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Meaning of Collection Allocation | Apportionment of Overhead Expenses

Meaning of Collection Allocation
Meaning of Collection Allocation

Meaning of Collection Allocation

With the rapid advancement in industrialization with all its complexities it has become necessary for classifying and modifying all expenses to facilitate expeditious collection and accumulation by departments.

All standing order numbers and account numbers must have identification for departments or shops except in cases where this is not possible.

The expenses in standing order numbers and account numbers will be first totaled up and accumulated under the three board categories, viz. works or production overheads; administrative overheads; and commercial or selling and distribution overheads.

As far as possible. the factory/works will have to be departmentalized and the extent of departmentalization depends upon the circumstances of individual cases and the extent of refinement needed without unnecessary spending of time and money.

On a further analysis of the standing orders and account numbers. expenses specific to particular departments are taken under them as such leaving only common expenses for allocation.

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These should then be allocated to the various departments to reflect a true impact by means of suitable bases of allocation. Thus the total expenses allocated to all sections can be reconciled with the control total under the three categories mentioned above.

The departments under which the expenses can be directly collected through various abstracts, etc. Will comprise of production departments and non-production or ancillary departments.

As the overheads have to be ultimately absorbed by the final output or production, the service department expenses have to be further allocated to the production shops on some equitable bases depending upon the nature and extent of services rendered.

The final consolidated allocation sheet will exhibit a cumulative total of expenses for the Production Departments of the factory, Administration and Commercial Activity.

It is usual that administration expenses are also bifurcated and allocated to the production and commercial aspects on some reasonable basis.

The totals will then be tallied with the control totals in the financial books, When such an accumulation results, the next exercise is to find a costing unit (like Direct Labour hours, Direct Wages, Machine hours, etc.) for each of the production departments and the commercial activity.

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The total expenses of each department is then divided by the total costing units of that department which will indicate a rate of absorption for the output of that department.

Apportionment of Overhead Expenses

The relevant rates coupled with the number of costing units in each department for the individual item of output will give the absorption of the departmental expenses.

(a) All items of overheads are collected under the relevant Standing Order Number or Account Numbers and grouped under classified heads.

(b) The totals are distributed directly as far as possible or allocated on suitable bases to the producing and non-producing departments.

(c) The totals of the non producing departments are then allocated to the producing and non-producing departments and re-allocated under a step ladder system till all expenses ultimately get accumulated under producing departments only.

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(d) Divide the total so accumulated by the base costing units of the respective production department to arrive at the rate of absorption.

(e) Multiply the relevant rate and the base costing units expended in the respective department on the individual outturn to indicate the absorption of the departmental overhead by the output.

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