The basis may be the sales value, sales quantity, manufacturing cost, or number of units to be manufactured. Addition as a Separate Item of CostĪccording to this method, office and administrative overheads are added separately to the cost of the job, process, or product according to some suitable basis selected for the purpose. The manufacturing and selling divisions cannot function effectively without the help of the administrative function.Īdministrative overheads should, therefore, be charged to these two divisions. Therefore, it is a wise step to transfer them to the costing profit and loss account. One argument in support of this principle is that there cannot be any equitable basis for charging office and administrative overheads to other functions of the products. Instead, they should be shown in the costing profit and loss account by transferring the same. Hence, they should not be charged to these divisions. In this case, the principle applied is that the administrative overheads have no direct relationship with the manufacturing or selling divisions. Transfer to Costing Profit and Loss Account If depreciation of buildings is to be apportioned, then the space occupied or floor area of each division shall form the apportionment basis. The nature, object, and function of administrative overheads will thus form the basis of apportionment. However, the problem here is that it is not easy to find a suitable basis for apportioning this overhead between the two divisions. In this way, administrative overheads are absorbed in both manufacturing and selling and distribution overheads. Here, the principle followed is that administrative overheads are also incurred for the manufacturing and selling divisions.Ī portion of administrative expenses, therefore, must be charged to the manufacturing division and another part to the selling division. Apportionment to Manufacturing and Selling Divisions
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