state the basic for departmentalization of various expenses explain the various steps necessary from calculating the claim for loss of profit
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Answer:
1. Classifications of Overheads Costs:
Overheads can be classified on the basis of number of characteristics.
The following are the important basis of overhead classification:
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1. Functionwise Classification.
2. Elementwise Classification.
3. Behaviourwise Classification.
4. On the Basis of Normality.
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5. Controllability Basis.
I. Functionwise Classification:
Under this method of classification, the various functions performed by the factory constitute the basis.
Accordingly overheads are classified as follows:
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1. Production Overhead:
Production overhead is also termed as factory overhead, works overhead, or manufacturing overhead. It is the aggregate of factory indirect material cost, indirect wages and indirect expenses. Some examples of indirect material cost used in the manufacturing process are consumable stores, tiny part of materials such as thread and button in readymade garment industry, nails and polish in furniture making industry and so on.
Example of indirect labour cost incurred in production process are wages and salaries of repair and maintenance staff, salary of foreman, supervisor, inspector, watchman’s salary, work’s manager’s salary, etc. Example of indirect expenses incurred in production process are depreciation, repair and maintenance, rent, rates, taxes of factory building, drawing office expenses and so on.
2. Administration Overhead:
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These overheads are of general nature and consist of all costs incurred in the direction, control and administration of an undertaking which is not related directly to production or selling and distribution function. Some examples of indirect material cost are office stationery such at paper, pen, ink, carbon papers, stapler, etc.
Some examples of indirect labour cost incurred in the administration department of a factory are salaries of managing director, accountant, secretary clerks and attenders. Some examples of indirect expenses incurred in office are lighting and heating, rent and taxes repairs and maintenance, bank charges, legal charges, telephone charges, etc.
3. Selling Overheads:
The overheads which are incurred in promoting sales and retaining customers is known as selling overheads. Selling overheads include internal material cost, indirect labour cost and indirect expenses. Some examples of indirect material cost are catalogues, price lists, free gifts and samples, etc.
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Some examples of indirect labour cost incurred in the sales department are salaries of sales manager, salaries and commission of salesmen. Some examples of indirect expenses incurred in the sales department are expenses incurred in training salesman, advertisement, market research expenses, rent, insurance, heating and lighting of sales show room.
4. Distribution Overheads:
These are expenses which are incurred from the time finished products are packed until they reach their destination. Distribution overhead includes indirect material cost, indirect labour cost and indirect expenses. Some examples of indirect materials cost incurred in the distribution department of a factory are packing materials such as cardboard boxes, hammers, nails, etc.
Some examples of indirect labour cost incurred in the distribution department are salaries of warehouse staff, salaries of drivers of delivery vans, etc. Some examples of indirect expenses are rent, heating, lighting, repairs of warehouse, freight, maintenance of delivery vans, etc.
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II. Elementwise Classification:
Under this method, expenditures are classified into three heads:
1. Indirect Materials:
These are the materials which cannot be conveniently identified with individual cost units. These are small and relatively inexpensive items which may become the part of the finished product. Examples of such materials are – lubricating oil, sand paper, nuts and bolts, tools for general use, gum, etc.
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2. Indirect Labour:
Indirect Labour pertains to the wages of indirect workers and cannot be conveniently identified with a particular cost unit. Examples of indirect labour are – contribution to provident fund, gratuity, holiday pay, supervisor’s salary, overtime wages, etc.
3. Indirect Expenses:
All indirect costs, other than indirect material and indirect labour costs are termed as indirect expenses. These costs cannot be directly identified with a particular job, process or work rather these are common to cost centres. Examples of indirect expenses are – rent and rates, depreciation, lighting and power, insur
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