Manufacturing Overheads
Control of manufacturing overhead cost can be best achieved by means of the flexible budget. It provides a base for comparing the actual overhead with the budgeted overhead adjusted to the level of activity attained. Fixed budgets may be used for planning purposes. No adjustment is made for actual level of activity attained. Flexible budgets may be prepared by the following two methods.
- Range of activity method of setting flexible budget.
- Fixed plus variable rate method of setting flexible budget.
An item wise budget of overhead expenses can be prepared quarterly or monthly to control overheads. The budget should be based on anticipated production capacity and the past expenses. The fixed and variable expenses should be segregated. The actual expenses should be ascertained and controlled.
Control of Administration Overheads
A major portion of administrative overhead costs is fixed in nature and are incurred due to management policy. Administration overhead can be classified to two parts, namely, the expenses that vary with volume of office work and fixed expenses. Fixed overheads e.g. depreciation cannot be controlled at lower levels of management and can be incorporated in a fixed cost budget for informing the top management.
They are usually non-controllable. Though it is difficult to control such costs, the following methods can be used to control administration overheads:
- Preparing control reports and comparing the results with the past.
- Flexible Budget: Budgets are fixed for each item of administration overhead so that periodical comparisons can be made and responsibility can be fixed and to ensure that the actual do not exceed the budgets.
- Standard Cost Accounting: The most important problem connected with the administrative overhead cost is its costing treatment rather than its control because a major portion of the overhead is not controllable.
Control of Selling and Distribution Overheads
It is not easy to identify or link selling and distribution costs with units of production because the costs are normally incurred after production has been completed.
The incidence of these costs depends upon several factors such as the distance of market, terms of sale, extent of competition etc.