BBA Study Material to Cost Accounting Topic Wise Short Notes of Overheads

BBA Study Material to Cost Accounting Topic Wise Short Notes of Overheads : BBA Cost Accounting Notes Study Material Sample Modes Papers for Students Free Download in PDF.

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BBA Study Material to Cost Accounting Topic Wise Short Notes of Overheads
BBA Study Material to Cost Accounting Topic Wise Short Notes of Overheads

Bba Study Material to Cost Accounting Topic Wise Short Notes of Overheads Apportionment And Absorption: After Studying this Post you are able to understand: Absorption, Allocation, Apportionment, Blanket Absorption Rate, Chargeable Expenses, Collection of overhead, Departmental Absorption Rate, Departmentalisation, Depreciation, Direct Expenses, Idle Capacity Cost, Indirect Costs, Indirect Expenses, Interest on Capital, Machine Hour Rate, Obsolescence, Overhead, primary Distribution, Reciprocal Basis, Repeated Distribution, Secondary Distribution, Service Centre Costs, Step Down Method, Supplementary Recovery Rate.

Learning objectives

  • Meaning Of Overheads
  • Distinction Between Overheads And Direct Expenses
  • Collection Of Overheads
  • Meaning Of Overhead Allocation, Apportionment And Absorption
  • Basis Of Apportionment Of Overheads
  • Criteria For Overheads Allocation And Apportionment
  • Apportionment Of Service Departments Costs
  • Methods Of Overhead Absorption
  • Blanket And Departmental Absorption Rates
  • Over And Under Absorption Of Overheads
  • Treatment Of Idle Capacity Costs
  • Arguments For And Against Inclusion Of Interest On Capital
  • Impact Of Depreciation On Product Cost

 

Bba Study Material to Cost Accounting Topic Wise Short Notes of, Overheads: Apportionment And Absorption

Bba Study Material to Cost Accounting Introduction of Overheads: Apportionment and Absorption

Introduction

CIMA Defines overhead cost as “the total cost of indirect material, indirect labour and indirect expenses”. Overheads are the indirect costs which cannot be allocated to any specific job, process because they are not capable of being identified with any specific job or process. Overheads include cost of indirect material, indirect labour, indirect expenses which cannot be conveniently charged to any job, process, cost unit etc. for example, cost like rent, rates, administration and supervision, depreciation, maintenance, selling and distribution expenses, cleaning materials etc. cannot be directly attributed to cost units produced. The costing treatment of overhead deals with methods where by these indirect expenses can be related to cost units. Overhead is the cost of materials, labour and expenses which cannot be economically identified with specific saleable cost unit.

Bba Study Material to Cost Accounting Topic Wise Short Notes of, Overheads: Apportionment and Absorption,Topic is Direct Expenses and Overhead: Distinction

Direct Expenses and Overhead: Distinction

Direct expenses are directly allocable to a job, process, service, cost unit or cost centre. It is not possible to allocate the overheads to job etc.; and only through apportionment and absorption, it can be charged to different jobs, processes, services, cost units or cost centres. An expense is whether a direct expense or overhead depend on the extent of departmentalization and specific circumstances of a particular expense. For example, a machine is hired for general purpose, the hire charges are treated as overhead. But if that machine is hired or used for a specific job, then the hire charges will be direct charge to that particular job. Another example is that, power consumption is normally treated as direct expense if it is consumed for single plant or machinery. But if numbers of machines consume the power, then power will be treated as overhead and will be apportioned to the different machine centres on some equitable basis, which have used power.

Bba Study Material to Cost Accounting Topic Wise Short Notes of, Overheads: Apportionment and Absorption, Topic is Accounting of Overheads

Accounting of Overheads

The important step involved in accounting of overheads is as follows:

  1. Classification and codification of overheads
  2. Collection of overheads
  3. Primary and secondary distribution of overheads using:
  4. Allocation
  5. Apportionment
  6. Absorption

For ascertainment of cost and profitability of each unit of production, it is necessary for the effective analysis of costs. The direct materials and direct labour are easily attributed to cost objects but charging of overheads to cost objects poses a major problem. To overcome the difficulties in ascertainment of unit cost and profitability, proper classification and codification is done for ease or recording, collection and control of cost data.

CIMA defines classification as “the arrangement of items in logical groups having regard to their nature (subjective classification) or the purpose to be fulfilled (objective classification)”.

Classification is the process of arranging items into groups according to their degree of similarity. Accurate classification of all items is a prerequisite to any form of cost analysis and control system. The classification system must meet the objectives of all the systems which may use the classifications.

Bba Study Material to Cost Accounting Topic Wise Short Notes of, Overheads: Apportionment and Absorption, Topic is Collection of overheads

Collection of overheads

Overheads collection is the process of recording each item of cost in the record maintained for the purpose of ascertainment of cost of each cost centre or cost unit. For ease in collection of overheads, classification and codification of overhead items is necessary. For collection of overhead expenses, the following are some of the documents maintained:

  • Stores Requisitions – different cost centres will obtain their requirements of indirect standing from stores by submitting the store requisition notes which indicate the standing order number and the department which has used the indirect material issued from the stores. A material issue analysis sheet is prepares at the end of every month and the total indirect materials issued from the store are charged or debited to production overhead control account and credited to stores ledger control account.
  • Wage Sheets – the wages and incentives paid to the indirect labour are recorded in the time cards and job cards along with the standing order numbers of each cost centre and wage analysis is prepared at the end of the month from the entries appearing in the time card and job cards and the total is debited or charged to factory overhead control account and credited to the wages account.
  • Cash Book – the indirect expenses incurred will be entered in cash book, will be scrutinised on monthly basis and collect according to the standing order numbers department wise and debited to the respective control accounts like stores ledger control account, wages control account, cost ledger control account.
  • Purchase Order and Invoices – the indirect expenses pertaining to the purchases, sales and distribution are collected, according to the purchase orders or invoices originated.
  • Journal Entries – the overhead expenses relating to number of items can be collected from books of original record i.e., journal and necessary entries are passed in the cost ledger. It is to be noted that majority expenses are to be apportioned to factory overhead, administration overhead, marketing and distribution overhead.
  • Other Registers and Records – some of the overhead items which do not involve cash outlay like, depreciation, notional rent, accrued expenses etc. can be collected from the miscellaneous registers and records available with the production, accounting, sales, personnel department etc.

Bba Study Material to Cost Accounting Topic Wise Short Notes of, Overheads: Apportionment and Absorption, Topic is Allocation and Apportionment of Overheads

Allocation and Apportionment of Overheads

Cost allocation and cost absorption is the partitioning of a cost among a set of cost objectives. For this purpose, the cost object could be production units, machines, groups of machines, individual products or group of products, companies that price all or a large part of their output on a cost plus basis certainly need to include overheads in their cost of production financial reporting is another reason for allocating costs. In addition, internal management reports frequently use full costs for evaluating the performance or individual cost centres.

BBA STUDY MATERIAL TO COST ACCOUNTING  SHORT NOTES OF DEPARTMENTALISATION

Departmentalisation

For efficient working and for collection, allocation and absorption of costs, an organisation is divided into number or departments like machining , fabrication, assembling, maintenance, power, personnel, tool room , stores, accounts, costing, etc. and the overheads are collected, allocated or apportioned to respective departments. This process is called ‘departmentalisation’ o f overhead which will help in ascertainment of cost of each department and control of expenses. This will help in computation of cost of different units, products or jobs passed through the departments or services rendered by the departments.


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