ACC 116 UITM

1. OVERHEAD
CHAPTER 4

2. LEARNING OBJECTIVES
You should be able to :
 Differentiate between direct costs and
overheads.
 Identify the various types of overheads.
 Allocate & apportion overheads to the
various cost centers.
 Apportion the overheads of service
centre.
 Calculate predetermined overhead rates
using the different bases & explain the
circumstances under which each base is
most effective.

3. WHAT IS AN OVERHEAD?
Overhead is a term which includes:
1. Indirect material cost
2. Indirect Wages
3. Indirect Expenses

4. Indirect Material
cost
• Material other
than direct
material
• Glue in shoe-
making
• Nails in
furniture trade
Indirect Wages
• Wages other
than direct
wages ie who
are not directly
involved in
production
• Example
would be
supervisors,
sweepers and
maintenance
inspectors
Indirect
Expenses
• Expenses
other than
direct
expenses
• Example
would be heat,
light,
depreciation,
rent, rates and
insurance

5. TYPES OF OVERHEADS
Production
overhead
Costs incurred in
production.
Examples:
Indirect materials
Indirect wages
Insurance of plant,
Factory rent
Administration
overhead
Costs incurred in
administration.
Examples:
Office salaries
Audit fees
Stationary
expenses
Selling
Overhead
Costs incurred
in selling.
Examples:
Advertising
costs,
Salaries &
commission to
sales
representatives
Distribution
overhead
Costs incurred
from product
completion to
the customer.
Examples:
Transport
charges
Packing costs

6. METHODS OF CLASSIFYING
OVERHEADS
BEHAVIOUR NATURE TRACEABILITY FUNCTION
•FIXED
OVERHEAD
•VARIABLE
OVERHEAD
•SEMI-VARIABLE
OVERHEAD
•INDIRECT
MATERIAL
•INDIRECT
LABOUR COST
•INDIRECT
EXPENSES
•DIRECT
DEPARTMENTAL
OVERHEAD
•INDIRECT
DEPARTMENTAL
OVERHEAD
•FACTORY
OVERHEADS
•ADMINISTRATIV
E OVERHEADS
•SELLING
OVERHEADS
•DISTRIBUTION
OVERHEADS

7. THE COST CENTRES
PRODUCTION COST CENTRE SERVICE COST CENTRE
Where the production takes place.
For example:
Machining
Assembly
Painting
Centre which provide service to
production cost centre.
For example:
Maintenance
Canteen
Administrative
Store

8. OVERHEAD COSTS
Direct
Allocation
Apportionment
Production
department
A B
Service Department
X Y
Re apportionment service dept
costs to production dept
Absorptio
n
(OAR)
PRODUCTS

9. ASSIGNING OVERHEADS
1. Cost Allocation
A process of charging to a cost
centre. The overhead can be
allocated directly if the exact amount
is known.
2. Cost Apportionment
Process of charging a fair share of
overhead to 2 or more cost centers
by using an appropriate basis.

10. BASIS OF
REAPPORTIONMENT
SERVICE CENTRE COMMONLY USED BASIS OF
REAPPORTIONMENT
MAINTENANCE MAINTENANCE LABOUR HOUR
MAINTENANCE WAGES
PLANT VALUES
MACHINE HOURS
STORES NUM. OF REQUISITION
WEIGHT OF MATERIAL ISSUED
PERSONNEL NUM. OF EMPLOYEES
LABOUR HOURS
INSPECTION NUM. OF PRODUCTION,
EMPLOYEES
NUM. OF INSPECTION TICKETS
NUMBER OF JOBS
POWER GENERATION METER USAGE /kwh
TECHNICAL ESTIMATE

11. BASIS OF
APPORTIONMENT
OVERHEADS BASIS
Rent/rates, heating & lighting, fire
insurance on building
Area /Space occupied
Depreciation of plant & machinery,
motor vehicles, equipments,
insurance on vehicles
Cost / net book value
Power & heating Horse power/kwh
Supervision, canteen expenses,
welfare, other employee related
expenditure
Number of employees, direct labour
hours, direct wages

12. ASSIGNING OVERHEADS
3. Reapportionment of service cost centre
overhead for service cost centre is re- apportion to
production cost centre because no production cost units
pass through the service cost centre.
The basis for re apportionment will depend on the type of
service .
4 methods of re apportionment are:
-Direct allocation method
-repeated distribution method
-Simultaneous equation method
-Specified order of closing method

13. ASSIGNING OVERHEADS
4. Absorption of production overheads
It means overhead is included in the
total cost.
To calculate overhead absorption
rate :
OAR = budgeted total OH absorbed
budgeted units of base used

14. BASIS OF ABSORPTION
1) Direct Materials Cost Percentage
2) Direct Labour Cost Percentage
3) Prime Cost Percentage
4) Direct Labour Hour Rate
5) Machine Hour Rate
6) Unit of production

15. CALCULATION OF OAR
ABSORPTION METHODS FORMULA
DIRECT MATERIAL
COST % RATE
=TOTAL O.HEAD / TOTAL DM COST
= % OF DM COST
DIRECT LABOUR
COST % RATE
=TOTAL O.HEAD / TOTAL DL COST
= % OF DL COST
PRIME COST
% RATE
=TOTAL O.HEAD / TOTAL PRIME COST
= % OF PRIME COST
DLH RATE =TOTAL O.HEAD / TOTAL DLH
= RM PER DLH
MH RATE =TOTAL O.HEAD / TOTAL DMH
=RM PER DMH
COST UNIT RATE =TOTAL O.HEAD / TOTAL UNIT
OUTPUT
=RM PER UNIT

16. CALCULATION OF OVERHEAD
CHARGE
Once we have calculated the OAR, we
can now calculate the overhead
absorbed by the particular job or dept
using the selected basis.
Formula:
OAR x num. of units of absorption
base for the cost unit.

17. OVERHEAD ANALYSIS
SHEET
 The purpose of OAS is to show the
overhead charged to each cost centre.
 REFER TO :
OVERHEAD ANALYSIS SHEET.xlsx