Overhead cost control
- 1. WELCOME TO THE WORLD OF LEARNING
- 2. OVERHEADS (CONT….) COLLECTION OF OVERHEADS
- 3. COL L E CTION OF OVE RHE AD The collection of overhead is the process of recording each item of cost in the book of accounts maintained for the purpose of identification of cost. It is the process of accumulating or gathering indirect expenses A code number is allotted to a group of similar items of indirect costs those are of two types 1. Standing order number 2. Cost accounting number
- 4. Standing Order Number The number provided to items of overheads of production are known as standing order numbers. Cost Accounting Numbers The number provided to the items of office, selling and distribution overheads are known as cost accounting numbers. Indirect costs are usually collected from the following documents or sources of records. 1. Stores requisitions for indirect materials supplied from stores. It is prepared for the issue of indirect materials like cotton waste, lubricants, scraps, brushes, brooms etc.
- 5. 2. Journal This book provides data about the accrued charges and payments made in advance. 3. Wage analysis book This book provides information relating indirect wages, overtime, etc. to be treated as overheads 4. Invoice The Invoice or purchase journal gives information about the indirect method and stores purchased. 5. Cash Book For items of indirect cost paid in cash.
- 6. 6. Plant register for expenses like depreciation reports regarding scrap waste idle time, idle machine and idle facility. 7. Supplies Invoices for factory stationery 8. Meter Reading for power and lightening. 9. Lease Deed for rent, local government assessment records for rates etc.
- 7. Allocation and apportionment of overheads (departmentalization of overheads) allocation of overheads after having collected the overheads under proper standing order numbers the next step is to arrive at the amount for each department or cost centre. This may be through allocation or absorption. According to the chartered institute of management accountants, London, cost allocation is “that part of cost attribution which charges a specific cost to a cost centre or cost unit”. Thus, the wages paid to maintenance workers as obtained from wages analysis book can be allocated directly to maintenance service cost centre. Similarly, indirect material cost can also be allocated to different cost centres according to use by pricing stores requisitions.
- 8. Apportionment of overheads Apportionment refers to the distribution of overheads among departments or cost centres on an equitable basis. ICMA, london has defined it as “that part of cost attribution which shares costs among two or more cost centres or cost units in proportion to the estimated benefit received, using a proxy”. Apportionment is done in case of those overhead items which cannot be wholly allocated to a particular department. For example, the salary paid to the works manager of the factory, factory rent, general manager’s salary etc. Cannot be charged wholly to a particular department or cost centre, but will have to be charged to all departments or cost centres on an equitable basis.
- 9. Overheads can be classified into two ways: 1. Primary distribution of overheads primary distribution of overhead involves allocation or apportionment of different items of overhead to all departments of a factory. This is also known as departmentalisation of overheads. 2. Re-apportionment of service department overheads (secondary distribution) the process of redistribution of the cost of service departments among the production departments is known as secondary distribution.