The process of allocating and sharing overhead costs
Familiarity with primary and secondary overhead distribution and methods of secondary overhead distribution
Primary and secondary distribution of overhead:
The purpose of primary sharing is that the overhead costs are tracked, identified and credited to the account of the relevant department (cost center) separately from the service and production departments.
But in the secondary distribution, the overhead costs are accumulated and in the cost centers of the service departments of the factory on a specific basis. Defined and using appropriate methods, they are transferred to the cost centers of the production departments.
The act of transferring these costs from service areas to production areas is called secondary sharing.
Basics of secondary sharing of overhead:
For the secondary distribution of overhead, two basic tasks must be done.
1- First, the appropriate bases for transferring costs from service areas to production areas should be selected.
2- Select the appropriate method for secondary distribution.
Some of the most suitable bases in terms of secondary distribution are presented as follows:
Service circles are a suitable basis for cost sharing
Recruiting the number of employees
Accounting of working hours of employees
Repairs and maintenance of car working hours
Repairs of the building below the building
warehouse number of remittance / cost of materials
Restaurant number of employees
Health care number of employees
Guarding the basement level
Quality control of product number/quantity
Production planning of direct labor hours
Costs such as power, lighting, rent, and facilities, when different departments have benefited from them, can usually be attributed to a specific production or service department. The origin of these costs is not from any specific circle and they are intended for the use of all circles. Therefore, these costs should be shared among the user circles. The appropriate bases for sharing such costs are presented as follows.
Title cost sharing basis
Renting a factory under the building
Depreciation of the building below the building
Surface heat under the building
Supervising the number of employees
Telephone and telegraph number of calls – number of employees
Kilowatt hours of electricity
Surface water under the building
Secondary overhead sharing methods:
1- Direct method
This method is very simple, but it does not have the necessary accuracy. In this method, the cost of each time circle is shared between production circles based on appropriate bases. One of the main disadvantages of this method is that the cost share of the service departments that have provided services to each other is not considered.
2- one-way method
The one-way method is more complete than the direct method, but one of its disadvantages is that every circle whose cost is shared is removed from the next calculation process. On the other hand, it does not charge for the next distribution of shares.
The important and significant point is which service department should share its cost before other departments. There is no generally accepted rule in this case. But usually, the service circles are arranged according to their cost in descending order, then the sharing operation starts from the circle that has the highest cost.
3- Mathematical / algebraic / two-way method
The two-way method is a complete method and in the secondary distribution, it determines the share of the cost of the service departments that have received services from each other and provides complete information to the management.
For the secondary distribution of the cost in a two-way method, before any action, a table (matrix) of costing and costing should be formed. Then, based on this table, an equation should be set for service circles and cost sharing should be done by solving the equation
This post is written by Mahdi_kohsoltani