Control - Overheads, Cost Accounting B Com Notes | EduRev

Cost Accounting

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B Com : Control - Overheads, Cost Accounting B Com Notes | EduRev

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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.

  1. Range of activity method of setting flexible budget.
  2. Fixed plus variable rate method of setting flexible budget.

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:

  1. Few overheads are controllable when authority is delegated, as lower levels of management cannot control all expenses.
  2. Several causes are jointly controllable by different departments.
  3. Controllable costs vary with activity level. They tend to be fixed or semi-fixed and indirect with respect to either the product or departments and non-controllable by lower levels of management.
  4. The decisions made do not alter the amount of fixed costs as they are long-term costs.

The following steps should be taken to control manufacturing overheads:

  1. Overheads should be properly classified as fixed, variable and semi-fixed.
  2. The overhead cost should be budgeted by each classification and each department.
  3. Actuals and budgeted figures should be compared and necessary action initiated.
  4. Standard costing system should be introduced.

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 :

  1. Preparing control reports and comparing the results with the past.
  2. Flexible Budget: Budgets are fixed for each items of administration overhead so that periodical comparisons can be made and responsibility can be fixed and to ensure that the actuals do not exceed the budgets.
  3. Standard Cost Accounting: The most important problem connected with the administrative overhead cost is its costing treatment rather than its control because a major portion of the overhead is not controllable.

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:

  1. capacity of sales organisation cannot be properly defined,
  2. it is difficult to exercise control over customers and competitors,
  3. strict control cannot be exercised by sales representatives and other field workers,
  4. price fluctuations are determined by many factors besides cost factors,
  5. market potentials and capacity cannot be properly estimated,
  6. the difference between selling and not selling is sometimes not clear.

Such cost can be controlled and reduced by the following :

  1. preparing selling and distribution control reports and cost control reports.
  2. preparing flexible budgets: The budget should be drafted keeping in mind the potential and anticipated sales of each product in every region. Many of the selling and distribution expenses can be budgeted on this basis. Top management estimates and plans certain expenses like advertisement, credit facilities, sales promotion etc. which cannot be directly linked with sales. Periodical statements can be prepared. Actuals should be compared with budgeted figures and any variations should be corrected.
  3. standard costing.
  4. comparison with past performance: The expenses incurred in a period can be compared with the corresponding expenditure incurred earlier. Difference in amounts and percentages to sales can be verified and corrective action initiated.

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