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What is Overheads | Bases For Allocation of Expenses to Departments

What is Overheads
What is Overheads

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.

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