THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA . Thilanka Warnakulasooriya B.Com Special (Col), ACA . POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/2014 Principles of Financial and Cost Accounting. Accounting for Overhead.
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Thilanka WarnakulasooriyaB.Com Special (Col), ACA
POSTGRADUATE DIPLOMA IN BUSINESS AND FINANCE - 2013/2014Principles of Financial and Cost Accounting
Overhead is the Expenditure incurred in the course of making a product, providing a service or running a department, but which cannot be traced directly and fully to the product, service or department
Selling & Distribution OH
i.e. Rent , Electricity,
Identify the activity or item or equipment where the cost are accumulated.
Cost centers can be either production cost center or service cost center
i.e Garment Factory
i.e. Cutting supervisor salary directly identified to the cutting cost center
4. Apportioning overhead cost to cost centers
Some OH can not be directly identified to particular cost center. Accordingly such cost should be shared among the cost centers. These cost should be divided among cost centers based on most reasonable basis.
(Apportionment of overhead is distribution of overheads to more than one cost centre on some equitable basis)
i.e. Garment factory monthly electricity bill was Rs. 200,000. Factory consist of 4 cost centers . The floor area occupied by each cost center are as follows.
Apportion the electricity between cost centers.
Service cost centers cost should charged to production cost centers since salable units does not pass through service departments. The reasonable apportionment basis should be used
Secondary Distribution with reciprocal Servicing overhead absorption rates
To production & service department
Simultaneous Equation Method
Only to Production Department
Repeated Distribution Method
Step Down Method
Overhead absorption rate (OAR)
“Attributing OH to particular product or service based on particular basis”
Generally OAR calculated by dividing the OH cost of the cost center by number of units/ Volume of absorption base which is appropriate for the cost center
OAR = Budgeted Overhead cost
There is no ideal OAR, depending on the company some use machine hours or labor hours. The most appropriate OAR depends on factors such as cost, information availability, nature of the product, technology used etc.
Actual Overhead incurred xxxx
Overhead absorbed xxxx
(budgeted OAR * actual activity level)
Under/ Over absorption xxx