Overheads are indirect costs that cannot be directly traced to a single unit/job (e.g., factory rent, supervisor salary). The overhead problem in costing is: collect them correctly and charge them fairly to products/jobs using suitable bases.
The standard flow is:
Overheads = indirect materials + indirect labour + indirect expenses.
Examples:
Allocation: charging an overhead wholly to one cost centre when it is clearly identifiable.
Apportionment: distributing an overhead among two or more cost centres on an equitable basis.
Exam tip: Always justify the base briefly: choose the base that best reflects cause-and-effect.
Service departments (e.g., maintenance, stores, canteen) serve production departments. Their overheads must be re-apportioned to production departments.
Common approaches (conceptual):
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Functional classification of overheads:
Allocation vs apportionment:
Cost accounting is a form of managerial accounting that aims to capture a company's total cost of production by assessing the variable costs of each step of production as well as fixed costs, such as a lease expense.
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Overheads are indirect costs that cannot be directly traced to a single unit/job (e.g., factory rent, supervisor salary). The overhead problem in costing is: collect them correctly and charge them fairly to products/jobs using suitable bases.
The standard flow is:
Overheads = indirect materials + indirect labour + indirect expenses.
Examples:
Allocation: charging an overhead wholly to one cost centre when it is clearly identifiable.
Apportionment: distributing an overhead among two or more cost centres on an equitable basis.
Exam tip: Always justify the base briefly: choose the base that best reflects cause-and-effect.
Service departments (e.g., maintenance, stores, canteen) serve production departments. Their overheads must be re-apportioned to production departments.
Common approaches (conceptual):
Absorption means charging overheads to products/jobs using an absorption rate.
Common bases (methods):
Choice depends on production characteristics:
Budgeted factory overhead = ₹150,000 Budgeted machine hours = 30,000 hours
Machine hour rate = 150,000 / 30,000 = ₹5 per machine hour
If Job A uses 120 machine hours, overhead absorbed = 120 × 5 = ₹600.
Common causes:
Treatment (typical):
Actual overhead = ₹210,000 Overhead absorbed = ₹200,000 Under-absorbed overhead = ₹10,000
If supplementary rate is based on absorbed overhead: Supplementary rate = 10,000 / 200,000 = 5% (under)
Then:
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Machine hour rate = Budgeted overhead / Budgeted machine hours = 150,000 / 30,000 = ₹5 per machine hour.
Overhead absorbed by job = 120 × 5 = ₹600.
So, machine hour rate is ₹5/hr and overhead charged to the job is ₹600.
