OVERHEADS
Any expenditure in excess of Prime Costs is known as Overheads. In
other wordsOverheads = Indirect materials+ Indirect Labour+ Indirect expenses

Classification of overheads

On the basis of elementsi. Indirect materials
ii. Indirect labour
iii. Indirect Expenses
 On the basis of behaviouri.
Fixed Overheads
ii. Variable Overheads
iii. Semi-variable Overheads
 On the basis of functioni. Factory Overhead
ii. Office & Administrative Overhead
iii. Selling & Distribution Overhead.
 Steps in Overhead costing Collection of overheads under standing order
 Allocation of Overheads
 Apportionment of Overhead
 Absorption of Overhead
 Over/Under absorption of overhead
 Accounting for over/under absorption of overheads
Apportionment of overheads
 Distinction between allocation and Apportionment
 Apportionment of overheads- When costs are incurred for a
particular cost centre then it is called allocation of overhead.
 Apportionment of Overheads-On the other hand when costs
are common to all department, then the costs are apportioned
to the department on some equitable basis.
 Basis of Apportionment
Common Expenses
Basis of apportionment
1) Factory Rent, Rates& taxes
2) Insurance of Building
Floor area Occupied
Costs of building/Floor area
3) Depreciation of Building
4) Depreciation Of plant & Machinery
5) Insurance of Stock
6) Supervisor’s salary
7) Canteen expenses/ Staff Welfare Exp
8) Indirect Wages
9)Electric charges
10) Stores Overhead
11) General Expenses
12) Power
Cost of building/Floor area
Cost of Plant & machinery
Stock Value
No of Workers
No of Workers
Direct Wages
No of light point x wattages/ no
of light point/Floor area
Value of Material
Working Hours/Direct wages.
H.P. of machine x Wattage
H.P. of Machine
 Re-distribution of Overheads:

Re-distribution of service department costs to production
department. This may be
 Direct service to Production Department
 Reciprocal services
 Methods of Re-distribution
 Repeated method
 Simultaneous equation.
 Absorption of Overheads






Production Unit method
Direct material Costs Method
Direct labour Costs method
Percentage of Prime costs method
Labour Hour rate method.
Machine Hour rate method
Illustration: X.Ltd. has three production departments A, B and C and two service
departments D and E. Following information relates to the month of January 2015:
Rent-Rs 10000; Depreciation of machine- Rs 20000; Motive Power- Rs 3000; Indirect
wages – Rs 23000; lighting- Rs 2400; Supervisor’s salary- Rs 16000.
Additional Information:
Area Occupied (Sq. Ft)
Light points
Direct wages (Rs)
H.P. machine
No of workers
Value of Machines (Rs)
60000
A
2000
10
3000
60
50
80000
B
2500
15
2000
30
40
100000
C
3000
20
3000
50
60
5000
D
2000
10
1500
10
30
5000
E
500
5
500
-20
Services rendered by department D and E to production department are in
the ratio of 5:3:2 and 4:4:2 respectively
Expenses
Basis
Rent
of di
Statement Showing Distribution of Overheads
Basis of
Total
A
B
C
D
E
distribution
Area Occupied
(4:5:6:4:1)
Depreciation
Value of Machine
(12:16:20:1:1)
Motive Power H.P. of machine
(6:3:5:1)
Indirect wages
Direct Wages
(6:4:6:3:1)
lighting
Light Points
(2:3:4:2:1)
Supervisor's
No of Workers
Salary
(5:4:6:3:2)
Direct Wages
Actual
Total overheads
10000
2000
2500
3000
2000
500
20000
4800
6400
8000
400
400
3000
1200
600
1000
200
23000
6900
4600
6900
2400
400
600
800
16000
4000
3200
4800
2000
76400
3450 1150
400
2400 1600
1500
19300
17900
24500
200
500
10350 4350
Statement Showing Re-distribution of Overheads
Expenses
Basis of
distribution
Total
Total
A
B
C
D
E
76400
19300
17900
24500
10350
4350
Deptt D
5:3:2
5175
3105
2070
Deptt E
4:4:2
1740
1740
870
26215
22745
27440
TOTAL
76400
(10350)
(4350)
NIL Nil
ABSORPTION OF OVERHEADS
• Absorption of overheads means estimation of
overheads on some reasonable basis.
• Various methods of overhead absorption are(i) Percentage of Direct Material.
(ii) Percentage of Direct Wages.
(iii) Percentage of Prime Costs.
(iv) Labour Hour Rate method.
(v) Machine Hour Rate Method.
Estimated/ Budgeted Overhead
Overhead absorption rate = ---------------------------------------Absorption Base
Overhead absorbed = Actual base x Absorption rate
• Machine Hour Rate Method: It is basically an absorption rate of
overheads under which factory overheads are absorbed in case
where the production is pre-dominantly carried on through
machines and the products are not uniform.
Computation of Machine Hour Rate
Amount(Rs) Amount(Rs)
Particulrs
A. FIXED EXPENSES p.a.
Rent, Rates and Taxes
Insurance Premium for the Machine
Salary of supervisor
Garage rent
Lighting
B. Effective machine Hour :
Machine Hour
Less: Normal Idle Time
Effective Machine Hour
C. Fixed expenses Per hour (A/B)
--------------------_________
----__________
-----------------------------
Amount(Rs)
Amount(Rs)
D. Variable Expenses Per Hour
Total Depreciation
Depreciation = ----------------------------------Effective machine hour
Repair and maintenance
Power
Machine Hour Rate
Capital Cost
Total depreciation = ------------------Life of the Mach.
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OVER/UNDER ABSORPTION OF OVERHEADS
• Over Absorption- An over absorption occurs when overhead
absorbed is more than the actual overheads incurred.
• Under Absorption- an under absorption occurs when overhead
absorbed is less than the actual overheads incurred.
Treatment of Over/under absorption of Overheads
• Transfer to Costing Profit & Loss account.
• Carried to the next accounting year.
• Adjusted the overhead absorption rate with a supplementary rate.
Overhead absorption for the departments
Deptt A= Machine Hour x Machine hour rate
= 14000 hrs x Rs 1.50 = Rs 21000
Deptt B = Direct Labour Hour x Hourly Rate
= 3000 hrs x Rs 1.30 = Rs 3900
Deptt C = Direct Wages x Overhead %
= Rs 6000 x 80% = Rs 4800
Deptt D = No. of Pieces x Overhead Rate
= 950 x Rs 2.00 = Rs 1900
Statement showing Over/Under Absorption of Overhead
Particulars
Overhead Absorbed
Deptt A
21000
Deptt B
3900
Deptt C
4800
Deptt D
1900
Overhead incurred
19300
4200
4000
2000
---------------1700
---------------(300)
---------------800
-------------(100)
---------------
----------------
----------------
-------------
Over / (Under)
Absorption