COST ACCOUNTING-I
Factory Overheads
Factory Overheads
Overhead costs are the operating
costs of a business enterprise
which cannot be traced directly
to a particular unit of output.
Overhead costs are also termed
as
‘indirect
cost’
or
‘supplementary cost’ or ‘non
productive cost’.
Manufacturing Overheads
Classification of Overheads
Overheads can be classified on
the following basis:
Function-base
Identify-base
Behavior-base
Manufacturing Overheads
Classification of Overheads
Function-base Classification:
Overheads can be divided into the following
categories on functional basis.
 Factory
(Manufacturing)
or
Overheads
 Administration Overheads
 Selling and Distribution Overheads
Production
Manufacturing Overheads
Classification of Overheads
Factory
(Manufacturing)
or
Production
Overheads:
 Indirect materials,
 Indirect labor
 Indirect expenses like rent, rates and insurance
of factory, power, lighting of factory, welfare
expenses like canteen, medical etc. and
 Depreciation
Manufacturing Overheads
Classification of Overheads
Function-base Classification
Administration Overheads:
 indirect materials like office stationery and
printing,
 salaries of office clerks, secretaries, accountants,
 indirect expenses rent, rates and insurance of
office, lighting heating and cleaning of office, etc.
 Depreciation
Manufacturing Overheads
Classification of Overheads
Function-base Classification
Selling and Distribution Overheads:
 indirect materials like catalogues, printing,
stationery, price list,
 salary of salesmen, sales managers,
 rent, rates and insurance of showroom, etc.,
advertising expenses, etc.
 Depreciation
Manufacturing Overheads
Classification of Overheads
According to Identifiable:
Overheads can be classified as
 Indirect materials
 Indirect labor
 Other indirect expenses
Manufacturing Overheads
Classification of Overheads
Steps in Accounting of Overheads
STEP 1
Classification of
Manufacturing
Overheads
STEP 2
Allocation and
Apportionment of
Overheads
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
Factory Overhead (Manufacturing overhead) is any
factory cost that is not direct materials or direct
labor. The components of factory overheads are;

Indirect Material

Indirect Labor

Utility Costs,

Depreciation and Amortization Costs,

Factory building or
insurance etc. costs,
machinery
rent,
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
Indirect Material
The material that will be consumed as part of the
production process, but are not integrated in
substantial amounts into a product or job. Examples
of indirect materials are:
 Cleaning supplies
 Disposable safety equipment
 Disposable tools
 Glue
 Tape
 Oil
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
Indirect Labor
Indirect labor costs are not
directly related with the
production.
For example wages of storekeepers,
foremen,
timekeepers,
inspectors etc.
supervisors,
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
Depreciation and Amortization Costs
Depreciation is a method of allocating the cost of a tangible asset over its
useful life. In other words, depreciation is the systematic expiration cost of
fixed assets. Examples of fixed assets that can be depreciated are
 Buildings,
 Machinery,
 Furniture,
 Vehicle,
 Office equipment.
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
Depreciation Costs
The only exception is land, which is not depreciated
(since land is not depleted over time, with the
exception of natural resources).
Depreciation methods are,
 Straight Line and
 Declining Balance Method
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
15
Depreciation Methods-Straight Line Method
Straight Line Method is the most common time-based
depreciation method. Under this method the amount of
depreciation expense is the same for each year of useful life.
To calculate asset depreciation under the straight line method,
simply divide the depreciation basis (cost – salvage value) by the
estimated useful life.
𝑨𝒄𝒒𝒖𝒊𝒔𝒊𝒕𝒊𝒐𝒏 𝑪𝒐𝒔𝒕 𝒐𝒇 𝑭𝒊𝒙𝒆𝒅 𝑨𝒔𝒔𝒆𝒕𝒔 − 𝑬𝒔𝒕𝒊𝒎𝒂𝒕𝒆𝒅 𝑺𝒂𝒍𝒗𝒂𝒈𝒆 𝑽𝒂𝒍𝒖𝒆 (𝑻𝒂𝒉𝒎𝒊𝒏𝒊 𝑯𝒖𝒓𝒅𝒂 𝑫𝒆ğ𝒆𝒓)
𝑼𝒔𝒆𝒇𝒖𝒍 𝑳𝒊𝒇𝒆 (𝒀𝒆𝒂𝒓𝒔 𝒐𝒓 𝒑𝒆𝒓𝒊𝒐𝒅𝒔)
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
16
Depreciation Methods-Straight Line Method
For example, ABC Co. purchased a vehicle for TL 12.800 in
production as of the beginning of 2014 with an estimated life
of five years, and a TL 1,000 salvage value.
Acquisition Cost of Fixed Assets −Estimated Salvage Value (Tahmini Hurda Değer)
Useful Life (Faydalı Ömür)
2014 Depreciation Cost=
12.800−1.000
= 2.360
5 Years
Depreciation Method
Straight Line Method
17
Depreciation Methods-Straight Line Method
Acquisition Cost of Fixed Assets −Estimated Salvage Value (Tahmini Hurda Değer)
Useful Life (Faydalı Ömür)
2014 Depreciation Cost=
12.800−1.000
= 2.360
5 Years
Years
Cost of Vehicle
Depreciation Cost
Accumulated
Depreciation
Net Value of Fixed
Assets
2014
12.800
2.360
2.360
10.440
2015
12.800
2.360
4.720
8.080
2016
12.800
2.360
7.080
5.720
2017
12.800
2.360
9.440
3.360
2018
12.800
2.360
11.800
1.000
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
18
Depreciation Methods-Straight Line Method
Years
Cost of Vehicle
Depreciation Cost
Accumulated
Depreciation
Net Value of Fixed
Assets
2014
12.800
2.360
2.360
10.440
2015
12.800
2.360
4.720
8.080
2016
12.800
2.360
7.080
5.720
2017
12.800
2.360
9.440
3.360
2018
12.800
2.360
11.800
1.000
2,500
2,000
1,500
1,000
500
0
2013
2014
2015
2016
Series1
2017
2018
2019
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
19
Depreciation Methods-Declining Balance Method
Declining (Reducing) Balance Method the amount of depreciation cost declines year to
year. This method charges depreciation at a higher rate in the earlier years of an asset.
The amount of depreciation reduces as the life of the asset progresses. Depreciation under
reducing balance method may be calculated as follows:
Depreciation Rate=
1
x2
Useful Life
Depreciation Expense=Net Book Value x Rate %
Net Book Value=Acquisition Cost of Fixed Asset −Accumulated Depreciation
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
20
Depreciation Methods- Declining Balance Line Method
For example, ABC Co. purchased a vehicle for TL 12.000 in
production as of the beginning of 2014 with an estimated life of
five years.
𝑫𝒆𝒑𝒓𝒆𝒄𝒊𝒂𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒆 =
𝟏
𝟓
𝒙 𝟐 = 40%
Depreciation Expense2014 =(Acquisition Cost of Fixed Asset −Accumulated Depreciation) x Rate %
Depreciation Expense2014 =(12.000−0) x 40 %
Depreciation Expense2014 = 4.800
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
21
Depreciation Rate=
1
x 2 = 40%
5
Depreciation Expense2014 =(Acquisition Cost of Fixed Asset −Accumulated Depreciation) x Rate %
Depreciation Expense2014 =(12.000−0) x 40 %
Depreciation Expense2014 = 4.800
Years
Cost of Vehicle
Depreciation Cost
Accumulated
Depreciation
Net Value of
Fixed Assets
2014
2015
2016
2017
2018
12.000
12.000
12.000
12.000
12.000
4.800
2880 (7.200 x0,4)
1728 (4.320 x 0,4)
1036,8 (2.592 x 0,4)
1.555,2
4.800
7.680
9.408
10.444,8
12.000
7.200
4.320
2.592
1.555,2
0
Factory Overheads (Manufacturing Overheads)
Step 1: Classification of Factory Overheads
22
Years
Cost of Vehicle
Depreciation Cost
Accumulated
Depreciation
Net Value of
Fixed Assets
2014
2015
2016
2017
2018
12.000
12.000
12.000
12.000
12.000
4.800
2880 (7.200 x0,4)
1728 (4.320 x 0,4)
1036,8 (2.592 x 0,4)
1.555,2
4.800
7.680
9.408
10.444,8
12.000
7.200
4.320
2.592
1.555,2
0
6,000
5,000
4,000
3,000
2,000
1,000
0
2013
2014
2015
2016
2017
2018
2019
Factory Overheads (Manufacturing Overheads)
Step 2: Allocation and Apportionment of Overheads
Steps in Allocation of Factory Overheads
STEP I
(Primary Allocation)
STEP II (ReDistribution)
STEP III (Costing
Methods)
• Allocating to Cost Centers
• Allocating to Production Cost
Centers
• Allocating to Cost Unit
Factory Overheads
Allocation of Overheads-Step 1: Allocating to Cost
Centers
24
What is Cost Center?
Cost center is the smallest
organizational subunit for which
separate
attempted.
cost
collection
is
Factory Overheads
Allocation of Overheads-Step I: Allocating to Cost
Centers
25
Cost centers are two types:
a) Production Cost Centers: They
are cost centers where finished
products are manufactured
b) Service Cost Centers: They are
cost centers that support the
production cost centers in
manufacture of a product.
Factory Overheads
Allocation of Overheads-Step I: Allocating to Cost
Centers
Cutting&
Molding
(KESİM)
Department
Assembly
(MONTAJ)
Department
Polishing
(BOYAMA)
Department
For
example
in
manufacturing furniture,
Cutting
&
Molding
department, Assembly
department
and
Polishing Department
are main production
cost centers.
Factory Overheads
Allocation of Overheads-Step I: Allocating to Cost
Centers
Maintenance
and Repair
Department
Cafeteria
Department
For
example
in
manufacturing furniture,
service
(support)
departments
can
are
Maintenance and Repair
Department,
Heating
Department
Department.
Heating
Factory Overheads
Allocation of Overheads-Step I: Allocating to Cost
Centers
Overheads
Production Cost
Centers
Cutting and
Molding
Assembly
Service Cost
Centers
Polishing
Maintenance
and Repair
Cafeteria
Heating
Factory Overheads
Allocation of Overheads-Step I: Allocating to Cost
Centers
Step I: Primary Distribution- Allocating to Cost Centers
Distribution of items of overheads that can not be attributed to
cost centers is called primary distribution.
Factory Overheads
Allocation of Overheads-Step I: Allocating to Cost
Centers
Step I: Primary Distribution- Allocating to Cost Centers
The allocation and apportionment is made using the most suitable bases as;






direct labor hours,
area occupied,
electricity consumption,
number of employees,
departmental wages,
machine hours worked etc.
Factory Overheads
Allocation of Overheads-Step I: Allocating to Cost
Centers
31
Example:
ABC Furniture Co. manufactures furniture in production
departments as Cutting & Molding, Assembly and Polishing
Department. The support or service departments are
Maintenance and Repair Department, Heating Department.
The occurred costs directly attributed to cost centers are as
follows:
Factory Overheads
Allocation of Overheads-Step I: Allocating to Cost Centers
Cost Allocation Sheet
Production Department
Service Department
Cutting and
Maintenance
Assembly Polishing
Heating
Total Cost
Molding
and Repair
8.000
20.000
12.000
40.000
Cost
32 Centers/Costs
Direct Material
Direct Labor
Factory Overhead
- Indirect Material
15.000
17.000
18.000
-
-
50.000
2.960
1.140
780
170
425
5.475
- Indirect Labor
2.000
1.200
900
800
1.200
6.100
- Utility (Electricity)
?
?
?
?
?
8.925
- Depreciation (Machinery)
?
?
?
?
?
15.000
-
kwh
Cutting and
Molding
4.700
3.800
2.000
Machine Hours
6.000
8.000
4.000
Assembly
Polishing
Maintenance and
Heating
Repair
1.250
1.000
3.000
3.000
Total
12.750
24.000
The electricity consumption will be allocated on the base of kwh and the machinery
depreciation on the base of machine hours worked.
Required: Apportion the utility and depreciation cost to cost centers.
Factory Overheads
Allocation of Overheads-Step II: Allocating to
Production Cost Centers
33
Step II: Secondary Distribution-Allocating to Production Cost Centers
Re-Distribution is a process where service centers costs are transferred to
production centers.
Factory Overheads
Allocation of Overheads-Step II: Allocating to
Production Cost Centers
Methods of Secondary Distribution
1) Direct re-distribution method (No service
between service cost centers)
2) Step ladder method (Non reciprocal service
between service cost centers)
3) Simultaneous Equation method (Reciprocal
service between service cost centers)
Factory Overheads
Allocation of Overheads-Step II: Secondary Distribution
1) Direct re-distribution method (No service
between service cost centers)
This method based on the assumption that service
cost centers provide service only production
departments or centers. The overheads of service
departments re-apportioned to production centers
according to benefits received by them.
Factory Overheads
Allocation of Overheads-Step II: Secondary Distribution
36
Example:
ABC Furniture Co. manufactures furniture in production
departments as Cutting & Molding, Assembly and Polishing
Department. The support or service departments are
Maintenance and Repair Department, Heating Department.
Heating Costs will be distributed according to m2, Maintenance
and Repair according to Maintenance Hours.
The occurred costs directly attributed to cost centers are as
follows:
Factory Overheads
Step II: Secondary Distribution
Cost Centers/Costs
37
Production Department
Cutting and
Molding
Direct Material
Assembly
Service Department
Polishing
Maintenance and
Heating
Repair
Total Cost
8.000
20.000
12.000
40.000
Direct Labor
15.000
17.000
18.000
50.000
Factory Overhead
12.000
10.000
5.580
3.720
4.200
35.500
- Indirect Material
2.960
1.140
780
170
425
5.475
- Indirect Labor
2.000
1.200
900
800
1.200
6.100
- Utility (Electricity)
3.290
2.660
1.400
875
700
8.925
- Depreciation (Machinery)
3.750
5.000
2.500
1.875
1.875
15.000
TOTAL COST
m2
Maintenance Hours
35.000
47.000
35.580
3.720
Polishing Maintenance and
Repair
4.200
Heating
125.500
Cutting and
Molding
Assembly
770
630
840
560
400
3.200
1.350
1.125
1.125
500
900
5.000
Total
Factory Overheads
Step II: Secondary Distribution
Solution:
38
Cost
Centers/Costs
Production Department
Cutting and
Molding
Direct Material
Assembly
Service Department
M&
Polishing
Repair
Heating
Total Cost
8.000
20.000
12.000
40.000
Direct Labor
15.000
17.000
18.000
50.000
Factory Overhead
12.000
10.000
5.580
3.720
4.200
35.500
Total of Primary Distribution
35.000
47.000
35.580
3.720
4.200
125.500
Re-distribution of Heating Serve.
1.443,75
1.181,25
1.575
Re-distribution of M&R Serve.
Total of Secondary Distribution
1.395
37.838,75
m2
Maintenance Hours
Benefits Received
Heating
Maintenance & Repair
Cutting and
Molding
770
1.350
-
1.162,5 1.162,5 (3.720)
49.343,75 38.317,5
Maintenance and
Repair
560
500
(4.200)
-
125.500
Heating
Total
400
900
3.200
5.000
Maintenance
and Repair
Heating
Total
%37,5
-
-
%100
%31,25
-
-
%100
Assembly
Polishing
630
1.125
840
1.125
Cutting and
Molding
Assembly
Polishing
%34,375
%28,125
%37,5
%31,25
Factory Overheads
Allocation of Overheads-Step II: Allocating to
Production Cost Centers
2) Step Ladder Method – Step Distribution Method (Non reciprocal
service between service cost centers)
Under this method the cost of most serviceable department is first
apportioned to other service departments and production
departments.
The next service department is taken up and its cost is apportioned
and this process goes on till the cost of the last service department is
apportioned.
Thus, the cost of last service department is apportioned only to the
production departments.
Factory Overheads
Allocation of Overheads-Step II: Secondary Distribution
40
Example:
ABC Furniture Co. manufactures furniture in production
departments as Cutting & Molding, Assembly and Polishing
Department. The support or service departments are
Maintenance and Repair Department, Heating Department.
Heating Costs will be distributed according to m2, Maintenance
and Repair according to Maintenance Hours.
First apportioned center will be chosen according to Total Cost.
The occurred costs directly attributed to cost centers are as
follows:
Factory Overheads
Step II: Secondary Distribution
41
Cost Centers/Costs
Production Department
Cutting and
Assembly Polishing
Molding
Direct Material
Service Department
Maintenance
and Repair
Heating
Total Cost
8.000
20.000
12.000
40.000
Direct Labor
15.000
17.000
18.000
50.000
Factory Overhead
12.000
10.000
5.580
3.720
4.200
35.500
- Indirect Material
2.960
1.140
780
170
425
5.475
- Indirect Labor
2.000
1.200
900
800
1.200
6.100
- Utility (Electricity)
3.290
2.660
1.400
875
700
8.925
- Depreciation (Machinery) 3.750
5.000
2.500
1.875
1.875
15.000
TOTAL COST
m2
Maintenance Hours
35.000
47.000
35.580
3.720
Polishing Maintenance and
Repair
4.200
Heating
125.500
Cutting and
Molding
Assembly
770
630
840
560
400
3.200
1.350
1.125
1.125
500
900
5.000
Total
Factory Overheads
Step II: Secondary Distribution
Solution:
42
Cost Centers/Costs
Production Department
Cutting and
Molding
Direct Material
Assembly
Service Department
Polishing
M&
Repair
Heating
Total Cost
8.000
20.000
12.000
40.000
Direct Labor
15.000
17.000
18.000
50.000
Factory Overhead
12.000
10.000
5.580
3.720
4.200
35.500
Total of Primary Distribution
35.000
47.000
35.580
3.720
4.200
125.500
Re-distribution of Heating Serve.
1.155
945
1.260
Re-distribution of M&R Serve.
Total of Secondary Distribution
1.710
37.865
1.425
49.370
Cutting and
Molding
770
1.350
Maintenance and
Repair
560
500
-
125.500
Total
400
900
3.200
5.000
Maintenance
and Repair
Heating
Total
%30
%20
-
%100
%31,25
-
-
%100
Polishing
630
1.125
840
1.125
Cutting and
Molding
Assembly
Polishing
Heating
%27,5
%22,5
Maintenance & Repair
%37,5
%31,25
Benefits Received
1.425 (4.560)
38.265
-
(4.200)
Heating
Assembly
m2
Maintenance Hours
840
Factory Overheads
Allocation of Overheads-Step II: Allocating to
Production Cost Centers
3) Simultaneous Equation method (Reciprocal
service between service cost centers)
Under this method, the true cost of the service departments
are ascertained first with the help of simultaneous equations;
these are then redistributed to production departments on the
basis of given percentage.
This method is preferable and is widely used even if the
number of service departments are more than two.
Factory Overheads
Allocation of Overheads-Step II: Secondary Distribution
44
Example:
ABC Furniture Co. manufactures furniture in production
departments as Cutting & Molding, Assembly and Polishing
Department. The support or service departments are
Maintenance and Repair Department, Heating Department.
The occurred costs directly attributed to cost centers are as
follows:
Factory Overheads
Step II: Secondary Distribution
45
Cost Centers/Costs
Production Department
Cutting and
Assembly Polishing
Molding
Direct Material
Service Department
Maintenance
and Repair
Heating
Total Cost
8.000
20.000
12.000
40.000
Direct Labor
15.000
17.000
18.000
50.000
Factory Overhead
12.000
10.000
5.580
3.720
4.200
35.500
- Indirect Material
2.960
1.140
780
170
425
5.475
- Indirect Labor
2.000
1.200
900
800
1.200
6.100
- Utility (Electricity)
3.290
2.660
1.400
875
700
8.925
- Depreciation (Machinery) 3.750
5.000
2.500
1.875
1.875
15.000
TOTAL COST
m2
Maintenance Hours
35.000
47.000
35.580
3.720
Polishing Maintenance and
Repair
4.200
Heating
125.500
Cutting and
Molding
Assembly
770
630
840
560
400
3.200
1.350
1.125
1.125
500
900
5.000
Total
Factory Overheads
Step II: Secondary Distribution
Solution:
46
Cutting and
Molding
Assembly
Polishing
Maintenance
and Repair
Heating
Total
Heating
%27,5
%22,5
%30
%20
-
%100
Maintenance & Repair
%30
%25
%25
%20
%100
Benefits Received
H=4.200+0,20 3.720+0,20H
H=4.200+0,20M
H=4.200+744+0,04H
M=3.720+0,20H
0,96H=4.944
Cost Centers/Costs
Production Department
Cutting and
Molding
Direct Material
H=5.150
Assembly
M=4.750
Service Department
Polishing
M&
Repair
Heating
Total Cost
8.000
20.000
12.000
40.000
Direct Labor
15.000
17.000
18.000
50.000
Factory Overhead
12.000
10.000
5.580
3.720
4.200
35.500
Total of Primary Distribution
35.000
47.000
35.580
3.720
4.200
125.500
1.416,25
1.158,75
1.545 1.030
1.425
1.187,5
1.187,5 (4.750)
Re-distribution of Heating Serve.
Re-distribution of M&R Serve.
(5.150)
950
-
Manufacturing Overheads
Classification of Overheads
Behavior-base Classification:
Overheads can be classified into the
following categories on the base of
behavior;
 Fixed overheads like rent of building,
insurance of building, plant, depreciation
of machinery and buildings etc.
 Variable overheads like indirect material
and indirect labor.