Normally, overhead is primary distribution for different department. <\/span><\/p>\n

The best basis is chosen and overhead allocated in proportion. <\/span><\/p>\n

\u00a0<\/span><\/b><\/p>\n

Bases of Allocation of Overheads<\/span><\/b><\/p>\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n

\n Bases of Allocation<\/span><\/b><\/p>\n<\/td>\n	\n Overheads\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 <\/span><\/b><\/p>\n<\/td>\n<\/tr>\n
\n Number of employees<\/span><\/b><\/p>\n<\/td>\n	\n canteen expenses<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n welfare<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n supervision <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n insurance of staff<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n personnel (recruit) office<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n general expenses <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Direct wage<\/span><\/b><\/p>\n<\/td>\n	\n indirect wage<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n provident fund <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n compensation fund<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n holiday pay<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n amenities (facilities)<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Indirect wage<\/span><\/b><\/p>\n<\/td>\n	\n direct wage<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Indirect expenses\u00a0 <\/span><\/b><\/p>\n<\/td>\n	\n direct expenses <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Indirect overhead <\/span><\/b><\/p>\n<\/td>\n	\n direct overhead <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Floor space or area<\/span><\/b><\/p>\n<\/td>\n	\n rent and other building area<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n lighting and heating<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n air conditioning<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n fire pre-caution service<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n depreciation on building<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Direct materials handling<\/span><\/b><\/p>\n<\/td>\n	\n materials handling <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n store keeping <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n store overhead<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n weight or volume of materials <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Direct labour<\/span><\/b><\/p>\n<\/td>\n	\n general overhead<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n sundry expenses or overhead <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n machine\u00a0 hour <\/span><\/b><\/p>\n<\/td>\n	\n repairs and maintenance<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n machine related expenses <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n No. of light point<\/span><\/b><\/p>\n<\/td>\n	\n electricity<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n lighting power<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Horse power<\/span><\/b><\/p>\n<\/td>\n	\n power or electric power<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n steam power<\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Capital or book value<\/span><\/b><\/p>\n<\/td>\n	\n depreciation on plant and machinery <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n repairs and maintenance <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/b><\/p>\n<\/td>\n	\n \u00a0<\/span><\/p>\n<\/td>\n<\/tr>\n
\n Sales or total cost<\/span><\/b><\/p>\n<\/td>\n	\n selling and distribution expenses <\/span><\/p>\n<\/td>\n<\/tr>\n
\n \u00a0<\/span><\/p>\n<\/td>\n	\n audit fees<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n Secondary Distribution<\/span><\/b><\/h3>\n The process of apportioning service department expenses among the production departments is called secondary distribution. <\/span><\/p>\n In other words, secondary distribution is the reapportionment of service department expenses among the production departments after completion of primary distribution. <\/span><\/p>\n \u00a0<\/span><\/i><\/p>\n Definition of apportionment \u00a0<\/span><\/b><\/h3>\n According to ICMA, London,<\/span><\/i><\/b> <\/i>\u201cCost apportionment is the allotment of production of items of cost to cost center or cost units.\u201d<\/span><\/i><\/p>\n \u00a0<\/span><\/i><\/p>\n Some<\/span> common <\/span>secondary <\/span>distributions are as follows:<\/span><\/p>\n Direct distribution method<\/span><\/b> <\/b><\/p>\n Under this method, the costs of service department are NOT distributed or apportioned to production department. <\/span><\/p>\n Overcharge and under charge is ignored. [See PROBLEM & SOLUTION: 1A, 1B]<\/span><\/b><\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Step method<\/span><\/b><\/b><\/p>\n Under this method, the costs of service department are distributed or apportioned production department step by step or one by one. [See PROBLEM & SOLUTION: 2A, 2B, 2C, 2D]<\/span><\/b><\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Reciprocal method<\/span><\/b><\/b><\/p>\n When overhead of one service department distributed to other service department then distributed to production department is known reciprocal method. <\/span><\/p>\n Although reciprocal method is the most accurate method yet it is also the most complicated.\u00a0<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Repeated redistribution method<\/span><\/b><\/p>\n Under repeated redistribution method, first of all, the total overhead costs are written below the respective departments. <\/span><\/p>\n Then as per the percentage given for distribution of service department costs, the apportionment is made to production departments.<\/span><\/p>\n \u00a0<\/span><\/p>\n Keep in Mind (KIM) <\/span><\/b><\/p>\n\n\n\n \n Reciprocal method is not in syllabus that is why not shown in illustration.<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \u00a0<\/span><\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Allocation of Overhead<\/span><\/b><\/h3>\n Allocation of overheads is the process of identification the overhead of a particular cost center, job or department. <\/span><\/p>\n In other words, whole or undivided expenses are written to a particular cost center, job<\/span> or department. <\/span><\/p>\n When overhead expenses have been collected, they have to be allocated to related departments. <\/span><\/p>\n For example, overtime paid to the workers of \u2018Department A\u2019 should be allocated to \u2018Department A\u2019. <\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Definition of allocation<\/span><\/b> \u00a0<\/span><\/i><\/b><\/h3>\n According to ICMA, London, <\/span><\/i><\/b>\u201cCost allocation is the allotment of whole items of cost to cost center or cost units.\u201d<\/span><\/i> <\/i><\/p>\n \u00a0<\/span><\/b><\/p>\n Importance of allocation of overheads<\/span><\/b><\/b><\/p>\n The main importance of allocation of overhead are: <\/span><\/p>\n It helps to separate correct overhead for correct department. <\/span><\/p>\n It provides cost information to the management for important decisions. <\/span><\/p>\n It helps to minimize the wastage of resources. <\/span><\/p>\n It provides guideline to estimate cost of future line-of-activities. <\/span><\/p>\n It helps to minimize cost of output. <\/span><\/p>\n \u00a0<\/span><\/i><\/b><\/p>\n  <\/p>\n <\/p>\n \u00a0<\/span><\/i><\/b><\/p>\n \u00a0<\/span><\/b><\/p>\n  <\/p>\n Apportionment of Overhead<\/span><\/b><\/h3>\n According to given data of the overhead, some overhead are distributed directly, some in ratio, some in percentage, some in based on other overhead etc. <\/span><\/p>\n For the\u00a0apportionment of overhead expenses<\/span><\/strong>, the departments of a factory are divided into two categories.<\/span><\/p>\n They are production departments and service departments.<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Production departments<\/span><\/b><\/p>\n Production departments are directly engaged in manufacturing products. <\/span><\/p>\n For example: in a garment factory, production may be shared across the cutting, stitching, finishing and packing departments.<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Service departments<\/span><\/b><\/p>\n Service departments do not perform operations on products to be manufactured. <\/span><\/p>\n But, they provide auxiliary services to support the production departments. <\/span><\/p>\n These services include repairs and maintenance, purchasing of parts, storeroom, training and payroll.<\/span><\/p>\n \u00a0<\/span><\/p>\n Generally, there are three methods to apportionment of overhead; they are:<\/span><\/p>\n Direct distribution method<\/span><\/b><\/p>\n Under this method, the costs of service department are distributed or apportioned to production department. <\/span><\/p>\n Overcharge and under charge is ignored. <\/span><\/p>\n \u00a0<\/span><\/p>\n Step method<\/span><\/b><\/p>\n Under this method, the costs of service department are distributed or apportioned production department step by step or one by one. <\/span><\/p>\n \u00a0<\/span><\/p>\n Reciprocal method<\/span><\/b><\/p>\n When overhead of one service department distributed to other service department; then distributed to production department, it is known reciprocal method. <\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Definition of apportionment <\/span><\/b><\/h3>\n According to ICMA, London,<\/span><\/i><\/b> <\/i>\u201cCost apportionment is the allotment of production of items of cost to cost center or cost units.\u201d<\/span><\/i><\/p>\n \u00a0<\/span><\/b><\/p>\n Keep in Mind (KIM) <\/span><\/b><\/p>\n\n\n\n \n Reciprocal method is not in syllabus that is why not shown in illustration.<\/b><\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \u00a0<\/span><\/b><\/p>\n \u00a0<\/span><\/b><\/p>\n Importance of apportionment of overhead<\/span><\/b><\/p>\n The <\/span>main <\/span>apportionments of overhead expenses are as follows: <\/span><\/p>\n It helps to find out correct cost of products for different cost centers\u00a0 <\/span><\/p>\n It provides cost information to the management for important decisions. <\/span><\/p>\n It helps to minimize the wastage of resources. <\/span><\/p>\n It provides guideline to estimate cost of future line-of-activities. <\/span><\/p>\n It helps to minimize cost of output. <\/span><\/p>\n \u00a0<\/span><\/p>\n <\/p>\n \u00a0<\/p>\n \u00a0<\/span><\/b><\/p>\n \u00a0<\/span><\/b><\/p>\n \u00a0<\/span><\/b><\/p>\n Absorption of Overhead<\/span><\/b><\/h3>\n Absorption means charging or sharing overhead to different cost units. <\/span><\/p>\n In other words, charging or sharing overhead to specific product or individual units is known absorption. <\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Definition of absorption \u00a0<\/span><\/b><\/h3>\n According to ICMA,<\/span><\/i><\/b> <\/i>\u201cThe allotment of overhead to cost unit is known as overhead absorption.\u201d <\/b><\/span><\/i><\/p>\n \u00a0<\/span><\/b><\/p>\n Absorption of overheads charges to individual products or jobs. <\/span><\/p>\n It is a process of distribution of overheads allotted to a particular department or cost center over the units produced. <\/span><\/p>\n The absorption of overhead is done by applying overhead absorption rates. <\/span><\/p>\n \u00a0<\/span><\/p>\n In most cases, the rates are predetermined. <\/span><\/p>\n The overhead to be absorbed by a particular cost unit will be calculated by dividing the producing cost center overhead for a period by the cost units produced by that center in the period.<\/span><\/p>\n When a cost center produces dissimilar units (jobs to customer order) the volume of production must be expressed in a common measurement; they are direct labour hours, machine hours etc. <\/span><\/p>\n When a cost unit passes through several centers, the overhead absorbed should be separately for each center.<\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n Methods of absorption<\/span><\/b><\/p>\n There are different methods of absorption of overhead; they are:<\/span><\/p>\n Cost per unit of output or production unit<\/span><\/p>\n Percentage of direct materials cost<\/span><\/p>\n Percentage of direct labour cost<\/span><\/p>\n Percentage of prime cost<\/span><\/p>\n Labour hour rate<\/span><\/p>\n Machine hour rate <\/span><\/p>\n Sales price method<\/span><\/p>\n \u00a0<\/span><\/b><\/p>\n [See PROBLEM & SOLUTION: 3A, 3B, 3C, 3D, 3E, 3F]<\/span><\/b><\/b><\/p>\n \u00a0<\/span><\/p>\n <\/p>\n \u00a0<\/p>\n \u00a0<\/span><\/b><\/p>\n \u00a0<\/span><\/b><\/p>\n \u00a0<\/span><\/b><\/p>\n Differences between allocation and apportionment<\/span><\/b><\/span><\/h3>\n Allocation is the process of identification of overhead with cost center. <\/span><\/p>\n Apportionment means the expenses which cannot identify wholly with a particular department. <\/span><\/p>\n The different are: <\/span><\/p>\n\n\n\n\n\n\n\n\n \n Bases <\/span><\/b><\/p>\n<\/td>\n \n Allocation <\/span><\/b><\/b><\/p>\n<\/td>\n \n Apportionment <\/span><\/b><\/p>\n<\/td>\n<\/tr>\n \n Direct or indirect <\/span><\/p>\n<\/td>\n \n Allocation is a direct process.<\/span><\/p>\n<\/td>\n \n Apportionment is an indirect process.<\/span><\/p>\n<\/td>\n<\/tr>\n \n Basis<\/span><\/p>\n<\/td>\n \n Some of allocations are directly allocated. <\/span><\/p>\n<\/td>\n \n Apportionment needs a suitable basis for sub-division of overhead.<\/span><\/p>\n<\/td>\n<\/tr>\n \n Whole or part\u00a0 <\/span><\/p>\n<\/td>\n \n Allocation deals with whole item of overhead.<\/span><\/p>\n<\/td>\n \n Apportionment deals with the proportion of item of cost.<\/span><\/p>\n<\/td>\n<\/tr>\n \n Limit<\/span><\/p>\n<\/td>\n \n Allocation is wider and accurate than apportionment.<\/span><\/p>\n<\/td>\n \n Apportionment is less accurate than allocation.<\/span><\/p>\n<\/td>\n<\/tr>\n \n Staring and end<\/span><\/p>\n<\/td>\n \n Allocation ends with a cost center.<\/span><\/p>\n<\/td>\n \n The process of apportionment is carried further down.<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n ***** EP <\/span>Online <\/span>Study *****<\/span><\/p>\n Thank you for investing your time.<\/span><\/i><\/p>\n Please comment on the article.<\/span><\/i><\/p>\n You can help us by sharing this post on your social media platform.<\/span><\/i><\/p>\n \u00a0<\/span><\/p>\n Jay G<\/span>o<\/span>o<\/span>g<\/span>l<\/span>e<\/span>, Jay YouTube<\/span>, Jay Social Media<\/span><\/span><\/p>\n \u091c\u092f<\/span> \u0917\u0942<\/span>\u0917<\/span>\u0932<\/span>.<\/span> \u091c\u092f<\/span> \u092f\u0941\u091f\u094d\u092f\u0941\u092c<\/span>,<\/span> \u091c\u092f<\/span> \u0938\u094b\u0936\u0932<\/span> \u092e\u0940\u0921\u093f\u092f\u093e <\/span><\/p>\n \u00a0<\/span><\/p>\n \u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"     Overhead | Concept of Overhead All expenses other than direct expenses and production are overhead. It is an aggregate of all indirect materials, indirect wages and indirect expenses. Another name for overhead are on cost, burden cost, indirect expenses, non-productive cost, supplementary cost, logistic support cost and loading cost etc. \u00a0 Definition of […]<\/p>\n","protected":false},"author":19997,"featured_media":5920,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2916,2306,11],"tags":[2927,2920,2925,2926,2922,2921,2928,2923,2924],"writers":[144],"yoast_head":"\n