STEPS FOR DISTRIBUTION OF OVERHAEDS

 STEPS FOR THE DISTRIBUTION OF OVERHEADS

The various steps for the distribution of overheads have been discussed in detail as below: 

1. Estimation and Collection of Manufacturing Overheads

The amount of factory overheads is required to be estimated. The estimation is usually done with reference to past data adjusted for known future changes. The overhead expenses are usually collected through a system of standing orders.

Standing Orders : In every manufacturing business, expenses are incurred on direct materials and direct labour in respect of several jobs or other units of production, manufacture of which is undertaken. The incurring of these expenses is authorised by production orders or work orders. The work order numbers are not ordinarily fixed or permanent. They are generally allotted in a serial order according to the number of manufacturing jobs undertaken by the business. In addition, indirect expenses are incurred in connection with the rendering of services to the production departments, or to the manufacturing process. The term “Standing Order” denotes sanction for indirect expenses under various heads of expenditure.

In large factories, usually the classification of indirect expenditures is combined with a system of Standing Orders (sometimes also referred as Service “Orders”). It is a system under which a number is allotted to each item of expense for the purpose of identification, and the same is continued from year to year. All the indirect expenditure in such a case, is charged to one or the other of the Standing Orders and periodical summaries, giving total of each Standing Order, are prepared for comparison with budgets, as well as for apportioning them among the various departments. The extent of such analysis and the nomenclature adopted are settled by the management according to the needs of the industry. 

2. Allocation of Overheads over various Departments or Departmentalisation of Overheads
Most of the manufacturing processes functionally are different and are performed by different departments in the factory. Where such a division of functions had been made, some of the departments should be engaged in actual production of goods, and others in providing services ancillary thereto. At this stage, the factory overheads which can be directly related to the various production or service departments are allocated in this manner.

It may, sometime, become necessary to sub-divide a manufacturing organisation into several cost centres, so that a closer distribution of expenses and a more detailed control is practicable.

It is thus obvious that the principal object of setting up cost centres is to collect data, in respect of similar activities more conveniently. This avoids a great deal of cost analysis.