ALLOCATION,APPORTIONMENT

&
ABSORPTION OF OVERHEADS

Made By:-
Rohit Jain
BFIA-III
 Overheads
• Overheads are the indirect costs which cannot be
easily allocated to any specific Job, Process because
they are not capable of being identified with any
specific Job or Process. Overheads include cost of
indirect material, indirect labour, indirect expenses
which cannot be conveniently charged to any job.
Allocation and Apportionment of Overhead

• Allocation is the process by which cost items are charged

direct to a cost unit or cost centre. It is the process of charging
the traceable amount of overhead to cost centre or cost unit.
Overhead costs by their nature cannot often be related to one
particular cost centre.

• Apportionment is the division of costs among two or more

cost centres in proportion to the estimated benefits received,
using some logical basis.
Allocation of overhead
Overhead

Fabricatio Assemblin Maintena

Machining Power Stores Canteen
n g nce
Type of overhead Basis of apportionment

1. Rent and rates, heating, repairs, Area occupied(Floor space)

depreciation of buildings
2. Lighting Number of light points, area occupied

3. Power Horsepower of machines or machine hours

4. Depreciation, insurance, repairs and Book value of asset or original cost

maintenance of a plant and vehicle
5. Personnel, Staff Welfare Canteen, wages, Number of employees or wages paid
Cost office
6. Stores No. of stores requisitions or value of material
issued or value of material stored

7. Selling and Distribution Sales value

8. Advertisement Sales value

 ABSORPTION OF OVERHEADS

Absorption of factory overheads refers to charging of the factory

overheads of a particular production deptt to various product
manufactured, or jobs completed or orders expected in that
department. It is basically charging of overheads to cost units.

Two steps:

i) Computation of overhead rate :

Total overheads of cost centre/total units in base
ii) Application of these rates to cost units:
overhead absorbed = No. of unit of base in cost unit X Overhead rate
 METHOD OF ABSORPTION OF FACTORY OVERHEADS

1) Direct material cost percentage method:

Production overhead/Direct materials *100
2) Direct labour cost percentage method:
Production overhead/Direct labour cost *100
3) Prime cost percentage method:
Production overhead/Prime Cost*100
4) Direct labour hour method:
Production overhead/Direct labour hour
5) Machine hour method:
Production overhead/No of machine hour
Thank You