Generally factory overheads form a substantial portion of the total overheads. It is very important therefore, that such overheads are properly absorbed over the cost of production.
The following are the steps involved in accounting of overheads:
- The overhead expenses incurred by various departments are collected and accumulated under appropriate standing order numbers in the overhead expenses ledger.
- Allocation of overheads to production and service departments
- Apportionment of such overheads which cannot be allocated
- Re-appointment of service department expenses to production departments
- The total overhead expenses incurred by steps (i) to (iv) above represents the total overhead cost of production departments.
- An overhead rate is to be computed for each department on the basis of estimated, actual or normal expenses and normal rate of working
- The departmental overheads are applied or charged to the cost of products manufactured by different departments at a rate determined in the foregoing manner.
- Periodical comparison of actual with absorbed expenses to find out under or over absorption of overheads.
