We know that factory cost or works cost is represented by prime cost plus factory overhead. Thus, the elements of prime cost i.e. direct materials, direct labour & chargeable expenses are directly related to cost centers or cost units, but on the other hand, elements of factory overhead cannot be specifically related to cost centers or cost units. To various departments, apportionments of these expenses are to be made, as benefits from the same expense are derived by all these departments. After these expenses have been apportioned to various departments, they are again apportioned to cost centers or cost units. The under mentioned steps are involved in the procedure:
(a) For finding out the items of factory overhead, classification of overheads is to
be made.
(b) Factory overhead items have to be collected.
(c) On a suitable basis, to the production or service department, each item of factory
has to be distributed. To one department or other, some expenses may be directly chargeable.
(d) Service department costs are to be redistributed to production departments so that
the entire factory overhead can be consumed by all the production departments together.
(e) Factory overhead coming to the share of each production department has to be absorbed
by the production units produced by that department.
Collection of Factory Overhead:
Under the standing order numbers, the collection of factory overhead expenses should be done, for each item of expenses a number being provided.
For historical costing the documents are to be collected from the following sources:
- Stores Requisition:
The amount of indirect materials drawn can be known from the stores requisition. The standing order number & the department drawing such indirect materials will be shown by the stores requisition. To Factory Overhead A/C, total value of indirect materials drawn is to be debited & to the Stores Ledger A/c, the same has to be credited.
- Time or Job card & Wages analysis:
- Purchase Documents:
- Cash Book & Petty Cash book:
- Subsidiary Documents:
From the time or job cards, indirect wages payable by each department are obtained. Against standing order numbers booking of these are done. The wage analysis is prepared periodically from the time or job cards. Thus, for a particular period, the total indirect wages of the factory is shown by the wages analysis. To the Factory A/c, the total amount is debited & to the Wages Control A/c, the amount is credited.
Purchase & consumption of indirect materials may be made without passing them through stores ledger & from outside agencies, services may be received. For these materials or services, invoices are received which are then entered in purchase journal maintained for cost collection. According to standing order numbers, further analysis of the items obtained from purchases journal are made. At the end of a period, to the Factory Overhead A/c the total of the purchases journal is debited & to Cost Ledger Control A/c these are credited.
Under the standing order numbers, indirect expenses relating to production must be collected from the cash book & petty cash book for each department.
There are certain costs which do not mean cash outlay, like depreciation, notional rent, notional interest etc. By scrutinizing the subsidiary documents, these items are to be obtained. For example, from plant ledger, depreciation can be obtained & notional rent, notional interest etc can be obtained from the documents which record the estimates of such costs.
Some items of expenses are there which may not be solely
attributable to factory overhead. Along with factory overhead, to the administration
overhead, selling overhead & distribution overhead, they must be attributable.
So amongst factory, administration, selling & distribution overheads, apportionment
of such expenses must be made.
For collection of overhead under historical or absorption costing, the above documents
are used. Under predetermined cost system, on the basis of budget, estimates or standards,
the expenses are collected.
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