Accounting for overheads 小组成员:叶子怡 漆阳 曾腾 黎江璐
part1 overheads part2 absorptio n costing part3 overhead allocation. apportionment. absorption part6 ledger entries relating to overheads part5 over and under absorption of overheads part4 blanket absorption rates and departmental absorption rates Chapter Preview
Topic1 overheads Overhead is the cost incurred in the course of making a product, providing a service or running a department,but which cannot be traced directly and in full to the product,service or department.
Overheads overheads include the following items: indirect materials production + + indirect expenses selling and distribution + + indirect labour administration
Topic2 Overhead allocation Allocation is the process by which whole cost items are charged direct to a cost centre. Cost centre: when costs are incurred, they are generally allocated to a cost centre. A cost centre acts as a collecting place for certain costs.
types of cost centre production department production area service department administrative department selling or a distribution department overhead cost centre
Example Wages of the foreman of department A $200 Wages of the foreman of department B $150 Indirect materials consumed in department A $50 Rent of the premises shared by departments A and B $300 The cost accounting system might include three overhead cost centres: Cost centre: 101 Departments A 102 Departments B 201 Rent
Overhead absorption is the process whereby overhead costs allocated and apportioned to production cost centres are added to unit,job or batch costs.Overhead absorption is sometimes called overhead recovery. Overhead absorption
Calculation of overhead absorption rates Estimate the overhead likely to be incurred during the coming period. Estimate the activity level for the period. Divide the estimated overhead by the budgeted activity level. → absorption rate Absorb the overhead into the cost unit by applying the calculated absorption level.
Example : Athena Co makes two products,the Greek and the Roman.Greeks take 2 hours each to make and Romans take 5 labour hours.What is the overhead cost per unit for Greeks and Romans respectiveky if overhead are absorbed on the basis of labour hours? Step1: total overhead $50,000 Step2: tatal direct labour hours 100,000 Step3: Absorption rate = =$0.50 per direct labour hour Step4: Greek Roman Labour hours per unit 2 5 Absorption rate per labour hour $0.50 $0.50 Overhead absorbed per unit $1 $1
A percentage of direct materials cost A percentage of direct labour cost A percentage of prime cost A rate per direct labour hour A rate per unit A rate per machine hour Choosing the appropriate base
4:overhead apportionment Apportionment is a procedure whereby indirect costs are spread fairly between cost centres Service cost centre costs may be apportioned to production cost centres by using the reciprocal method Stage1:Apportioning general overheads Stage2:Reapportion service department costs the reciprocal method of apportionment
stage1: Apportionment general overheads Apportionment is a procedure whereby indirect costs are spread fairly between cost centres Service cost centre costs may be apportioned to production cost centres by using the reciprocal method overhead to Which the basis applies Basis Rent rates heating and light repairs and depriation of building Floor area occupied by each cost centre Depreciation insurement of equipment cost or book value of equipment Personnel office canteen welfare wages and cost offices first aid Number of employees or labour hours worked in each cost centre
(a) the direct method of reapportionment (b)step down method of reapportionment (c)the reciprocal method of apportionment Stage2:Reapportion service department costs Service cost centrePossible basis of apportionment stores Number of cost value of material requisitions Maintenance Hours of maintenance work done for each cost centre Production planning Direct labour hours worked in each production cost centre Our aim is to reapportion all the service department costs to the production departments, in one of three ways
AB Maintenancestores Service department services were used as follows (a) the direct method of reapportionment Allocated costs General costs ABMaintenancestoresTotal Maintenance hours used Number of stores requisitions 4.3.3Example:Swotathon direct method(ignore inter- service department work
Required:Caculate the total production overhead costs of departments A and B using the direct method of reapportinment (1)Maintenance department overheads These are reapportioned as follows Total hours worked in Departments A and B = =9000 Reapportioned to Department A= 5000/9000*34840=19356 4000/9000*34840=15484 (2)Stores department overheads These are reapportioned as follows Total numeber of stores requistions= =4000 Reapportioned to Department A=3000/4000*18660=13995 Reapportioned to Department B=1000/4000*18660=4665
4.3.4step down method of reapportinment step1 Reapportion one of the service cost centre overheads to all of the other centres which make use of its services step2 Reapportion the overheads of the remaining service cost centre to the production department only The other service cost centre is ignored The method works as follows
Elm Co has two service departments serving two production departments Overhead costs apportioned to each department are as follows service 1 department is expected to work a total of hours for the other departments divided as follows hours production production service sevrice 2 department is expected to a total of hours for the other departments, devided as follows hours production production service QUESTION
Required The finance director has asked you to reapportion the costs of the two service departments using the direct method of apportionment step down method production 1production 2service 1service Apportion Service 1 cost (9384) Apportion Service 2 costs (16996)
4.4The reciprocal method of apportionment Examole: Swotathon using repeated distribution method AB Maintenanc e stores allocated costs general costs ` ABMaintenancestores Maintenance hours used Number of stores requisitons
Remember to apportion both the general and allocated overheads The bases of apportionment for Maintenance and Stores are the same as for the above example ABMaintenanceStores Total overhead Apportion maintenance (34840)3484 NIL22144 Apportion stores (22144) 4429NIL Apportion maintenance (4429)442 NIL442 Apportion stires NIL(442) Total overhead NIL NIL
(a)It does not matter which department you choose to apportion first Apportioned as follows: Maintenance hours worked in department Tota; maintenance hours worked *34840 production department A 5000/10000*34840=17420 production department B 4000/10000*34840=13936 stores department= 1000/10000*34840=13936 (b) Stores overheads are apportioned as follows: Number of stores requisitions for department Total number of stores requisitions * Production department A=3000/5000*22144=13286 Production department B=1000/5000*22144=4429 Maintenance =1000/5000*22144=4429 (c)Stores requisitions for A Total stires requisitions(A+B) *Stores overheads=3000/4000*442=332
4.5 The reciprocal (algebraic) method of apportionment The results of the reciprocal method of apportionment may also be obtained using algebra and simultaneous equations. Example:Swotathon using the algebraic method of apportionment Let M=total overheads for the Maintenance department S=total overheads for the Stores department
Remember that total overheads for the Maintenance department consist of general overheads apportioned,allocated overheads and the share of Stores overheads(20%). Similarly,total overheads for Stores will be the total of general overheads apportioned, allocated overheads and the 10% share of Maintenance overheads. M=0.2S+$34,840 (1) S=0.1M+$18,660 (2)
Multiply equation (1) by 5 to give us 5M=S+174,200 (3), which can be rearranged as S=5M-174,200 (4) Subtract equation (2) from equation (4) S=5M-174,200 (4) S=0.1M+$18,660 (2) 0=4.9M-192,860 4.9M=192,860 M=$39,359 Substitute M=$39,359 into equation (2)
S=0.1x39,359+18,660=22,596 These overheads can now be appoetioned to the production departments using the proportions above. A B Maintenance Stores Overheads costs 93,030 60,670 34,840 18,660 Apportion maintenance (50%/40%/10%)19,680 15,743 (39,359) 3,936 Apportion stores (60%/20%/20%) 13,558 4,519 4,519 (22,596) Total 126,268 80,932 Nil Nil You will notice that the total overheads for production departments A and B are the same regardless of the method used.
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