OVERIII;,1\D f49
14tt (:'.:/.f7',.1 N/ ) ,i /.'l N/\C' I,i I 1::N1' A(: (:C) l.! N'l'l N(:)
irr prrrclr,rsc journll nrnirrt:rirrort ftlr cost collection,'fhe itenrs obtained fr'onr purcltases
iorrrrrirl are lirr'thcr arrolyscd according to stunding order nutnbcrs. At thc cnd of a period
llro totirl 0l tlrc prrlclrascs journal is debitcd to Fac(ory Overhead A/c ancl credil.cd to Cost
Lc(lllcr ('()l)tl ul A/c.
4. Cash ttook and Petty Cash Book : Fronr thc cash book and petty cash book
indirccL exl)cnses relating to production nrust bc collected tbr each departtncnrunder
stalding order numbcrs.
5, Subsidiary Docunrents : There are ceFtain costs which do not lnian cash outlay,
lbr exarnple, depreciation, notional rent, notional intercst etc.'I'hesc iterns are to
colleot.cd by scrutinising the subsidiary documen(s. For exantplc, depreciation can bc
obtained from plant ledger, notional rent, notional interest etc. can be obtained from the
docurncnts wherein estilnates of such costs are recordecl.
It nrLrst be rcnrcrnbered that, there are some items <-rf expcnscs wllich may not be
solely attributable to iactory overhead. They rnust be attributablc to factory overllead,
adrninistration ovcrhead, selling overhcad and distributiorr ovcllrcad. So, suclt oxPensos
nrusr bc apportioncd amongst factory, adnrinisttrtion, sclling and distribution overheads,
'l'hc above rlocurnents are used lirl collcctiorr olovcthoarl undcr hrstorio;rl or absorp-
tion cr-r:stlng Undcr predetcrrnined cost ri)'stcrn [hc cxpcnsos arc collccted on the basis ol'
buLlgct, cstirnalcs or standards.
Distribution of Factory Overhead to Production and Service Oepartments
Ilvery manul'acturing conccrn dividcs its l'tctory into valious departtnents for tltc
purpose of better control, better crrsting ()l ioLrs, I)ro(lucts ctc. Each depirrtltrent is x
cost ccntrc.'I'hesc departments irre ol'tN'o tyPcs --- (lJ procltrction derparltnents, and
(ii) service dcpartruents. Production dgpqrturcrr[s actually ;tI0clLtco tl)c outptll. or carry on
rhc proccss or operation, rvhile thr: servicc tlcprrrtrncnts rcndcr serviccs to the production
dL.paitnronl.s. Scrvicc departrncrits ar'c nuxiliury del)arlnrcnt-\.'l'hcv do not prociuce, buI
thcir c)iistonce is cssentiirl for t.he production tlcplrtmcnts, bccausc rvitlrout thc hclp ol-tho
scrvico cJcpnrtments in terms of spccial typcs o['services thcy rendcr, tho produc[ion
tleprtLrnr:n ts crn not producc,
IJxpcnse.s urc incurred in both produclion deparInrcnts ancl service dcpaltments.
Some cxpenses are incurred for thc benefit oI all the degrrtmcnts. 'l'hus, an expense which
-hasbcon incun-ecl fbr the benefit of anl,one dcpartrnent exclusively, can be chirrged to
rhLrr departrrent only ; but an expense which has been incurrcd i'or thc benefit of all the
departnrents hrs to be distributed to all the departnrents on sonre suitablc basis. This
process of distribution is called prirnarl, distribution. Prim:rry distribution represents
ussigning, allocating or apportioning thc overhead exl)enses to all tlre dcpartnrents of the
l:rctory to which thcy rtpply.
Wc have rnentioned above two telms nanrcly allocation and apportionrncnt. Let us
cxplain rhc rreaning of the Lerrns and horv they diffcr frorn each other, bcfore looking into
the valious brscs used for prinrary distribution ofexpenses.
Allocalion of ExJ.rcnses : According to l.C.M.A., Lortdon, lllocation of expenses
rncans "the allotrnent oI whole items of cost to cost centres or cost units", Al]ocation,
(lrcrc[ore, rrrcans charging to a departnrent or cost centrc that cxpensc rvhich has been
incuncd cxclLrsivcly for tlrat depanmcnt or cost centre. In other words, overlread expcnse
identifiable to a departnrent is chargcd to that departrncnt only and this is called alloca-
tion. When any expense is allocated to a department the question of sharing that expensc
by other departments does not arise. For cxarnple, where separate electric nre[ers are
provided, the cost of elictricity shorvn by electric bills for any departmcnt is allocated to
that deJrartment only.
Apportionment of Expcnscs : According to l.C.M.A., London, apportionment of
expcnses nreans "the allotrncnt to two or more departments or cost centres of proportions
ol common itcms of cost on esLimated basis of benefit received". Apportionrnent is,
therefore, charging to a cost centre or a department a fair share of arr overhead exl)ensc.
be
Let us take the same example of electricity cost. If the departlnents are not proviclcd
with separatc meters, there will be only onc elcctricity bill, the arnounI of which r]rusr be
sharcd by all the departments on some reasonable basis. Charging of the rcasonable shure
of the bill to cost centres or departmcnts is known as apportionment.
Distinction betwcen Allocation and Apportionment :
l. Allocation deals with itenrs which are identiliable with any one dcpartmcnt. For
example, indirect wages of departments A, B and C are scpara[cly obtained irnd
hence the rvholc antount ol indirect wages of thc respcctive departntent rs
charged lo that department only. Allocation, therefore, deals with rvlrolc ireurs
while apportionment deals with only a particular portion of an itent of cost.
2. Allocation indicates direct process of charging, because allocablc cosr nced nor
: be shared by nrore than one cost centre. Apportionntent, on thc other hand, nocds
tlre ascertainntent of reasonable share of an expense to be bornc by the various
departments benefired. Aftcr ascertaining the share ofsuch expcnse to be borne
by a particular departlnent, anrounI oI the share can bc charged or apportioncd to
that depart nrent.
3. Allocation is a nruch wider ternt tlran apportionlrrcn[.
4. Whether an expet)sc is to bc allocated or upportioncd does llot del)end upon rhr
characteristic of the cxpense, but it depends upon Lire re)ationship bcrivccn thc
expense and the cost centre or cost unit.
It must be rerncrnbcred that
-
(l) overheads cannot generally be allocated to products, because they arc not idenLj-
fiable easily with the products. Overheads can be apportionetl ro or absorbcd by
the products on some suitable basis.
(il) Certain overhead expenses (for exantple, indirect wrgc ol departlrcnts) lrru
idenrif.iable with a particular departrnent and rnay bc allocated to that (lcl)lrtn)cnt,
but not to the products of the departnrent. Such cxpcnses relating to a dcpartrncnt
can be apportioned to the products ofthe departrnent on sonle suitablc basis.
Bases of Primary Distribution Commonly Used :
(a) Area Occupied (i.e., lloorspace occupicd) : On this basis expenses rclating to
accomntodation such as rent, rates and taxes ctc. are prinrarily distributed. ln the absencc
of other more spccific basis, lighting expense is also distributed on this basis. Nighr
,'vatching exnensc is also distributed, oftin,,on this brsis. Salary of tlrr. iloor supcrvisrrr or
floor mlrnager is often distributcd on this';blsis, if no othcr rnore appropriurc brsis rs
avail able.
 OVERHMD 35 I
150 COST AND MANACEMENT ACCOUNTING

(b) Capital Vnlues of Rcspcctive Asscts : Repairs and insurance of building' plant Rs.750: Power Rs.4,500;Lighting Rs.800; Supcrvision Rs.6,000; Premia for workrnen's
1nd rrrac6lrrery, <leprcciatlorr of building, plant and machincry etc. irre distributcd on the compensalion insurance Rs. 1.400.
basis of'capiral valucs ol'respcciive assets. Insuranc€-rjfstock is distributcd Dn the basis of Solution :
stock \,:lluo:rr.rd so on. I'ri nnrl D is trib tt tio tt S t tnr nutrS'
(c) Kilowatt I{ours/Horse Powerof Machines : On this basis, power cost is distri-
Producliot Dcpls. SeNicc Depils.
hutcd. Whcrr thc hours of'work in differcnt departments vary widely, the basis should be
Toral
FIorsc power x Machine hours inst0ad of horse power only.
Ite ms of Cost Ilas is of D ist ri.bu tiotr Antounl A B C X Y
(d) Light PoinLs and Wattage : Lighting expenscs, i.e., electricity is distributed on Rs. Rs. Rs. Rs. Rs, Ils.
tho hrasis of nuntbcr of light points. This becomes appropriate if there is uniformity in the Ilent, Rates and Taxes Floor Area Occupied 5,000 |,800 r,200 t,000 700 300
waltagc ol'the points. If the wattage vary, the basis of distribution should be wattage and (18.: 12: l0:7:3)
not the number of Iight points. Again, if the hoLrrs of work in thc departnlents vary, Repairs to Buildings Value of Buildings I t,500 5,000 3,000 2.000 1,000 500
Wattage x Hours of work should be the basis of distriburion. (10:6:4:2:t)
(c) Nunrber of Employees : On this Repairs to Plant Value of Plant 7,500 2,400
basis, canteen expenses, tinre-keeping, person- 2,000 t,600 t,000 s00
ncl depxrtnlent expenses, first aid etc., arc distributcd. ln fact, all welfare cxpenses (21:20: I6: l0:5)
clcpcnding upon the nunrber ofcntployces should bc distributcd on this basis. Employer's
Depreciation of Plcnt _Do_ 22,500 7,200 6,000 4,800 3,000 ,,too
Insurance of Stock Valuc of Stock 1,500 '7
50 500 250
liability insurance is also distributed on this basis.
(15: l0:5)
(l) Dcpartrnental Dircct Wages : TIris basis is comrnonly used in practice to distri- lnsurancc ol- Plant Value oi Plant '150 240 200 J60 100 50
bute I'actor1, ovcrlread expenses, but this is not always satisfactory. Only those iLenrs (24:20:1610:5)
',vlrich vrry accortling to direct wagcs rnay be suitably distr.ibuted on this basis,.for Power Ilorst: Pou,cr ol
oritrnplc, prr:nria 1'or rvorknrcn's compensatior) insurance. Supervision expense is olten Machincs 4,500 t,800 r,200 l,500
drstribtitcd on this basis although it does not appear to be very appropriate. (6:4:-s)
t.ighting No. of [-ight Poinrs 800 300
(B) l'roduction Hours of Direct Workers I Works management expenses, general 200 r50 t00 -50
(6:4:3:2:l)
,,".rii,,," cxpcnses and most of the qeneral expenses are suitably distributed on this basis.
Su perv ision No, ol'Enrployecs 6,000 2,000 r,500 t.200 800
ll llre work is done nrainly witlr the help oImachines, machine hours instead of produc-
(20: 15: 12:8:5)
500

tion hours ofdirect workcrs is used as the basis. Prenria for Workmen'
(h) Tcchnical Estimates : Sonte cxpehBes are distributed arnt-rrrgsr rhc departments Contpensation Wagcs
ln thc basis ol'teclrnical estin)ates, [or example, s[eanr charge. lrrsu rance (10:8:6:3:l) r,400 _s00 400 300 150 50

lllustration 1. Total 6l .450 21,990 16,200 r 2,960 6,850 3,450

l,indwal l-td hlrs iivc departmcnts of rvhiclr,4, 1l and C are production dcpar(rncltts whilc X and )' Nolc."fhctotitloverllcadofservicedcprrtmenl.sshoulilrlsoincludedircctmatcrialsandrvagesol
lhosc
arc serYicc dcl)lirtnrcnts. Thc folloliing are thc partiirrla- relating to thcrd_epartnlents : scrvicc dcpartntents. This has been discussed subscquently.
,4 u C x v
Flr.ror rrca occupicd (sq, nteters) I 80 120 100 't0 30 Redistribution of Service Department Costs :
No ol errployees 20 t5 l2 8 .5 'l'lrc factory overhead expenses arc to be ulrimately charged (o
thcjobs, production
llorse pou,cr ol machines 600 400 500 units, proccsses or opera(ions. The service c.lepartrnents only rendcr services to the
\\/agcs'-(rn lls ) 50.000 40,000 30,000 15,000 5,000 production departments where thejobs are being executcd, products are bcing produceci,
Vduc ol'pl:rnt (in Ils.) 2,40,000 2,m,000 I,60,000 1,00,000 50,000 processes are being carried on or opelations are being donc. so, tlrc servicc
departorcnr.
Vdue ol buildings (in Rs.) 5,00,000 3,00,000 2,00,000 r,00,000 50,000 costs are to be apportioned to the production departrnents in order to facilitate
clr;rging of
N0, ol Iight points 30 20 15 t0 -5
all factory overheads to jobs, products, proccsses or opcratiorls. This apportionmcnt is
Vrlue oi stock (in Rs,) 1,50,000 1,00,000 50,000 called secondary distribution:
Distribute tl)c following costs to the various depar[menrs on the most equitable basis : ' ['l'he American authors usually use the tenhsprimary distribution (when
costs arc apportioncd
Ilcnt, rates and taxes Rs.5,000; Repairs to building Rs. 11,500; Repairs ro planr to production and service departtnents) and seconfrary disrriburion (when
scrvice department costs
Rs.7,500;Depreciationof plantRs.22,500; Insurarccof stockRs. 1,500;lnsurrnce of plant are apportioned to production departments).
l