Unit – 2

Overheads
Syllabus
Overheads: features, classification, methods of allocation and
apportionment of overheads, primary and secondary distributions
Overheads are the expenditure which cannot be traced to or identified
with any particular cost unit. They are expenses, which are not directly
identifiable or allocable to a cost object.
Classification of Overheads
1. On the basis of function
2. On the basis of elements
3. On the basis of controllability
4. On the basis of behaviour
On the basis of Function
1. Factory overheads
2. Office and Administration overheads
3. Selling and Distribution Overheads
4. Research and Development overheads
On the basis of Elements of Cost
1. Indirect Materials
2. Indirect Labor
3. Indirect Expenses
On the basis of Behaviour or Cost
1. Fixed Cost
2. Variable Cost
3. Semi-variable Cost
Scope of Overhead Costing
1. Accounting and Control of Manufacturing Overheads
2. Accounting and Control of Office and Administration Overheads
3. Accounting and Control of Selling and Distribution Overheads
4. Accounting of research and development expenses
Process of Manufacturing overheads
1. Estimation and Collection of manufacturing overheads
2. Cost allocation
3. Cost apportionment
4. Cost Re-apportionment
5. Absorption
6. Treatment of over-absorption and under absorption of overheads
The following is the list of some of the Common Expenses and a Suitable
or Appropriate Basis of Apportionment
Type of Overheads Basis of Apportionment
Purchase Department Expenses Number of purchase order or value of
Purchases
Material Handling expenses Value of Materials consumed or weight of
materials or volume of materials
Rent/Maintenance/Insurance on Floor space occupied
Building/Air-Conditioning/fire
precautions service
Depreciation and Insurance of Assets Value of Assets
Factory Lightning expenses Number of light points or floor space
Power Cost of Machinery Horsepower rating of the machine or the
Machine hours operated
Indirect wages Direct Wages
Supervision Time spent on number of employees or
Direct wages
Power and steam consumption/Internal Technical Estimates
transport/Management salaries
Miscellaneous production Expenses Direct Wages
Maintenance and repair shop Direct labour hours or machine hours
Tool Room Hours Worked
Canteen and welfare Number of Employees
Hospital and Dispensary Number of Employees
Personnel Department Number of Employees
Computer Section Computer Hours or specific allocation to
production Department
Stores Department Number of requisitions
Transport Department Truck Tonnage
Inspection Inspection Hours
Lighting Expenses No of light points or Area
Depreciation of plant and machinery Capital Value or Value of asset
General overheads Direct Labour hours

Problem – 1
X Ltd has three production department and four service department. The
expenses for these department, as per primary distribution summary, are as
follows:
Production Department
A Rs. 30,000
B Rs. 26,000
C Rs. 24,000
Service Department
Stores Rs. 4,000
Time Keeping and Accounts Rs. 3,000
Power Rs. 1,600
Canteen Rs. 1,000
The following information is also available with respect to the production
Departments
Particulars Dept A Dept B Dept C
Horsepower of Machine 300 300 200
Number of workers 20 15 15
Value of Stores Requisitions (Rs) 2,500 1,500 1,000

Problem – 2
Cadila Co. Ltd has three production depts. A, B and C and two service depts. D
and E. The Following figures are extracted from the records of the company
Rent and Rates 5,000
Indirect wages 1,500
Depreciation of Machinery 10,000
General Lighting 600
Power 1,500
Sundries 10,000
The Following further details are available
Particulars Total A B C D E
Floor Space 10,000 2,000 2,500 3,000 2,000 500
Light points 60 10 15 20 10 5
Direct Wages 10,000 3,000 2,000 3,000 1,500 500
H.P of machines 150 60 30 50 10 -
Value of machinery 2,50,0 60,000 80,000 1,00,0 5,000 5,00
00 00 0
Apportion the cost to Various Department on the most equitable basis.

Problem – 3
The following data were obtained from the books of Glaxo company for the half
year ended 30th September 2023. Prepare an overhead distribution summary.
Particulars Production Service Dept
Department
A B C X Y
Direct Wages 7,000 6,000 5,000 1,000 1,000
Direct Materials 3,000 2,500 2,000 1,500 1,000
Employees 200 150 150 50 50
Electricity 8,000 6,000 6,000 2,000 3,000
Light points 10 15 15 5 5
Assets Values 50,000 30,000 20,000 10,000 10,000
Area Occupied 800 600 600 200 200
The expenses for 6 months were:
Stores overheads 400
Motive power 1,500
Electric lighting 200
Labour welfare 3,000
Depreciation 6,000
Repairs and maintenance 1,200
General overheads 10,000
Rent and taxes 600
Apportion the expenses of department X in the ratio of 4:3:3 and that of
department Y in the proportion to direct wages, to department A, B and C,
respectively.

Problem on Secondary Distribution Method

Problem – 4
Bhuvana Ltd. Supplies the following information for the half –year ending 30
September 2023 and requests you to apportion the expenses to various
departments on the most equitable basis and re-apportion the service
department costs to production departments as follows:
Service Department X to Production Department in the ratio of 3:2:1, and
Service Department Y to Production Department in the ratio of 4:3:2
Particulars Production Service Dept
Department
A B C X Y
Direct Wages 14,000 12,000 10,000 2,000 2,000
Direct Materials 9,000 5,000 4,000 3,000 2,000
Employees 400 300 300 100 100
Electricity 16,000 12,000 12,000 4,000 6,000
Light points 20 30 30 10 10
Assets Values 1,00,0 10,000 40,000 20,000 20,000
00
Area Occupied 1,600 1,200 1,200 400 400
The expenses for 6 months were:
Stores overheads 800
Motive power 3,000
Electric lighting 400
Labour welfare 6,000
Depreciation 12,000
Repairs and maintenance 2,400
General overheads 20,000
Rent and taxes 1,200
Apportion the expenses of department X in the ratio of 4:3:3 and that of
department Y in the proportion to direct wages, to department A, B and C,
respectively.
Problem – 5 (Step Ladder)
The expenses of two production departments A and B and two service
department X and Y are as under
Department Amoun Y A B
t
X 2,000 25% 40% 35%
Y 1,500 - 40% 60%
A 3,000
B 3,200
Show the Secondary Distribution Statement based on the given data

Problem – 7
Evergreen Ltd. has three production and three service department. For the half
year ending 30 September 2023, the expenses of these departments, as per
primary distribution summary, show the following totals
Production Department
A Rs.32,000
B Rs. 26,000
C Rs. 23,000

Service Department
Labour Welfare Rs. 7,000
Stores Rs. 6,375
Power Rs. 4,625

The following additional information is available

Particul A B C Labours Stores Power
ars
Value of 8,000 6,000 4,000 - - 9,000
stores
Requisiti
on
No of 30 25 20 10 15 10
Stores
HP of 60 500 400 - - -
Machines

Problem – 8
Disha Ltd. has three production and two service departments. For the half year
ending 30-September 2023 the department distribution summary shows the
following totals:
Production Department
A Rs. 8,000
B Rs. 7,000
C Rs. 5,000
Service Department
X Rs 2,340
Y Rs. 3,000
The expenses of service department are charge out on a percentage basis as
follows:
Departmen A B C X Y
t
X 20% 40% 30% - 10%
Y 40% 20% 20% 20% -
Prepare Statement showing the apportionment of service department expenses
to production department under Repeated Distribution method.