Friday, March 6, 2015

Accounting Of Administration Overhead

There are three distinct methods of accounting administrative overheads, viz,
    Apportioning between production & selling & distribution function:
    According to this method, total administration overhead are apportioned between production & sales departments on some equitable basis, on premise that manufacturing & selling are two main functions of organisation & administrative expenses are incurred mainly for these two functions, Hence, all expenses pertaining to administrative function should be proportionately charged to production & selling departments, & absorbed by products as part of production & selling & distribution overheads, Identity of administration overheads, thereby, îs lost,
    Transfer to profit & loss account
    This method recognises fact that items of administration expenses are of fixed nature, having no direct relationship with production & sales activities, They should therefore, be treated as period cost & be written off to costing profit & loss account în period în which they are incurred,
    Treating administration overhead as separate addition to cost of productions sales
    In this method, administration overhead îs treated as separate function, & administrative overhead appears as separate element of cost of goods sold, However, most difficult problem arises în selecting equitable base for recovery - absorption, The following bases are normally used for determining rate of application:
        Factory cost
        Gross profit
        Net sales value
        Number of units sold - manufactured
    Each one of above basis has relative merits & demerits, but generally factory cost îs adopted for product cost oriented products, while one of last three bases îs used where selling & distribution cost îs predominant, However, it should be emphasised that although administration overhead will be added to cost of sales, same should not be loaded with inventory of finished goods - work-in-process,
Control of Administrative Overhead
Administrative overhead expenses are of fixed nature, arising out of management policies, Control of such expenses requires collection under correct cost account numbers for each administrative department, For purpose of control, overheads collected for accounting period are compared with similar figures of previous period, Such comparison will reveal efficiency - inefficiency of concerned department, However, this method gives limited degree of control, if level of activity îs not constant during two periods under comparison, Again, past year’s data may not provide right evaluation criteria, because it incorporates inefficiencies of past year & fails to consider intervening changes,  A better method of control îs preparation & use of budget for each item of expenses classified department wise, The budget figures based on anticipated activity level are compared against actual performance, & variances are analysed & responsibility îs assigned to department concerned for control purposes,

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