Contents
Meaning of Overheads
Overheads comprise of many items having relationship to different factors. Hence allocation of such expenses to the individual departments should be commensurate with these relevant factors.
Certain items are possible of being collected under standing order numbers which can be further analyzed in abstracts to form the basis of allocation to the departments.
ALSO READ- Meaning of Collection Allocation | Apportionment of Overhead Expenses
The various bases for allocation of expenses to departments are:
(a) Direct allocation
Based on the analysis and abstract, items like sundry supplies drawn through requisitions or indirect wages through wages classification summaries and analysis should not present difficulties.
For power steam etc., if separate meters are installed, the meter reading can be used for allocation purposes.
(b) Number of persons
Allocation of items of social and labour welfare expenses, like canteen expenses, colony expenses, sports and educational facilities etc. will have a greater relationship to the number of persons.
(c) Direct Wages or total wages
Items relatable to total wages-like Employer’s Liability Insurance, Workmen’s Compensation Insurance, Provident Fund Contribution of the employer are few of the items related to wages.
ALSO READ- What is Re-Apportionment of Service Departments Overheads | Basis of Re-Apportionment
The convenience of this method in view of its ready and easy availability as a base has been recognized widely.
(d) Proportionate to the value of assets
Rates & taxes, depreciation. insurance on assets and, sometimes, repairs and maintenance are allocated on this method.
(e) On area or cubic capacity or units
Items like heating, lighting, humidifying, white washing etc. expenses come under this basis.
(f) Direct Labour Hours
Many items of expenses will have a better relation to the time element. Items like supervision, works administration, sundry supplies time office expenses, development and research etc., can take this basis.
ALSO READ- What is Primary Distribution of Overheads | Definition
(g) Technical estimate
If no base is available then some ad hoc estimate based on the experience of the technical personnel will form the basis. For Power, if no meter is installed and horse power hours are not available; steam consumption and water consumption etc., may take this basis.
Related Links
- Cost Accounting | Purpose or Functions of Cost Accounting
- Advantages and Disadvantages of Cost Accounting
- Difference between Cost Accounting and Management Accounting
- What is Cost Concepts and Different Terms of Costs
- What is concept of Cost Audit | Objective and Scope of Cost Audit
- Advantages and Disadvantages of Cost Audit
- Meaning of Methods of Cost | Basic Methods of Costing
- What is meaning of Classification of Cost & elements of Cost | rules of Cost Accounting Standard
- What is Installation of a Costing System | Conditions and Factors
- What are the practical difficulties in installing cost accounting
- What is technique of Costing | Various techniques of Costing
- What is Material or Inventory Control | Techniques of Materials Control
- What is FIFO Method | advantages and disadvantages
- What is LIFO method | Advantages and Disadvantages
- What is Periodical or Annual Inventory Control System | Limitations
- Methods of Pricing Material Issues | Cost Methods
- What is Cost of Labour Turnover | Causes, Effects Classification
- What is meant by idle time | Definition, Causes, Control
- What is meaning of overtime work | Reason, Disadvantages
- HIFO method of inventory valuation |Advantages, Disadvantages
- What is two Bin System | Meaning of Bin Card and Specimen
- What is Meaning of NIFO Method | Advantages, Disadvantages
- What is Market Price Method or Replacement Price Method | Advantages, Disadvantages
- What is average cost method of Inventory valuation | Advantages and Disadvantages
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