Overheads/ExpensesADMMBA I 2014

OVERHEADSFunctionElementsBehaviour

Function

ProductionAdministrationSelling & Distribution

ElementsIndirect MaterialIndirect LabourIndirect Expenses

BehaviourVariableFixedSemi - Variable

Allocation, Apportionment, AbsorptionAllocation & Apportionment:1.Own expenses2.Share of common expenses: factory related expenses divided among the departments (insurance, security, rent, lighting)3.Redistributed from service departmentsTotal of 1+2+3 = Production overheads

AbsorptionHow to absorb the Production overheads?

To be absorbed by : It means the POH to be added to the cost of the unit of productTotal prodn.overheads A suitable base

Methods of absorptionThe base/denominator can be one of the followingDirect :1.Production unitsPercentage:2.Direct material cost3.Direct labour cost4.Prime costPer hour rate5.Labour hours6.Machine hours

Overhead Rate1.Pre-determined overhead rate2.Single( blanket )rate & department rate3.Under or over absorption ( treatment )Capacity costs( Maximum, operating, capacity based on sales expectancy, normal capacity, derated capacity, idle, )

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