allocation and absorption of OH

The following points highlight the top two methods of apportionment of overheads. The methods are: 1. Primary Distribution of Overhead 2. Secondary Distribution.

Apportionment of Overhead: Method # 1.

Primary Distribution of Overhead:

Primary distribution involves apportionment or allocation of overhead to all departments in a factory on logical and rational basis. This process of apportionment is also known as departmentalisation of overhead. It is to be carefully noted that at the time of making primary distribution, the distinction between production and service departments is ignored.

Following points should be considered for primary distribution of items of overheads:

(i) Basis for distribution should be equitable and practicable;

(ii) Method adopted for distribution should not be time-consuming;

(iii) Overhead expenses should be distributed among different departments on the basis of benefits received by departments;

For the purpose of primary distribution, a departmental distribution summary is prepared in the following way:

Basis of Apportionment of Factory Overhead:

Expenses:

1. Lighting, heating, rent, rates and taxes, depreciation on building, repair cost of building, caretaking etc.

2. Insurance on Plant and Machinery, Building; Depreciation on Plant and Machinery; Maintenance of Plant and Machinery.

3. Insurance on tools and fixtures, power, repairs and maintenance cost etc.

4. Canteen subsidy or expenses, pension, medical expenses, personnel department expenses, cost of recreational facilities. Expenses of wage department

5. Cost of supervision.

Base:

1. Floor area occupied by each department. Light points for lighting.

2. Capital values of Assets.

3. Direct Labour hours or Machinery hours.

4. Number of employees or workers.

5. Time devoted.

Apportionment of Overhead: Method # 2.

Secondary Distribution:

In a factory a product does not pass through Service department (S), but service department renders service to production departments for carrying on production function. It is, therefore, logical that the product cost should bear the equitable share of cost of service department. Under this backdrop, the second step is to distribute the total cost of service departments among the production departments.

The process of redistributing the cost of service departments among production departments is known as secondary distribution. Here, the cost of service department means the apportioned overheads plus direct materials plus direct labour and direct expenses of concerned service department.

Bases for Secondary Distribution:

Service Department Costs:

(i) Employment department

(ii) Maintenance department

(iii) Purchase department

(iv) Store keeping

(v) Canteen, welfare and recreation

Basis of Redistribution:

(i) Rate of labour-turnover or number of employees.

(ii) Hours worked for each department.

(iii) No. of purchase orders or value of materials purchased.

(iv) No. of requisitions.

(v) No. of employees of each department.

Swill Co. Ltd. has three production departments and two service departments. From the following information show the distribution of service departments cost under the repeated distribution method: