What is meant by overhead cost sharing based on appropriate basis?
When the overhead costs created by different service and production departments are divided among the cost-creating departments based on a reasonable and logical basis, according to the role that the department in question had in creating the cost, it is said that the sharing is done on an appropriate basis.
What is certain is that choosing the basis for cost sharing is not easy, but for cost sharing, there must be a logical relationship between the cost and the basis of sharing to the desired circle.
For example, the cost of social security insurance, the employer’s share, should be divided between different departments based on the salary of employees, or the cost of building rent can be divided between departments based on the area of the infrastructure.
You should know that some overhead costs can be shared between departments on different bases, and the best basis should be chosen for sharing, for example, the cost of electricity consumption can be shared based on the meter or the number of lighting flames or the surface area of the infrastructure.
Pay attention to the table below that shows the basis of sharing some overhead costs.
What does primary allocation of overhead mean: Allocation of overhead costs to cost centers using a suitable basis for distribution to departments is called primary allocation. In fact, in primary allocation, indirect costs are distributed to production and service departments.
What does secondary distribution mean: In the definition of service departments, we mentioned that service departments are the departments that are indirectly involved in the production of products and their activity is to provide services to themselves and other production departments.
When the costs of these departments are divided among other departments on a logical basis, it is called secondary sharing.
Therefore, in short, secondary distribution means dividing the costs of service departments into production departments, it should be noted that secondary distribution is done in order to determine the final price of products.
Mehdi Koh Soltani (financial services, accounting, financial and tax consultant):
The group of accountants and auditors of Tabriz
https://t.me/joinchat/BnzBsTuioTshiXBwf9bBPQ
This post is written by Mahdi_kohsoltani