PA302 COST ACCOUNTING OVERHEAD. BY : PUAN WAN MAIMUNAH WAN ISHAK COMMERCE DEPART. POLISAS. WHAT IS OVERHEAD COST ? Any indirect cost Cost which is cannot be allocated directly to unit of production. Including indirect raw materials, indirect labour and indirect expenses.
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PA302 COST ACCOUNTING OVERHEAD BY : PUAN WAN MAIMUNAH WAN ISHAK COMMERCE DEPART. POLISAS
WHAT IS OVERHEAD COST ? Any indirect cost Cost which is cannot be allocated directly to unit of production. Including indirect raw materials, indirect labour and indirect expenses.
ALLOCATION AND APPORTIONMENT OF OVERHEAD Departmentalization of overhead Primary Distribution Some overhead costs can be directly identified with a particular department or cost center and can be allocated specifically to the department. However, there are some overhead costs that cannot be identified and charged directly to a department. The costs must be apportioned to any department using such items. Cost apportionment is the process of charging expenses in an equitable proportion to the various cost center or department. Further about apportionment… • means dividing the company into segments called cost centers to which expenses are incurred. * Productions department = represents a subunit of the company where manufacturing activity takes place. * Service departments =represent cost centers which provide support for the production department.
Example 7.1 The Elegant Company has four departments.A, B and C are the production departments and D is a servicingdepartment. The actual costs for a period are as follows:
The following data are also available in respect of the four departments: You are required to apportion the above costs to the various departments on the most equitable method.
Do not fear of opposition and challenges…remember a kite rise against the wind… LETS CHECK OUT THE ANSWER…. TOTAL COST :
Secondary DistributionThe overhead costs of service department should be further assigned to production Departments. WHY ?Service departments do not themselves manufacture anything. The reassignment or reapportionment of service departments overhead to production department is termed secondary distribution.
Eg.1 (secondary distribution) : • Assume the following data for A. Azim Industries: • The departmental distribution (primary distribution) summary has the following totals: The expense of the service departments is charged out on a percentage basis as following: • You are required to show the reapportionment of overhead using continuous method.
Example 2 : • Assume the following data for A. Azim Industries: • The departmental distribution ( primary distribution ) summary has the following totals: • The expenses of the service departments is charged out on a percentage basis as follows: • You are required to show the reapportionment of overhead using direct method.
ABSORPTION OF OVERHEAD COSTS • After all service departments overhead costs have been apportioned to production departments, the next step is to spread factory overhead to different products or job produced. • This is termed as ‘overhead absorption’.
Methods of Absorption • Some method of overhead absorption has to be applied to absorb factory overhead to individual product or jobs on some equitable basis. The rate, which is used to charge overhead costs to the products job, is known as absorption rate. The following are the generally recognized methods of absorption rate The activity level that should be used are base on items such as direct labour hours, direct labour costs, machine hours, direct material costs and unit of output.
Example 1: • The following data was collected for MM factory: Production overheads RM10000 Direct labour hours 2000 hours Direct labour costs RM8000 Machine hours 4000 hours Direct materials costs RM5000 Production 2500 units Calculate OAR using the following bases: a. Direct labour hours; b. Direct labour costs c. Machine hours; d. Direct material costs; and e. Production output.
Solution : a) OAR = Budgeted Overhead Budgeted Direct labour hours = 10,000 2000 DLH = RM5 per direct lab. hour. b) OAR =Overhead Direct labour costs = 10000 8000 = 125% of direct labour costs
Solution : • c) OAR = Overhead Machine hours = 10000 4000 machine hours = RM2.50 per machine hour • d) OAR = Overhead Direct material costs = 10000 5000 = 200% of direct material costs • e) OAR = Overhead Production output = 10000 2500 = RM4 per unit
Example 2: • Turn to page 3 eg 8.3 ( your module) Lets try out that example Experience is not what happens to you. It is what you do with what happens to you