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ACCOUNTING FOR OVERHEADS. BY- Dr. Kamlesh Khosla M.com, M.A.(Eco.), PH.D PG Diploma in PMIR & PG Diploma in Journalism and Mass Communication . INTRODUCTION.

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ACCOUNTING FOR OVERHEADS

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Accounting for overheads
ACCOUNTING FOR OVERHEADS

BY- Dr. Kamlesh Khosla

M.com, M.A.(Eco.), PH.D

PG Diploma in PMIR &

PG Diploma in Journalism and Mass Communication


Introduction
INTRODUCTION

Accounting of Overheads is one of the most important & technical aspect of Cost accounting. From Cost reduction & Cost control point of view, overhead play a great role. So, proper understanding of computation and accounting of overhead is must for Students of commerce.


Meaning of overheads
Meaning of OVERHEADS???

  • Overheads is the aggregate of indirect materials cost, indirect labour cost and indirect expenses which cannot be conveniently identified with and directly allocated to a particular cost centre or cost object.

    Example- Indirect Material Cost

    Indirect Labour Cost

    Indirect Expenses


Distribution of overheads
Distribution Of Overheads

Step 1 -> Classification of Overheads

Step 2 -> Collection of Overheads

Step 3 -> Allocation of Overheads

Step 4 -> Apportionment of Overheads

Step 5 -> Re-apportionment of service department overheads

Step 6 -> Absorption of Overheads



Collection of overheads
Collection of Overheads

  • Collection of overheads means the collection of various items of overheads under suitable account heading and a unique Standing Order Number(S.O.N.) or Cost Account Number(C.A.N.).

    Sources -> Material Requisitions

    -> Wages analysis Book

    -> Invoices

    -> Cost Journal

    -> Subsidiary Records



Apportionment of overheads
Apportionment of overheads

  • It is the process of charging the proportion of common items of cost to two or more cost centres on some equitable basis.

    PRINCIPLES FOR APPORTIONMENT OF OVERHEADS

  • Actual Benefit

  • Potential Benefit

  • Ability to pay

  • Specific Criteria/Survey method



Secondary distribution of overheads
Secondary Distribution Of Overheads

It means the apportionment of overheads of service departments among the production departments on some suitable basis.

METHODS

  • On Non Reciprocal Basis/Step ladder method

  • On Reciprocal Basis-

  • Simultaneous Equation Method

  • Repeated Distribution Method

  • Trial & Error Method


Methods of absorption of overheads
Methods Of Absorption Of Overheads

Overhead Absorption Rate =

Total overheads of cost centre/ Total Quantum of base

METHODS

  • Percentage Of Direct Material Cost

  • Percentage of Direct Labour Cost

  • Percentage of Prime Cost

  • Direct Labour Cost

  • Machine Hour Rate

  • Rate Per Unit Of Production


Accounting for overheads

  • Percentage of Direct Material Cost

    Factory Overhead Rate = Amount of Production overheads/ Direct Cost Material x 100

  • Percentage Of Direct Labour Cost

    Factory Overhead Rate = Amount Of Production Overheads/ Direct Labour Cost x 100

  • PercentageOf Prime Cost Method

    Factory Overhead Rate = Amount Of Production Overheads/ Prime Cost x 100


Accounting for overheads

  • Direct Labour Hour Rate

    Factory Overhead Rate = Amount Of Production Overheads/ Direct Labour Hours

  • Machine Hour Rate

    Factory Overhead Rate = Amount of Production Overheads/ Machine Hours

  • Rate Per Unit Of Production

    Factory Overhead Rate = Amount Of Production Overheads/ No. of Units of Production




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