Administration Overhead
For the formulation of the policies,
for giving direction in the desired direction to the organization & for the purpose
of controlling the operations & expenses, the administration overhead of an organization
is responsible. Thus administration overhead is the expenses which are required to
be incurred in connection with these functions of the administrative division.
Following activities are included in administrative functions: - (a) activities of
the board of directors & secretaries, (b) activities of financial accountants & managers,
(c) activities of auditors, (d) activities of personnel manager, (e) activities of
law officers etc.
Major administration expenses includes-
rent, rates & taxes paid for the administrative building; furniture & equipment;
repairs & maintenance incurred for the administrative building; salaries & allowances
paid; expenses related to travelling & conveyance; expenses related to transport;
audit fees paid; legal expenses; expenses incurred for stationery; postage, telegram & telephone
expenses; expenses related to personnel department; remuneration paid to directors;
bank charges; depreciation charged on furniture & equipment & administrative
building (if owned) etc.
In the cost account numbers, collection
of administrative overhead items are done in the same way as in standing order numbers,
the collection of the factory overhead are being done. In other words, for the purpose
of collecting factory overhead, standing order numbers are used & for the purpose
of collecting administrative overhead, cost account numbers are used.
Treatment of Administration Overhead in Cost Accounts:
In three different methods,
the treatment of administrative overhead may be done in cost accounts. The methods
are explained below:
- First Method: To the costing profit & loss account, administrative overhead are transferred, under this method. On the assumptions that the administrative expenses are of fixed nature & no relation can be determined between the administrative functions on the one hand & the production, sales & distribution functions on the other hand; this transfer may be justified. Thus, administrative expenses, on the basis of these assumptions are treated as ‘period cost’ which has to be written off to the concerned period’s costing profit & loss account.
- Second Method: Under this method,theapportionment of
the administration expense is made to the production functions & selling & distribution
functions of the organization. The assumption in this case is that, any organization
has mainly two functions-(i) production & (ii) sales & distribution. So
inclusion of appropriate share of administration expenses in both is needed for
the purpose of ascertaining the correct production as well as selling & distribution
overhead (in this case, for the purpose of overhead recovery, administrative function
is not recognized). To the administration overhead account, all administration
expenses which have been incurred during a period are debited & at the end
of the year, transfer of administration expenses, which are attributable to production
functions, is done to the factory overhead (i.e. production overhead) account & transfer
of the administration expenses, which are attributable to sales & distribution,
is done to the selling & distribution overhead account (production overhead
account & selling & distribution overhead account are debited respectively & administrative
overhead account is credited).
In this method, the selection of appropriate bases on the basis of which various administrative expenses items are apportioned to other two above mentioned overhead account is the principal difficulty. The bases used are almost similar to the bases which are used for the purpose of apportionment of production overhead.
When to the production overhead, amount of any administration expenses is apportioned; the apportionment of such amount is to be done again to the service department & to the production departments of the production function. To the production departments, the service department’s share has again to be reapportioned in the usual manner & ultimately from production, the recovery shall be done. - Third Method: Administration is treated as a separate
function under this method & in the cost accounts, the treatment of administration
expenses are done in the same manner as the expenses of other functions (i.e. production,
sales & distribution). Thus the question arises as how in total cost, the absorption
of administrative expenses will be done. On some suitable basis, absorption of
administration expenses is done.
Various bases, each having its own merits & demerits, are mentioned below.
On the basis of any of the following, administration overhead may be absorbed:
(a) no of units or quantity which have been produced, (b) sales value or quantity of sales, (c) gross profit on sales, (d) works cost, (e) conversion cost etc.
As works cost can be mostly influenced by all the functions of the administration, works cost is often taken as the best basis.
In this case, recovery of administration overhead is made as a percentage of works cost.
Administration overhead account is debited with all administration expenses; so far as the accounting entries are concerned. For recovery, with the proportionate amount calculated at the recovery rate (which is often expressed as a percentage of the works cost), finished stock account is debited & administration overhead account is credited. For example, if for a particular job or work order, works cost is $ 97500 & recovery rate which has been expressed as a percentage on works cost is 10%, the amount which is to be recovered by charging to finished stock account will be 10% of 97500 = $ 9750
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- Comparision between Production Overhead & Selling & Distribution overhead
- Nature & Treatment of some items of Expenses in Cost Accounts- Part I
- Nature & Treatment of some items of Expenses in Cost Accounts- Part II
- Nature & Treatment of some items of Expenses in Cost Accounts- Part III
- Over or Under absorption of Overhead
- Selling & Distribution Overhead
