ACCOUNTING AND CONTROL OF MANUFACTURING OVERHEADS

 ACCOUNTING AND CONTROL OF MANUFACTURING OVERHEADS

We have already seen that overheads are by nature those costs which cannot be directly related to a product or to any other cost unit. Yet for working out the total cost of a product or a unit of service, the overheads must be included. Thus we have to find out a way by which the overheads can be distributed over the various units of production.

• One method of working out the distribution of overheads over the various products could be to ascertain the amount of actual overheads and distribute them over the products. This however, creates a problem since the actual amount of overheads can be known only after the financial accounts are closed. If we wait that long, the cost sheets lose their main advantages and utility to the management.
•  All the decisions for which cost sheets are prepared are immediate decisions and cannot be postponed till the actual overheads are known. Therefore, some method has to be found by which overheads can be included in the cost of the products, as soon as prime cost, the cost of raw materials, direct employees and other direct expenses, is ascertained.
• One method is to work out pre-determined rates for absorbing overheads. These rates are worked out before an accounting period begins by estimating the amount of overheads and the level of activity in the ensuing period. 
• Thus, as soon as the prime cost of a product or a job is available, the various overheads are charged by these rates. Of course, this implies that the over-heads are charged on an estimated basis. Later, when the actual overheads are known, the difference between the overheads charged to the products and actual overheads is worked out and adjusted.