Factory Overheads: Distribution

What are FACTORY OVERHEAD costs?

INDIRECT MANUFACTURING COSTS OR ALL INDIRECT COSTS

BEGIN WITH SUPPLYING MATLS TO WORKS ST & END WITH PRIMARY PACKING OF PRODUCT
All manufacturing costs, other than direct material and direct labour costs
FACTORY RENTS, RATES, LIGHTING/ HEATING
Production costs which cannot be traced to individual products
DEP, REPRS & MAINT, INSURNCE OF FACTORY BLDG
POWER & FUEL
SALARIES & RELATED COSTS OF PRODUCTION MGT
Support (or service) departments
SALARIES, WAGES & OTHER COSTS RELATED TO SERVICE COST CENTERS SUCH AS TOOL
ROOM ETC
CANTEEN & OTHER STAFF WELFARE EXP
EXP CONNECTED WITH ADMINST OF FACTORY
Indirect materials (LUBRICANT, COTTON WASTE)
Indirect labour (WAGES OF INDIRECT WORKERS)

DISTRIBUTION OF FACTORY OVERHEADS

Distribution
(i)

of

Collection

factory

overheads

and

classification

involves
of

three
factory

stages:
overheads

All factory overheads would be collected and classified under appropriate accounting
headings, e.g. factory rent, insurance, lighting, depreciation etc. Each heading will be given
appropriate
standing
order
number.
(ii)

Departmentalisation

of

factory

overheads

The term departmentalisation of overheads refers to the allocation and apportionment of

overheads among various departments. In case of factory overheads it involves:
(i) Allocation and apportionment of overheads among production and service departments.
Production departments manufacture products while service departments help them in this
process. For example, in a textile industry the yarn and clothes departments are production
departments while those of a boiler house repairs are service departments. This is known
as
primary
distribution
of
factory
overheads.
(ii) Apportionment of service departments overheads among production departments. This
is known as secondary distribution of factory and also re-apportionment of factory
overheads.
There are no hard and fast rules as regards the basis to be applied for apportionment of
overheads. Any one or more of the following methods may be used.
(a) According to departmental wages: Expenses which vary directly with the
departmental wages paid can be apportioned on this basis, e.g. premium for workmens
compensation
insurance
etc.
(b) According to capital values of the assets: Overheads such as depreciation of
buildings, plant and machinery, fire insurance premiums on these assets, etc. may be
apportioned
on
his
basis.
(iii)

Apportionment

of

service

department

overheads

After the overheads have been classified between production and service departments the
costs of service departments are charged to such production departments which have been
benefited by their services. Any one or more of the following methods may be adopted for
this
purpose:

(a) Service or use method: Under this method overheads are distributed over various
production departments on the basis of services actually rendered. This criterion has the
greatest applicability in cases where overheads costs can be easily and directly traced to
departments
receiving
the
benefits.
(b) Potential benefits: Under this method service department overheads are charged to
production departments on the basis of potential rather than actual services rendered. This
method is particularly useful where the service department costs are largely fixed and
services have been provided taking into consideration the potential requirements of the
various
departments.
(c) Ability to pay method: This method presumes that higher the revenue of a production
department, higher is the proportionate charge for services. For example a textile mill may
apportion its overheads between superfine quality and controlled quality of cloth on this
basis. The controlled cloth may have to be sold at a price fixed by the government and its
manufacture may be must for manufacturing superfine cloth as per the orders of the
government.
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