Meaning :
It is the aggregate of indirect material,indirect labour and indirect expenses which cannot be identified with particular job, product or cost centre.
Classification of overheads
By function
Production overheads
Administration overheads
Selling overheads
Distribution overheads
By behavour
Fixed overheads
Variable overheads
Semi variable overheads
By element
Indirect labour
Indirect material
Indirect expenses
Classification of cost due to behavour
Fixed cost – in total will be same
Per unit will decrease
Variable cost – per unit will be same
Total variable cost will increase
Semi variable cost – it is changed level wise, e.g.
upto 1000units – per unit – Rs. 5000
above 1000 upto 2000 – Rs. 9000 …
Methods of segregation semi variable overheads into fixed and variable overheads
1 comparison by level of activity method
2 high and law point range method
In above 2 methods
Variable element per unit = change in amount of semi variable overheads/change in level of activity
Fixed overhead = total semi variable overheads – total variable elements at this level
3 least squre method like byx
Analytical method:
Under this method, decide proportion of variable and fixed cost on the basis of past experience
Graphical method: under this method x axis and y axis will be drawn. Plot various points on graph at different level of output draw a line which covers maximum points which is a variable overheads line and balance will be fixed overheads
In practice first two methods are used.
Allocation of overheads:
Common overheads will be allocated to different production as well as service department
Distribution of common expenses on some bases is called apportionment :
| Item | Base |
| Factory rent, repairs, maintenance, insurance,
Depreciation of factory |
Floor area of machine |
| Repairs, insurance, dep of plant and machinery | Capital cost- P & M |
| Insurance of stock | Value of stock |
| Superannuation, canteen, time keeping, personal office exp. | No of workers |
| Compensation, ESI, PF to workers | wages |
| Stores and stock | Value of Direct mat. |
| Material handling | Weight of direct material |
| Lighting and heating | No of light points |
| Power or steam consumption | Hoarse power of machine *hours worked if given |
Ans. 4
Statement of apportionment of overheads
| Particulars | Base | Total | I | II | III | iv |
| Rent,rate and taxes | Floor area
5:4:3:2 |
14000 | 5000 | 4000 | 3000 | 2000 |
| Dep,insurance, repairs | Value of P&M
5:6:2:1 |
28000 | 10000 | 12000 | 4000 | 2000 |
| Insurance of stock | Value stock
7:5:1:1 |
700 | 350 | 250 | 50 | 50 |
| Supervision, staff welfare | No of worker4:2:1:1 | 2000 | 1000 | 500 | 250 | 250 |
| Stores o/hs | Value materi
4:3:2:1 |
1000 | 400 | 300 | 200 | 100 |
| Lighting and heating | No of points
8:2:1:1 |
3000 | 2000 | 500 | 250 | 250 |
| Power | No of machines10:5:3:2
|
1000 | 500 | 250 | 150 | 100 |
| Total | 49700 | 19250 | 17800 | 7900 | 4950 |
Distribution of service department overheads to production department when no inter service departments use their services for each other.
Step ladder method – it is known as a non reciprocal method.
Under this method distribute overheads of service department to other service and production department.
Give priority in distribution to such service department which provides service to highest no of departments and then next highest so on…
Ans 6 Distribution of service department to production department :
First distribute s2 because it provides service to 4 departments.
second distribute s1 because it provides service to 3 departments.
Third distribute s3 because it provides service to 2 departments.
Overhead distribution statement step ladder
| Particulars | P1 | P2 | S1 | S2 | S3 |
| Given | 53000 | 7000 | 17000 | 30000 | 13000 |
| S2 in remaining dep.
3:5:1:1 |
9000 | 15000 | 3000 | (30000) | 3000 |
| S1 in remaining dep
5:3:2 |
1000 | 6000 | (20000) | – | 4000 |
| S3 in P1 and P2
(4:6)
|
8000 | 12000 | – | – | (20000) |
| Total | 80000 | 40000 |
Distribution of service department overheads to production department when inter service department are used.
1 simultaneous equation method
2 Repeated distribution method
3 trial and error method
Ans 7 simultaneous equation method
| P1 | P2 | S1 – x | S2 – y | |
| S1 – x | 50% | 40% | – | 10% |
| S2 – y | 30% | 50% | 20% |
While utilization of service based on raw
While forming equation see column
S1 – X, S2 – y,
X = 40000+0.2y, Y = 16000+0.1x
From solving above equations,
x = 44081, Y= 20408
Distribution of service department overheads to production department
| Particulars | P1 | P2 |
| Own department | 51837 | 12163 |
| S1 – 44081 (50%&40%) | 22041 | 17632 |
| S2 – 20408 (30% & 50%) | 6122 | 10205 |
| Total | 80000 | 40000 |
Extra practice simultaneous equation method
| P1 | P2 | S1 – x | S2 – y | |
| S1 – x | 40% | 40% | – | 20% |
| S2 – y | 60% | 30% | 10% |
P1 = 60000, P2=30000, S1=20000, S2=10000
While utilization of service based on raw
While forming equation see column
S1 – X, S2 – y,
X = 20000+0.1Y, Y = 10000+0.2x
From solving above equations,
x = 21425, Y= 14285
Distribution of service department overheads to production department
| Particulars | P1 | P2 |
| Own department | 60000 | 30000 |
| S1 – 21428 (40%&40%) | 8571 | 8571 |
| S2 – 14285 (60% & 30%) | 8571 | 4285 |
| Total | 77144 | 42856 |
Repeated distribution method or (reciprocal method )
Under this method services are used internally, hence distribute in given ratio to each other up to it becomes small amount below 10.
| particulars | P1 | P2 | S1 | S2 |
| Given | 51837 | 12163 | 40000 | 16000 |
| S1 to p1,p2,and s2 5:4:1 | 20000 | 16000 | (40000) | 4000 |
| S2 to p1,p2,and s1 3: 5:2 | 6000 | 10000 | 4000 | (20000) |
| S1 to p1,p2,and s2 5:4:1 | 2000 | 1600 | (4000) | 400 |
| S2 to p1,p2,and s1 3: 5:2 | 120 | 200 | 80 | (400) |
| S1 to p1,p2,and s2 5:4:1 | 40 | 32 | (80) | 8 |
| S2 to p1 and p2 | 3 | 5 | – | (8) |
| total | 80000 | 40000 |
Trial and error method :
Under this only statement of service department is prepared. It distribute to other service department in given % then total of service department will be distributed in production department in simultaneous method
| Particulars | S1 | S2 |
| Given | 40000 | 16000 |
| 10% of s1 used by s2, 10% of 40000 | – | 4000 |
| 20% of s2 used by s1, 20% of 20000 | 4000 | – |
| 10% of s1 used by s2, 10% of 4000 | 400 | |
| 20% of s2 used by s1, 20% of 400 | 80 | |
| 10% of s1 used by s2, 10% of 80 | 8 | |
| Total | 44080 | 20408 |
Distribution of service department overheads to production department
| Particulars | P1 | P2 |
| Own department | 51837 | 12163 |
| S1 – 44081 (50%&40%) | 22041 | 17632 |
| S2 – 20408 (30% & 50%) | 6122 | 10205 |
| Total | 80000 | 40000 |
Ans10
Step 1
statement showing allocation of overheads
| Particulars | P1 | P2 | S1 | S2 |
| Direct material | – | – | 200 | 700 |
| Direct wages | – | – | 100 | 350 |
| Direct exp | – | – | 50 | 175 |
| Indirect material | 6160 | 12320 | 100 | 350 |
| Indirect wages | 3090 | 6180 | 50 | 175 |
| Total allocated o/hs | 9250 | 18500 | 500 | 1750 |
Step 2 apportionment of common expenses
| Pariculars | base | total | P1 | P2 | S1 | S2 |
| Staff welfare | No of workers
37:74:2:7 |
3600 | 1110 | 2220 | 60 | 210 |
| Supervision | No of workers
37:74:2:7 |
3600 | 1110 | 2220 | 60 | 210 |
| Power | H. P. Points | 7200 | 2220 | 4440 | 120 | 420 |
| Lighting | Light points | 3600 | 1110 | 2220 | 60 | 210 |
| depreciation | Value of asset | 7200 | 2220 | 4440 | 120 | 420 |
| Insurance | Value of asset | 600 | 185 | 370 | 10 | 35 |
| Rent & rate | Floor area | 600 | 185 | 370 | 10 | 35 |
| Repairs | Floor area | 2400 | 740 | 1480 | 40 | 140 |
| ESI | Direct wages | 600 | 185 | 370 | 10 | 35 |
| General o/h | Direct wages | 480 | 148 | 290 | 8 | 28 |
| Stores o/hs | Direct material | 120 | 37 | 74 | 2 | 7 |
| Total | 30000 | 9250 | 18500 | 500 | 1750 |
Total department overheads :
| Particlulars | P1 | P2 | S1 | S2 |
| Allocated | 9250 | 18500 | 500 | 1750 |
| Apportionment | 9250 | 18500 | 500 | 1750 |
| Total | 18500 | 37000 | 1000 | 3500 |