ACCOUNT FOR

OVERHEAD
 Overheads
• Overheads is the aggregate of indirect materials cost,
indirect labour cost and indirect expenses which cannot
be conveniently identified with and directly allocated to
a particular cost centre or cost object
• Examples of overheads are:
Rent, taxes, depreciation, maintenance, repairs,
supervision, selling and distribution expenses, marketing
expenses, factory lighting, printing stationery etc.
Cont.
• Overhead can further be divided in to production,
administration and selling and distribution.
 Production overheads
• Production overheads are those indirect costs
incurred in the production process
• Example, indirect material and indirect labour and
indirect expenses used in the production process).
• The salary for production supervisor and factory
foremen can be are example of indirect labour and cost
price of lubricants for plants and machines, glue used to
fix items in the factory are example of indirect materials
(all these can be categorized as production overhead).
 Administration overheads
• Administration overheads are those indirect costs
incurred in making sure that the overall activities of the
entity runs in efficient manner.
• These includes cost related to office works for example
costs for office stationary, office cleaner’s salary,
depreciation of office machines, office electricity, etc.
Selling and distribution
overheads
• Selling overheads are those costs incurred in the
process of securing customers’ orders, and stimulating
customer’s demand.
• Example of these costs includes advertising costs, sales
men commission, bad debts, travelling expenses, bad
debt, etc.
• Distribution overheads are those cost incurred in
bringing goods near to the customer or a certain
destination. This involves all cost incurred until the
produced goods reach the customer.
• Example of distribution costs includes packing costs,
storage/ warehousing costs, delivery van costs, etc.
 Allocation of Overheads

• Overheads allocation is the process by which whole cost

items are charged direct to cost unit or cost center.
• Overheads are allocated to cost center which is directly
related or caused the occurrence of that cost.
• Allocation is made for those cost that can easily
identified and allocated to a particular cost center or
cost unit.
• Example: rent of factory building is allocated directly to
production department/cost center.
Example
• Consider the following costs of the company with
department A and B. The company has incurred the
flowing overheads for the period:

TZS
Wages of security men of department A 300,000
Wages of security men of department B 250,000
Indirect materials consumed in Department A 100,000
Rent of the premises shared by department s 600,000
A and B
Cont.
• Based on the given data, overheads incurred in
department A, will be directly allocated to department A
(TZS 300,000 + TZS 100,000) and Overheads incurred
in department B will be directly allocated to department
B (TZS 250,000).
• Rent is a common cost and it will be distributed
(apportioned) to departments A and B according to the
suitable agreed bases.
 Common cost/overheads
• Common cost/overheads are those cost which have an
impact on the general conducts of the company. The
benefits derived frm these costs are shared to the
number of departments in the organisation. These costs
cannot be assigned to a specific aspectt of the
organisation operation.
• In the example above, TZS 600,000 of Rent of the
premises shared by departments A and B is an example
of common cost. Both, department A and B enjoy the
rent benefit. Hence it is unfair to allocate the whole rent
cost to department A or B.
Apportionment of overheads
• The procedure whereby indirect costs are distributed
fairly between cost centers. Apportionment is done
when overheads cannot be wholly allocated to
particular department or cost center.
• There are several bases that are used to share
overheads fairly. Common bases for apportionment of
overheads include the followings:
Cont.
Overhead to which bases Bases
apply
Rent, rates, heating, and light, Floor area occupied by each cost center.
repairs and depreciation of
building
Depreciation, insurance of Cost or book value of equipment
equipment
Personnel office, canteen, Number of employees, or labour hours worked
welfare, wages, and costs offices, in cost centers.
first aid and other labour related
expenses
Supervising costs Number spent in each department, or number
of employees in the department.
Advertisement % of sales value
Electric power Horse power of machines, or number of
machine hours, or value of machines
Material handling and store Weight of materials, or volume of materials, or
overheads value of materials.
 Primary and secondary
apportionment
• Primary distribution/apportionment is the
apportionment of all overheads to cost centers.
• Under primary distribution, overheads are apportioned
to production cost centers and service cost centers by
using appropriate bases or directly identifiable
overheads are allocated to specific cost
center/department.
 Example: Apportionment
D-Rams manufacturing company incurred the following
overheads costs during the years ended 2021.
TZS “000”
Rent of factory 18,000
Depreciation of factory building 6,000
Canteen expenses 4,000
Lighting 12,000

Additional information for service and production departments is

as follows:
Production Service Total
department department
Dept. A Dept. B Dept. X Dept. Y
Floor area occupied 3 4 2 1 10
(Square metres) 30 40 25 5 100
Number of employees
SOLUTION-An overhead apportionment
analysis sheet
AMONUTS ARE IN TSZ
Overhead Bases Total Production Service department
departments
Dept. A Dept. B Dept. X Dept. Y
Rent of factory Floor area 18,000 5,400 7,200 3,600 1,800
Depreciation of Floor area 6,000 1,800 2,400 1,200 600
factory building
Canteen Number of 4,000 1,200 1,600 1,000 200
expenses employees
Lighting Floor area 12,000 3,600 4,800 2,400 1,200
TOTAL 40,000 12,000 16,000 8,200 3,800
NOTE:

• Apportioned cost to each department: = Rate of

apportionment × total amount of a particular overhead
• Rate of apportionment for each department is
determined by using the following formula:
• Floor area
• Rate for each department =
• Number of employees
• Rate for each department =
Secondary distribution/re-
apportionment
• is the re-apportioning of service cost centers overheads
to production cost centers.
• It is also known as re-apportionment of overheads.
Overheads of Service cost center are re-distributed to
production cost centers because these centers provide
service to production cost centers.
• Service Costs center do not engaged in any direct
production process but they incur costs.
• Costs incurred in these departments are related to the
services provided to the production department.
Re-apportionment methods
• Direct (crude) method: overheads of Service cost
centers are directly distributed to production
departments without considering that one service cost
center may provide service to other service cost center.
Example: (Direct method)
• You are provided the following overheads relating to two
production departments P1 and P2 and two service
departments, S1 and S2.
Production department Service
department
P1 P2 S1 S2
Overheads as per 8,000,000 8,500,000 2500,00 3000,00
primary distribution 0 0
Additional information:
S1 provide 60% of its service to P1 and 40% to P2
S2 provides 67% of its services to P1 and 33% to P2
You are required to Apportion Overheads of service
cost centers to production cost centers.
SOLUTION
Production Service department
departments (TZS)
(TZS)
P1 P2 S1 S2
Overheads as per 8,000,00 8,500,000 2500,000 3000,000
primary distribution 0
Redestribution of S1 1,500,00 1000,000 (2500,00 -
overheads 0 0)
Redestribution of S2 2,010,00 99,0000 0 (3000,00
overheads 0 0)
Total 11,510,0 9,599,000 0 0
00
Note:
• The amount trnsfered to production department from
servive department has been obtined based on the
percentage of benefit obtained (service offered) from
the particular service department to production
department.
i. Step down/ the specific order of closing method
First, re-apportion overheads of service cost center which
provide service to the maximum number of other service
departments. Second, continue to the next cost center
which serves large number of cost centers. All costs of
service cost centers are distributed to production
departments.
Cont.
ii. Reciprocal service methods
• This method is used when service cost centers are mutually
dependent to each other. Reciprocal Approach includes the
following Apportionment methods:-
• Repeated distribution method
• Modified repeated distribution method
• Simultaneous equations meth
iii. Repeated distribution method
Overheads of service department are distributed to other
departments repeatedly based on the agreed percentage. The
process continues until the all overheads of service cost centers
become completely apportioned to production departments.
Cont.
iv. Modified repeated distribution method
Under this method, the apportionment of service cost centers’
overheads to production cost center is done through two
steps:
a. Apportion the costs centers’ costs among the cost centers
based on the given percentages.
b. Apportion the total cost centers’ overheads to production
cost centers
v. Simultaneous equation methods
• This method is based on using simultaneous equation to
calculate the amount of overheads to be apportioned. Linear
equation is used in calculating overheads to be apportioned
instead of using steps discussed from the previous methods.
Example
MTARIKA Manufacturing company ltd is divided in to four departments.
Machining and Assembling are production departments; Store and
Maintenance are service departments. The actual costs for the period are as
follows:-
TZS
Repair and maintenance to plant
200,000
Depreciation of plant 2,000,000
Rent 2,400,000
Supervision 1,600,000
Power 1,200,000
Lighting 1,000,000
Canteen 2,000,000
10,400,000
Cont.
The following information is available with respect to the four
departments:-
Departments: Machining Assembling Store
Maintenance
Areas (sq. meter) 4,000 3,000 2,000 1,000
Number of employees 60 55 45 40
Effective horse power 20 30 30 20
Plant value (TZS) 700,000 600,000 400,000
300,000
REQUIRED:
a) How should the overhead costs be apportioned?
Cont.
b) Assume the service departments overheads are to be
apportioned to production departments on following
proportion:
Store department: 50% to machining department, 50%
to assembling department.
Maintenance Department: 40% to machining
department, 35% to assembling department and 25% to
store department.
REQUIRED:
Show how the overheads of service departments will be
distributed to production departments.
 Rate per
Overhead Bases Amount unit Departments
Machinin Assembli Maintena
g ng Store nce
TZS TZS TZS TZS TZS TZS
Repair and
maintenance of Plant 0.1 per
plant value 200,000 TZS 70,000 60,000 40,000 30,000
Depreciation of Plant
plant value 2,000,000 1 per TZS 700,000 600,000 400,000 300,000
areas Sq. 240 per
Rent meter 2,400,000 sq. meter 960,000 720,000 480,000 240,000
No. of
employee 8000 per
Supervision s 1,600,000 employee 480,000 440,000 360,000 320,000
Effec. 12000 per
Horse horse
Power power 1,200,000 power 240,000 360,000 360,000 240,000
areas Sq. 100 sq.
Light meter 1,000,000 meter 400,000 300,000 200,000 100,000
No. of
employee 2,000,000 10000 per
Canteen s 0 employee 600,000 550,000 450,000 400,000
Total 10,400,0 3,450,00 3,030,00 2,290,00
overheads 00 0 0 0 1,630,000
b) Re-apportionment of service department cost to
production departments

TZS TZS TZS TZS

Assembli Maintenan
Departments Machining ng Store ce

Total overheads as per 3,030,00

distribution 3,450,000 0 2,290,000 1,630,000
Reapportionment of:
(1,630,000
- Maintenance over heads 652,000 570,500 407,500 )
3,600,50
4,102,000 0 2,697,500 0
1,348,75 (2,697,500
- store overheads 1,348,750 0 ) 0
4,949,25
Total overheads 5,450,750 0 0 0