Distribution of Factory Overheads

Introduction to Distribution of Factory Overheads

Distribution of factory overheads includes three stages:

(i) Collection and classification of factory overheads

(ii) Departmentalisation of factory overheads

(iii) Absorption of factory overheads.

Collection and classification of factory overheads

All factory overheads would be collected and categorized within suitable accounting headings, example lighting, depreciation, factory rent, insurance etc. Each heading will be given appropriate standing order number.

Departmentalisation of factory overheads

The word 'departmentalisation of overheads' considers to the allocation and apportionment of overheads between several departments. In case of factory overheads it includes:

(i) Allocation and apportionment of overheads between Production and Service Departments. Production Departments manufacture products when service departments assist them in this process. For instance, the yarn and clothes departments are production departments when those of a boiler house and repairs are service departments in a textile industry. This is termed as main distribution of factory overheads.

(ii) Apportionment of Service Departments' overheads between Production Departments. This is termed as secondary distribution of factory overheads and as well re-appointment of factory overheads.

Apportionment of overheads

Certain expenses like General Manager's salary, rent of the factory etc. are acquired for the factory as a whole, and, so, these will comprise to apportioned over all the departments both Production and Service.

There are no hard and fast rules as consider the base to be applied of apportionment of overheads. Any one or more of the following techniques may be employed.

(a) According to departmental wages:

Expenses that change directly with the departmental wages paid can be apportioned on this basis, example premium for workmen's compensation insurance etc.

(b) According to capital values of the assets: Overheads like depreciation of buildings, plant and machinery, fire insurance premiums on these assets, etc. might be apportioned on this basis.

(c) According to floor area occupied. Overheads like lighting (unless metered separately) rent and rates, wages of night watchmen might be apportioned on the basis.

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(d) According to number of workers employed. Expenses of works canteen, time-keeping, welfare, personnel department, etc. can be apportioned on this basis.

(e) According to production hours of direct labour. Works management remuneration, cost of inter-department transport, general overtime expenses have to be charged to several departments in the ratio that the departmental hours bear to the total factory direct hours.

(f) According to technical estimate. The advice of technical personnel might also be helpful on the apportionment of certain expenses, example the cost of steam consumed through a specific department can be arrived at on the basis of the engineer's estimates.

The following table will assist the students in remembering the conventional basis of apportionment of overheads-

(ii) Apportionment of service department overheads

After the overheads have been divided among production and service departments the costs of service departments are charged to such type of production departments that have been benefited through their services.

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