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  Collection and Classification of Overheads

Introduction to Collection and classification of overheads

After the overheads have been categorized as factory, office and selling, it will be worthwhile to group items covered via each category under appropriate account headings. For instance, depreciation may consider to factory buildings, factory furniture, factory plant, etc. It will be suitable to group all items of depreciation that are relating to factory assets at one place within a common heading 'Depreciation' with appropriate sub-heading, This grouping of such as items with the like is essential to collect overhead items in a convenient and expeditious manner. The guiding principle in selecting such type of headings must be that the headings are clear and clear so that these might not be confused with each other.

Generally, to each heading of expense a code number is allotted. It might be described as allotment of codes to individual heads of expense is known as codification of overheads a method of short explanation of a particular head that is otherwise lengthy. It also makes sure secrecy and simple in classification, accounting and control. Codes are specifically helpful under computerised system of accounting. Codification might be done as per to anyone of the following methods.

(i) Numerical method: as per to this method numbers are allotted to every heading and sub-heading of expense.

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So, the first digit of the code number means the main expenditure and the consequent digit for its sub-division.

(ii) Alphabetical method: as per to this method, the alphabets are employed for identifying the expenses of cost centres. For instance:

AE - Administrative Expenses

MC - Maintenance Cost

AC - Assembly Cost

(iii) Alphabetical cum numerical method: as per to this method the alphabet depicts the main expenditure when the numerical depicts its sub-division.

Example:

Item                                     Code Number

Depreciation Plant                  D1

Depreciation of Furniture         D2

Code numbers provided to dissimilar items of overheads are listed in a schedule or manual for ready reference. No common list of these code numbers can be recommended because the number and types within which the overheads might be grouped depend upon the size of the factory, the nature of industry and the degree of control needed.

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