Bcom 2nd year overhead notes
Question 1. What does overhead mean? How can they be classified? Explain with an example. What is meant by overheads? How can these be classified? Explain with examples.
What do you understand by overlay? Explain the classification of surpluses and the various methods of their distribution. What do you mean by overheads? Explain the classification of overheads and point out the different methods of their allocation.
Meaning and Definition of Overhead or Over Cost
All those expenses which have no direct relation to the unit of production but are mandatory for production work, sales, distribution work etc. are called overhead. In other words, the total sum of indirect wages, indirect materials and indirect expenses is called overhead. In a general sense, indirect expenditure and overhead are considered synonymous with each other. But indirect expenses are real and they are accounted in the financial books. While indirect expenses are accounted for in the cost books. Therefore, the estimated indirect expenses are called overhead or overhead.
Walter W. In the words of Walter W. Bigg, “Overhead or overlay refers to the charge on production that is incurred for recovery of indirect expenses.”
In cost accounts, indirect expenses are estimated based on some valid principles to find the cost per unit of production or the cost of each work or contract or method. Estimated indirect expenses are called overheads or overheads. Overheads are over or under recovered in cost books because they are estimated (Overheads Over recovered or Under-recovered in Cost Books) which are then resolved by preparing a Cost Reconciliation Statement. In short, all the expenses which are included in the cost book in addition to the original cost are all called overheads or overheads.
Classification of overheads
The overheads can be classified as follows –
(I) Classification according to functions.
(II) Classification according to elements.
(Iii) Classification according to conduct of expenditure or classification according to variability.
(Iv) Classification according to control.
(V) Classification according to time interval.
(i) Function-wise Classification
Generally, the major activities of any organization include production, administration, sales and distribution.
Is included. Therefore, classifying the overheads according to these actions is called classification in the same way. In this view, the overheads can be divided into the following four parts.
(i) Factory overhead – also known as Works overhead, Production overhead or Manufacturing overhead.
(ii) Office and Administration ovelhead – also known as Establishment or General overhead.
(iii) Selling overhead
(iv) Distribution overhead.
This classification of overheads is very popular and is used to determine the cost of goods manufactured in each factory at different levels.
(II) the elements of the classification
(Element Wise Class I Fication)
This classification arises according to the definition of overhead. According to this classification, the overheads can be divided into the following three parts –
(1) Indirect Material Expense s –
Unpredictable are expenses which are related to the machineries of the factory. In these expenses, the expenditure of material used for dying stores is the expenditure of small tools to the machine, the expenditure of chicken fuel, the expenditure of tools for general use, etc.
(2) Indirect Labor Expensest-
Indirect labor comes – leave and lunch time wages, indirect labor remuneration, workers’ contribution to insurance fund, remuneration of premium and 51 of repair and maintenance labor.
(3) Indirect Expenses –
Under it. All those expenses which are given in the classification according to work.
(Iii) Classification according to Behavioral Expenditure or variabilitywise classification,
Different expenses related to overheads are of different nature. Some expenses are fixed, some expenses are variable and some expenses are of semi-variable nature. Some expenditures are reduced as the quantity of production decreases and increases as the quantity of production increases. While some expenses have no relation with the quantity of production, these expenses are of a stable nature. Thus the overheads can be divided in this way on the basis of variability.
(1) Fixed Overheads This type of indirect expenses are those which are related to time rather than dependent on the quantity of production. Among these expenses, rent of factory, office and warehouse etc. are prominent because these expenses are neither related to production nor related to quantity of production.
(2) Variable Overheads – This type of expenditure has the property of changing. Those overheads, which tend to fluctuate directly with the volume of production, are called variable overheads. This includes direct labor, direct wages and other direct expenses. Such expenses increase or decrease in proportion as well as increase or decrease of production. Bcom 2nd year overhead notes
(3) Semi-variable overheads when the expenditure is neither completely permanent nor fully variable in nature, it is called semi-variable or semi-permanent overhead. For example, insurance, road tax, permanent salary of a driver are permanent in the expenses of keeping a motor, but the expenses of petrol, repair, loss etc. are variable. Therefore, the total expense of keeping a motor will be called semi-variable or semi-permanent.
(iV) Classification According to Controllability
On this basis, overheads can be divided into two parts.
(1) Controllable overheads – those expenses. Organizations can be influenced by the decision of the managers and officers, ie those who can be controlled are called the control overhead.
(2) Uncontrollable overheads – Expenses that are outside the control power of the organization’s managers and which are determined by the external elements of the organization are called uncontrollable overheads.
(v) Normalcy classification: Generally they can also be divided on two grounds.
(1) Normal overheads The expenditure on normal production in normal conditions is called normal overhead. These expenses are included in the production cost of the item.
(2) Abnormal overheads – Expenses that increase due to special circumstances or extraordinary losses are called abnormal overheads. Extraordinary expenses thus incurred should not be taken into profit-loss account by adding to the cost of production of the manufactured goods.
Short answer questions
Question 1. ” ultra – absorption ‘ and ‘ low – absorption ‘ words to explain enter. Explain the terms-over-absorption ‘and’ under absorption ‘.
Under or Over Absorption of Overhead
The overheads are divided on various units or functions of production on an approximate basis. Therefore, there is a difference between actual indirect expenses and divided overheads. If the overheads absorbed on an approximate basis are less than the actual indirect expenses, it is called Under absorption of overhead and if it is higher then it is called Over absorption of overhead. The reasons for overheads being less or more than the actual indirect expenses can be
(i) If the actual production is less or more than the projected production. For example, if the absorption of overheads is based on 10000 units and the actual production is 10,000 units, then the difference between actual indirect expenses and absorbed overheads is obvious.
(ii) If the overheads are distributed on the basis of material or labor and their cost changes change more than anticipated.
(iii) The basis of overheads should be labor cost and in fact machines have been used more in place of workers.
(iv) The basis of aggregation, division or absorption of overheads is wrong.
Due to the above reasons, there is a difference between the actual indirect expenses and the overheads in which the Reconciliation statement is made, so that the over-period can be clearly known.
Question 2. Administrative Upriwyyon the absorption of the calculation method in use has to be a different formula tell.
Explain the different formula which are helpful in calcualtion of Absorption of administration overheads.
Absorption of administration overheads .
The administrative overhead should be related to the policy and operation of the industry, salary of office workers, postal expenses, stationery, telephone rentals. Etc. expenses fall in this category. When these expenditures are to be included in the cost of an item or sub-work as a separate item of cost, it is necessary to select the appropriate basis for their absorption. Generally, we find the same absorption rate for the whole factory. Detailed details in respect of expenses incurred by various departments are ignored . In short, the absorption rate of administrative overheads can be calculated on the following grounds.