Page 17 - Cost Accounting - Ready Reckoner

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CHAPTER – 3

Overheads

The sum of all indirect expenses is called Overheads.

Accounting for overheads takes many steps:

1. Identification of indirect expenses

2. Allocating them to various departments in an organization on an appropriate
basis (Primary Distribution Summary).
3. Re allocate the cost of service departments to production departments in a rate
in which services are rendered. (Secondary Distribution Summary).
4. Absorb the overheads for every unit of product or service.
5. In case of under or over absorption of overheads, find supplementary rate and
charge to products or charge to costing P/L Account.

Primary Distribution Summary (PDS):

All indirect expenses are allocated to all departments in an organization
(production and service departments) on an appropriate basis.

Eg:

Expenses Basis of Allocation
Rent Floor Space
Depreciation Value of Asset
Lighting Light points
Supervision No. of workers
Power H.P of machines
Miscellaneous Expenses Direct Wages

Direct material and Direct wages of service departments are taken at actuals while
preparing the primary distribution summary.