What is a Collection of Overheads in Overhead Distribution?

Kane Dane

The first step in overhead distribution is collection of overheads. This means the ascertainment of the total amount spent on each item of overheads during a particular period. Lets see in details.

Standing Order Numbers.

The term Standing Order denotes sanction for indirect expenses under various heads of expenditure. In large factories usually the classification of indirect expenditure is combined with a system of Standing Order.

It is a system under which each group of expenses should be given a distinct symbol or number so that each such group is easily distinguished from that of other.

Also read | The various Methods of Absorption of Factory Overhead.

Such symbols or codes are the codes for overheads and are known as “standing order numbers”. Each standing order number represents a particular type of expenditure and as and when the expenditure is incurred, it is appropriately classified. The code numbers may be alphabetical, numerical, or a combination of both.

Numerical Method.

Number from 01 to 10 may be for indirect material, 11 to 20 for indirect labor and so on.

Mnemonic Method.

S may be represent sale.
SA may be for sale — advertising.
SAS may be for sale — advertising — South India

Also read | What is Time Booking of Labor?

Combination of alphabets and number system.

Alphabet represents main group and numbers denote the sub-group.

R repairs.
R1 repair to machinery.
R2 repairs to buildings.
R3 repairs to vehicles

Thus, the manufacturing overhead costs are analyzed and classified by the code numbers on ‘the document. Now for the collection of factory overheads these various documents have to be processed from which the necessary data can be extracted.

Sources:

The sources from which overheads are collected are as follows:

Also read | What is Material Control?

Invoices:

Invoices received for stores purchases are available with the purchase department. The information regarding the cost of stores received can be collected from such invoices.

Basically, they are nothing but the document received by the sundry purchases under purchase requisition made by particular department. It contains the name and code of that particular department.

At the end of the month the total amount of purchase will lie debited to Factory Overhead Account and credited to Cost Ledger Control Account.

Also read | What is the difference between Financial Audit, Cost Audit and Management Audit?

Store Requisition:

Materials would be issues only after receiving store requisition from the department. That store requisition will have an indicated code number of the department making requisition.

This helps in charging the indirect materials to the particular department using them. A stores abstract on the pattern of materials abstract can be prepared to ascertain the amount of total stores issue.

Wages Analysis Book:

It is a book that provides with the information of indirect wages, overtime, bonus, etc. When wages are paid to indirect workers they are centered against the standing order number on the basis of job cards, time cards, etc.

Also read | What is Cost Audit Program?

Cash Book:

A scrutiny of cash book helps in identifying the amount of indirect expenses incurred. They should be properly scrutinized and the information given in them should be charged against the standing order numbers of different departments.

Journal:

It provides information related to non-cash items like rent, accruals, and payments in advance. It can be used for collecting information about these items mentioned for the accumulation of manufacturing overheads.

Also read | The Advantages and Limitations of Cost Audit.

Subsidiary Records:

It provides the information regarding scrap, waste, spoiled material idle time and idle facilities, so considering it is necessary for ascertaining their costs to be adjusted in overheads.