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Nature & Treatment of some items of Expenses in Cost Accounts - Part II Homework Help, Tutoring

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Nature & Treatment of some items of Expenses in Cost Accounts - Part II

Overtime & Night work wages: Depending upon the circumstances in which overtime & night work becomes necessary, these expenses are treated in cost accounts. When due to special desire of a customer, so that he can get the job completed within the scheduled time or within earlier time, it becomes necessary to do overtime or night work, in that case, to the job concerned, overtime premium is charged as direct wages.

When, for the purpose of making up the delay which is caused due to general inefficiency of the workers, supervision, stores etc. or due to improper co-ordination or faulty planning, it becomes necessary to do overtime or night work, in that case, to the production overhead, the overtime premium is charged & recovered from products. If, to cope with the increased market demand, it becomes necessary to increase the output, & for that purpose overtime work becomes necessary, then the amount is treated as overhead of the department in which overtime is worked. If, due to another department’s fault, overtime becomes necessary in one department, then the overtime premium is charged to the department by which fault is done. If overtime work is undertaken for a capital project, then cost of overtime work should be charged to the concerned project order.

When, due to the seasonal nature of the industry, it becomes necessary to undertake overtime work, then the overtime wages should be considered as general overhead of the factory or should be considered as deferred revenue expenditure which over the entire business cycle, should be equitably charged to production.
However, if overtime is undertaken due to abnormal conditions like war, flood, earthquake etc. then the cost of overtime work should be written off to costing profit & loss account & should not be charged to cost.
Idle facility: When a direct worker remains idle, then for the time, he remains idle & is paid wages for that is known as idle time cost or simply idle time. Similarly, when plants & equipment remain idle, it becomes necessary to incur certain items of expenses. These expenses are known as idle facilities. However, there would be no cost like idle facilities, if no expenditure is required to be incurred during the period in which plants & equipment remain idle.

The cost of idle facilities is included in production overhead, when idle facilities are regular & unavoidable & are due to one or more of the below mentioned reasons,

(a) when for some time, plant & equipment are required to be kept idle unavoidably, by the method of production;
(b) idleness arises between the completion of one job & beginning of the next job;
(c) nature of work is seasonal;
(d) shop management is faulty;
(e) for unavoidable reasons, it is not possible to fully employ the plants & equipment.

If, however, shortage of work or any other reason which is beyond the control of the management causes the idleness, then the cost should be written off to costing profit & loss account & should not be treated in cost accounts.
Canteen Expenses: Employers borne the canteen expenses as a welfare measure. If canteen is run on a ‘no profit no loss’ basis, then no cost will be involved as through meal charges, all costs will be recovered etc. However, if canteen is subsidized, then to the extent of subsidy, the cost is incurred by the employer & such cost should be treated as works overhead. For the purpose of debiting the expenses of workers’ canteen, staff canteen, and officer’s lunch room etc., use of separate standing order numbers are made. To such standing order numbers, receipts are also credited separately. On the basis of numbers of workers, staff & officers, cost which needs to be apportioned to production department or administrative department as the case may be, are indicated by debit balances. Also, on the basis of number of meals served for each cost centre, apportionment may be done.
Compensatory payment to workers: These payments may be of two parts- (a) workers are paid compensation on retirement (in the form of gratuity etc.) or on termination & (b) workers are paid compensation under Workmen’s compensation act. The former one is of regular nature & so the same should be treated as overhead. On the other hand, the dependency of the later is upon the number of accidents, extent of injury, length of service etc. & so they are not of regular nature. Therefore, estimation of payment should be on long term basis in the second type & in each period, charging of proportionate amount as overhead of the respective function should be done so that the charge becomes uniform.
Fringe benefit to workers: There is no direct relationship between the fringe benefits given to workers & the direct efforts of workers. Leave & holiday pay, sick pay, medical benefit, attendance bonus, shift allowances, canteen facilities, gratuity & pension schemes, employer’s contribution to provident fund, E.S.I etc. are included under fringe benefits.
Allocation of fringe benefit costs cannot be made to cost units, but the allocation can be done to the particular units where the workers work. Therefore, the cost is treated as departmental overhead. Owing to various reasons, the fringe benefit cost is not incurred uniformly over the periods. On long term basis, estimates are made & for the sake of uniformity, a proportionate amount may be charged to each period.
Dearness Allowance, House rent allowance, City compensatory allowance etc.: The workers are paid these allowances so that they can cover increased cost of living, they can hire accommodation where they cannot be allotted quarters & they can be compensated extra hardship of a particular locality, respectively, without changing the scale of basic wages. In cost accounts, these allowances may be treated in different ways:

(a) Tagging of allowances which are paid to the direct workers may be done with their basic wages & to the respective jobs or processes on which they work the allowances may be charged. On the other hand, when allowances are paid to the indirect workers, the same may be debited to the overhead of the department in which they work.

(b) Allowances paid to all the workers should be treated as overhead, allowances paid to workers of a particular department should be charged to the overhead of that department & from the production units of that department the same should be recovered.

(c) Calculation of a separate allowances recovery rate as a percentage of allowances on basic wages should be done. (On the basis of historical cost or predetermined cost, the working out of the rate should be done.) Initially, on the basis of direct wages, preparation of labour cards may be done. Finally, for the purpose of ascertaining the total labour cost of a job or standing order number, the separate recovery rate may be applied.

In most cases, the above mentioned second way is in use.
Profit-sharing bonus: When bonus is paid to the workers out of profit, the same is normally an appropriation of profit & hence should be excluded from cost. However, some accountants suggest that when bonus is paid out of profit, the same is nothing but deferred wages & so in cost accounts; the same should be treated by charging it to the overhead of the concerned function (i.e. production overhead, administration overhead, selling & distribution overhead etc. on the basis of the amount paid to employees under each function). If this accepted, then the bonus paid to direct workers should be treated as direct wages & the bonus paid to indirect workers should be treated as overhead.
Training cost:In almost every manufacturing concern, the organization of training scheme, either on own initiative or under government obligation, is now a common feature. A separate training section is maintained by most of the concerns which is treated as a service cost centre. Salaries & allowances of the trainees & training staff’ fees paid to outside organizations for providing to the trainees of the organization, special training, materials, tools & equipments etc. which are required for training etc., are included in the expenses of the training centre. To separate standing order numbers, all these costs are debited. To the training service cost centre, allocation of these costs & the share of other service cost centre’s expenses which are applicable to the training section are made. Then, usually on the basis of number of trainees coming from each cost centre, apportionment of the total cost of the training service cost centre is done in the usual manner to the production cost centers.
In the course of their training, some goods or services may be produced by the trainees. The estimation of the value of such goods may be made & the same should be credited to training service cost centre & the production order concerned should be debited.
Maintenance & repairs: Maintenance service may be of two types: (a) preventive maintenance, & (b) corrective maintenance. The former is a continuous process & a regular checkup & inspection is involved & wherever necessary, provision of repairs needs to be done. The later arises on special occasions which are caused by sudden break-down, stoppage etc.
Maintenance & repairs cost should be treated as production overhead. Against each department or cost centre, the expenses should be charged to the standing order number.
Expenditure incurred on heavy overhaul should not be entirely charged to overhead of the period & should be treated as deferred revenue expenditure. When the earning capacity or production capacity of the machinery or plant is increased due to maintenance & repair, the expenditure should be excluded from cost accounts & should be capitalized.

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