Control of Overheads
1. Manufacturing Overheads
Control of manufacturing overhead cost can be best achieved by means of the flexible budget. It provides a base for comparing the actual overhead with the budgeted overhead adjusted to the level of activity attained. Fixed budgets may be used for planning purposes. No adjustment is made for actual level of activity attained. Flexible budgets may be prepared by the following two methods.
An item wise budget of overhead expenses can be prepared quarterly or monthly to control overheads. The budget should be based on anticipated production capacity and the past expenses. The fixed and variable expenses should be segregated. The actual expenses should be ascertained and controlled.
If the budgets are prepared department wise, controlling cost and fixing responsibility is facilitated.
Departmental overhead cost reports should be designed to emphasise the items which can be controlled by the departmental managers and exclude those items which are non-controllable either directly of indirectly. Variances in non-controllable items is generally due to a poor system of cost allocation or due to decisions made by the management. Large non-controllable variances tend to obscure effectiveness of the departmental managers effort to control cost. Moreover, if there are large number of non-controllable items it make the report useless: Hence non-controllable items should be excluded.
Approved departures from budget should also be indicated in the performance reports and allowances for such approved departures should be introduced in variance analysis. In other words, “management by exception” should be applied for effective control of overhead cost.
Difficulties in controlling overhead costs
A certain amount of authority is usually delegated to lower level of management for controlling certain costs within their jurisdiction. However, the following difficulties are faced while controlling overheads:
The following steps should be taken to control manufacturing overheads:
2. Control of Administration Overheads
A major portion of administrative overhead costs is fixed in nature and are incurred due to management policy. Administration overhead can be classified to two parts, namely, the expenses that varies with volume of office work and fixed expenses. Fixed overheads e.g. depreciation cannot be controlled at lower levels of management and can be incorporated in a fixed cost budget for informing the top management.
They are usually non-controllable. Though it is difficult to control such costs, the following methods can be used to control administration overheads :
3. Control of Selling and Distribution Overheads
It is not easy to identify or link selling and distribution costs with units of production because the costs are normally incurred after production has been completed.
The incidence of these costs depends upon several factors such as the distance of market, terms of sale, extent of competition etc.
It is difficult to control such cost because of the following reasons:
Such cost can be controlled and reduced by the following :