OVERHEADS ACCOUNTING

What are overheads

 Overheads means aggregate of

indirect material,indirect
labour & cost

 i.e INDIRECT COST is that cost which

cannot be easily/directly charged on each unit
of output.
Example:

 IN a hotel,where we get multiple eatables, it

is very difficult to calculate per unit expense
of security guard to make a dish(like-dosa)
 SO,inorder to charge indirect cost on
finished goods ,following steps are to
followed:-
 1.Collect the overheads department wise i.e, do
total of overhead of all the departments.
 e.g. Overhead of purchase department- XXX
 +Overhead of production department-XXX
 +Overhead of sales department -XXX
 TOTAL= ____
 (This step is called Primary Distribution of
Overheads).
Primary distribution of overheads is also known as
departmentalisation.

 This steps involves two stages:

 *ALLOCATION of overheads.

 *APPORTIONMENT of overheads.
Allocation of Overheads.

 IT means that a specific indirect cost belongs

to only one department.So,this indirect cost
is charged & transferred fully to that
departments to which it relates.
 e.g. There are 4 family members,
 mother father son daughter
 therefore, individual person will have
individual mobile bill.
Apportionment of Overheads.

 IT is a process of dividing total overheads cost

among various departments on suitable basis
like we do in departmntal a/cing.
 e.g. Suppose there are 3 departments-
A,B,C.
 Rent to be apportioned between them
on the basis of area or space occupied by
each department.
 2. Secondary distribution of Overheads i.e.
transferring expenses of services depatments
to production departments bcz services
department do not do any production and
only helps production department in doing
production.
 e.g. NO earnings are done by
children.Their financial burden is borne by
their parents.
 3. After following the above 2 steps,we will come to know
how much expense we have done on different
departments.
 e.g. In india,there are mostly 3 types of restaurants.
 a)For making North-indian food expenses will be charged
to north indian restaurant.
 b)For making South-indian food expenses will be charged
to south indian restaurant.
 c)For making Chinese food expenses will be charged to
chinese restaurant.
In Overhead Accounting,always remember the
following concept.

 All Production Departments-Consider only

indirect costs , and ignore all direct costs of all
production departments.

 Consider both Direct & Indirect costs of all

services departments.