocation of Overheads Apportionment of Overhead Absorption of Overhead Over/Under absorption of overhead Accounting for over/under absorption of overheads

3 Apportionment of overheads
Distinction between allocation and Apportionment Apportionment of overheads- When costs are incurred for a particular cost centre then it is called allocation of overhead. Apportionment of Overheads-On the other hand when costs are common to all department, then the costs are apportioned to the department on some equitable basis. Basis of Apportionment Common Expenses Basis of apportionment Factory Rent, Rates& taxes Floor area Occupied Insurance of Building Costs of building/Floor area

4 3) Depreciation of Building Cost of building/Floor area 4) Depreciation Of plant & Machinery Cost of Plant & machinery 5) Insurance of Stock Stock Value 6) Supervisor’s salary No of Workers 7) Canteen expenses/ Staff Welfare Exp No of Workers 8) Indirect Wages Direct Wages 9)Electric charges No of light point x wattages/ no of light point/Floor area 10) Stores Overhead Value of Material 11) General Expenses Working Hours/Direct wages. 12) Power H.P. of machine x Wattage H.P. of Machine

5 Re-distribution of Overheads:
Re-distribution of service department costs to production department. This may be Direct service to Production Department Reciprocal services Methods of Re-distribution Repeated method Simultaneous equation.

6 Absorption of Overheads
Production Unit method Direct material Costs Method Direct labour Costs method Percentage of Prime costs method Labour Hour rate method. Machine Hour rate method

7 Illustration: X.Ltd. has three production departments A, B and C and two service departments D and E. Following information relates to the month of January 2015: Rent-Rs 10000; Depreciation of machine- Rs 20000; Motive Power- Rs 3000; Indirect wages – Rs 23000; lighting- Rs 2400; Supervisor’s salary- Rs Additional Information: A B C D E Area Occupied (Sq. Ft) Light points Direct wages (Rs) H.P. machine No of workers Value of Machines (Rs) Services rendered by department D and E to production department are in the ratio of 5:3:2 and 4:4:2 respectively

8 Statement Showing Distribution of Overheads Basis of di
Expenses Basis of distribution Total A B C D E Rent Area Occupied (4:5:6:4:1) 10000 2000 2500 3000 500 Depreciation Value of Machine (12:16:20:1:1) 20000 4800 6400 8000 400 Motive Power H.P. of machine (6:3:5:1) 1200 600 1000 200 Indirect wages Direct Wages (6:4:6:3:1) 23000 6900 4600 3450 1150 lighting Light Points (2:3:4:2:1) 2400 800 Supervisor's Salary No of Workers (5:4:6:3:2) 16000 4000 3200 1600 Direct Wages Actual 1500 Total overheads 76400 19300 17900 24500 10350 4350

9 Statement Showing Re-distribution of Overheads
Expenses Basis of distribution Total A B C D E 76400 19300 17900 24500 10350 4350 Deptt D 5:3:2 5175 3105 2070 (10350) Deptt E 4:4:2 1740 870 (4350) TOTAL 26215 22745 27440 NIL Nil

10 ABSORPTION OF OVERHEADS
Absorption of overheads means estimation of overheads on some reasonable basis. Various methods of overhead absorption are- (i) Percentage of Direct Material. (ii) Percentage of Direct Wages. (iii) Percentage of Prime Costs. (iv) Labour Hour Rate method. (v) Machine Hour Rate Method.

11 Estimated/ Budgeted Overhead
Overhead absorption rate = Absorption Base Overhead absorbed = Actual base x Absorption rate Machine Hour Rate Method: It is basically an absorption rate of overheads under which factory overheads are absorbed in case where the production is pre-dominantly carried on through machines and the products are not uniform.

12 Computation of Machine Hour Rate
Particulrs FIXED EXPENSES p.a. Rent, Rates and Taxes Insurance Premium for the Machine Salary of supervisor Garage rent Lighting B. Effective machine Hour : Machine Hour Less: Normal Idle Time Effective Machine Hour C. Fixed expenses Per hour (A/B) Amount(Rs) ----- -----_________ -----__________ ------

13 D. Variable Expenses Per Hour
Total Depreciation Depreciation = Effective machine hour Repair and maintenance Power Machine Hour Rate Capital Cost Total depreciation = Life of the Mach. Amount(Rs) ----- ------

14 OVER/UNDER ABSORPTION OF OVERHEADS
Over Absorption- An over absorption occurs when overhead absorbed is more than the actual overheads incurred. Under Absorption- an under absorption occurs when overhead absorbed is less than the actual overheads incurred. Treatment of Over/under absorption of Overheads Transfer to Costing Profit & Loss account. Carried to the next accounting year. Adjusted the overhead absorption rate with a supplementary rate.

15 Overhead absorption for the departments
Deptt A= Machine Hour x Machine hour rate = hrs x Rs 1.50 = Rs 21000 Deptt B = Direct Labour Hour x Hourly Rate = 3000 hrs x Rs 1.30 = Rs 3900 Deptt C = Direct Wages x Overhead % = Rs 6000 x 80% = Rs 4800 Deptt D = No. of Pieces x Overhead Rate = 950 x Rs 2.00 = Rs 1900

16 Statement showing Over/Under Absorption of Overhead
Particulars Deptt A Deptt B Deptt C Deptt D Overhead Absorbed Overhead incurred Over / (Under) Absorption 21000 19300 1700 3900 4200 (300) 4800 4000 800 1900 2000 (100)

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