Reapportionment of service department expenses over production department :-
1) Direct redistribution method:
? Service department costs are divided over production department.
? Ignore service rended by one dept. to another
2) Step method of secondary distribution (or) Non reciprocal method:
? Service department which serves largest number of service department is
divided first and go on.
3) Reciprocal service method:
i) Simultaneous equation method (or) Algebraic method
? Equation is formed between service departments and is solved to find the
ii) Repeated distribution method:
? Service department cost separated repeatedly till figure of service dept. is
exhausted or too small.
iii) Trial and Error method:
? Cost of service department is apportioned among them repeatedly till the
amount is negligible and the total is divided among production department.
Treatment of Over/Under absorption of overheads:-
i) If under absorbed and over absorbed overheads are of small value then it should be
transferred to costing profit and loss a/c
ii) If under and over absorption occurs due to wrong estimates then cost of product
manufactured should be adjusted accordingly.
iii) If the same accrued due to same abnormal reasons the same should be transferred
to costing profit & loss a/c
Apportionment of overhead expenses – Basis
a) Stores service expenses = Value of materials consumed
b) Factory rent = Floor area
c) Municipal rent, rates and taxes = floor area
d) Insurance on Building and machinery = Insurable value
e) Welfare department expenses
Number of employees
g) Amenities to employee’s
h) Employees liability for insurance
j) Lighting power = Plug point
k) Stores over heads = Direct material
l) General over heads = Direct wages
Reapportionment of service department cost to production department :-
1) Maintenance dept. = Hours worked for each dept.
2) Pay roll and time keeping = Total labour (or) machine hours (or) Number of
employees in each department
3) Employment (or) Personnel department = Rate of labour T.O (or) No. of
employees of each department
4) Stores Keeping department = No. of requisitions (or) value of materials of each
5) Purchase department = No. of purchase orders value of materials of each
6) Welfare, ambulance, canteen, service, recreation room expenses
= No. of employees in each department.
7) Building service department = Relative area each dept.
8) Internal transport service (or) overhead crane service
= weight, value graded product handled, weight and distance traveled.
9) Transport department = Crane hours, truck hours, truck mileage,
Number of packages.
10) Power house (electric power cost) = Housing power, horse power machine hours,
No. of electric points etc.
11) Power house = Floor area, cubic content.
RECONCILATION OF COST AND FINANCIAL A/C
Causes of differences:-
1) Purely financial items :
i) Appropriation of profits ?Transferred to reserves, goodwill, preliminary
expenses, dividend paid etc.
ii) Loss on sale of investment, penalties and fines
iii) Income ? Interest received on Bank deposits, profit on sale of investments,
fixed assets, transfer fees.
2) Purely cost account items: - Notional Rent / Interest / Salary
3) Valuation of stock:-
i) Raw-material = In financial a/c’s stock is valued at cost or market value
Whichever is less, while in cost a/c’s it is valued at LIFO, FIFO etc.
ii) Work in progress = In financial a/c’s administrative expenses are also
considered while valuing stock, but in cost a/c’s it may be
valued at prime (or) factory cost (or) cost of production
iii) Finished Goods = In financial a/c’s it is valued at cost or market price
whichever is less, in cost a/c’s it is valued at total cost of production.
4) Overheads: In financial = Actual expenses are taken
In cost = Expenses are taken at predetermined rate.
5) Depreciation: In financial = Charged in diminishing or fixed balance method
In cost = Charged in machine hour rate
6) Abnormal Gains: In financial = Taken to profit & Loss a/c
In cost = Excluded to cost a/c’s or charged in costing
profit & Loss a/c