Overheads: What the Older Papers Ask, and Where It Belongs
Chapter Twenty-Seven
Syllabus topic None. Beyond MU's two modules; see the note below
Pages 79 to 82 of 82
Why this chapter is here, and how to use it
MU's syllabus for this paper has two modules and neither is overheads. The examinable content of Cost Accounting - I is classification, the cost sheet, reconciliation, material cost and employee cost, and the twenty-six chapters before this one cover all of it.
But the past papers ask overheads in every sitting, because they were set on the older scheme in which this paper carried them, and MU's own Course Outcome 4 on the NEP page promises that the learner will design and justify overhead absorption rates. So this chapter exists, briefly, so that nothing an examiner has actually asked is missing from the book.
Read it last, and read it lightly. If your time is short, everything before this chapter matters more.
What an overhead is
An overhead is an indirect cost - indirect material, indirect labour and indirect expenses added together. It is a cost that cannot be traced economically to one cost object, and that is the whole of the definition.
| By function | What it holds |
|---|---|
| Factory or works overhead | Factory rent, power, depreciation on plant, supervision, indirect wages, factory insurance |
| Administration overhead | Office salaries, office rent, printing and stationery, director's fees, audit fees |
| Selling and distribution overhead | Advertising, salesmen's salaries and commission, carriage outward, warehouse rent, packing for transport |
The four steps, in order
Collection, allocation, apportionment, absorption. They are not synonyms, and a question that says "distribute" means one of them in particular.
| Step | What happens |
|---|---|
| 1. Collection | Overheads are gathered from the financial books under standing order numbers |
| 2. Allocation | A whole item is charged to one department because it belongs wholly to it - the indirect wages of department B |
| 3. Apportionment | An item belonging to several departments is split between them on a fair basis - rent on floor area |
| 4. Absorption | Each department's total is charged onto the units or jobs passing through it, by a rate |
Allocation is whole; apportionment is split. That distinction is worth a mark on its own and is asked as a distinguish-between.
Primary distribution is steps 2 and 3 together, over all departments including service departments. Secondary distribution then closes the service departments into the production departments.
Bases of apportionment
The basis must bear a relation to the cost. These are the ones MU's questions use.
| Overhead | Apportioned on |
|---|---|
| Rent, rates, heating, building insurance, building repairs | Floor area |
| Lighting | Number of light points, or floor area |
| Depreciation, insurance and repairs of plant | Value of plant |
| Power, motive power | Horsepower of machines, or horsepower multiplied by hours |
| Supervision, canteen, welfare, staff insurance, personnel office | Number of workers |
| Stores overhead, material handling | Value of material issued |
| Employer's liability insurance, contributions | Direct wages |
| General overhead where nothing better exists | Direct wages or prime cost |
The rest of this chapter
Module one is free. The rest of this chapter comes with the B.Com. (Accountancy) Semester 5 notes.
You are reading a chapter from a later module. Everything in module one of every subject stays free, and so does the syllabus.
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Free either way: the syllabus, and module one of every subject.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.