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Module III
Overheads:
Overhead cost Allocationand apportionment -Reconciliation of Cost and Finacial accounts
Cost related to a cost center or cost unit may be divided into two ie
...
The Indirect cost is
the overhead cost and is the total of indirect material cost, indirect labour cost, indirect expenses
...
So any expenditure over and above prime cost is known as overhead
...
Classification of Overheads (15 marks essay)
Overheads can be classified on the following basis:
DFunction-wise classification: Overheads can be divided into the following categories on functional basis
...
(b) Administration overheads eg:- indirect materials like office stationery and printing, indirect labour salaries of
office clerks, secretaries, accountants, indirect expenses rent, rates and insurance of office, lighting heating and
cleaning of office, etc
...
, advertising expenses, after sales service, discounts, bad debts etc
...
(a) Fixed overheads like managerial remuneration, rent of building, insurance of building, plant etc
...
() Semi-variable overheads like depreciation, telephone charges, repair and
maintenance of buildings, machines and equipment etc
...
(a) Indirect materials
(b) Indirect labour
(c) Indirect expenses
Allocation and Apportionment of Overhead to Cost Centres (Depart-mentalisation of Overhead)
When all the items are collected properly under suitable account headings, the next step is allocation and
apportionment of such expenses to cost centres
...
A factory is administratively divided into different departments like Manufacturing or Producing
department, Service department, partly producing departments
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An expense which is directly identifiable
with a specific cost centre is allocated to that centre
...
For example the total overtime wages of workers of a department should be charged to that department
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Apportionment of Overhead Expenses
28| P age
Cost apportionment is the allotment of proportions of cost to cost centres or cost units
...
Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting,
works manager's salary etc
...
The basis selected should be correlated to the expenses and the expense should be measurable by the
basis
...
The following are the main bases of overhead apportionment utilized in manufacturing concerns:
Direct Allocation
...
Example overtime premium of workers engaged in a particular department, power, repairs of a particular
department etc
...
Under this basis, overhead expenses are distributed to various departments in
the ratio of total number of labour or machine hours worked in each department
...
ci) Value of materials passing through cost centres
...
(i) Direct wages
...
are distributed amongst the departments in the ratio of
wages
...
(2 marks)
Machine hour rate is the cost of running a machine per hour
...
In such cases, the machine hour
to different items of production
...
There is
a
basic
similarity
machines for a period by the operating hours of the machine or the group of machines for the period
...
group of machine should be treated as
determined for each machine or group of machines
...
e
...
4) Standing charges are estimated for a period for every machine and the amount so estimated is divided by the
total number of normal working hours of the machine during that period in order to calculate an hou29/51
fixed charges
...
the
machine hour rate
...
Some
of the expenses and the basis of
apportionment
are
given below
...
Rent and Rates - Floor area occupied by each machine including the surrounding space
...
machine, alternatively according to floor area occupied by
the supervisory staff to each machine
...
Supervision estimated time devoted by
2
...
Lubricating Oil and Consumable Stores-On the basis of past experience
...
Insurance- Insurable value
Expenses
Machine Expenses
I
...
Miscellaneous
-
cost
upon facts
...
, less
residual value spread over its working life
...
Power
-
Actual
consumption
as
shown
by
meter
readings
or
estimated
consumption
ascertained from
past
experience
...
Repairs-Cost of repairs spread over
its
working life
Meaning of Reconciliation(2 marks)
Where
cost accounts
and financial accounts
are
separately
maintained in two different sets of
books, the
profit or
Therefore, it becomes necessary that periodically the
may not agree with that shown by other
...
profit or loss shown by the two sets of accounts is
for difference between the results disclosed by
A memorandum of reconciliation is prepared showing the reasons
well as to detect mistakes
It is done to check the arithmetical accuracy of both sets of accounts as
loss shown
each
by
one
system
...
Need for Reconciliation:
(a) It reveals the
(b) It
ensures
reasons
that
no
profit or loss between cost and financial accounts
...
(c)It helps in checking the arithmetical accuracy of both the sets of accounts
...
(e) It facilities internal control by highlighting the variations causing increase or decrease in profit
...
(g) It enables management to formulate policies regarding overheads, depreciation and stock valuation
(h) It ensures managerial decision-making
...
Items Shown Only in Financial Accounts:
costing and
disagreement hetween
There are a number of items which are included in financial accounts but find no place in costac
may be items of expenditure
to
or
appropriation
of profit
or
30/51
items of income
...
The items may be classified as under:
(a) Purely Financial Charges:
) Loss arising from the sale of fixed assets,
(i) Loss on investments,
(ii) Discount on debentures,
(iv) Interest on bank loan, mortgages and debentures,
(v) Expenses of the company's share transfer office,
(vi) Damages payable,
(vii) Penalties and fines,
(vii) Losses due to scrapping of machinery,
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(ix) Remuneration paid to the proprietor in excess ofa fair reward for services rendered
...
(c) Writing off Intangible and Fictitious Assets:
Goodwill, Patents and
Copyrights, Advertisement, Preliminary Expenses, Organisation Expenses, Underwriting
Commission, Discount on Issue of Shares/Debentures etc
...
Items Shown Only in Cost Accounts:
2
...
These items are very few
and usually are notional charges
...
show the nominal cost of
Similarly production may be charged with a nominal rent for premises owned to enable the concern to compare its
cost of production with that of a rented factory
...
Salary of the proprietor where he works but salary is not charged to Profit and Loss
A/c
...
Over or Under-absorption of Overheads:
Dverheads absorbed incostaccountson thehasisofestimation likenercentageon directmaterials
percentageondirect wages,etc
...
Ifoverheads are not
ully absorbedie the amountin cost accountsis lessthanthe actual amount, the shortfalliscalled under
absorption
...
Thus, under or over-absorption of overheads leads to difference in two accounts
...
4
...
The valuation of stock in cost accounts is dependent on this fact whether it is raw mateial, work-inprogress and finished goods
...
Work-in-progress inventory may be valued at prime cost or works cost or cost of production basis
...
Thus different bases adopted for valuation of raw materials,
work-in-progress and finished goods may differ and cause disagreement in the results
...
Different Methods of Charging Depreciation:
The methods of charging depreciation may differ in financial accounts and cost accounts and may cause
disagreement in profits of the two books of accounts
...
6
...
difference in profits as per two books of accounts