Secondary Distribution of Overheads IN B Com Notes | EduRev

Cost Accounting

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B Com : Secondary Distribution of Overheads IN B Com Notes | EduRev

The document Secondary Distribution of Overheads IN B Com Notes | EduRev is a part of the B Com Course Cost Accounting.
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What is Secondary Distribution of Overheads?
In the primary distribution of overbids, the overhead expenses are distributed among all the departments or cost centers, whether it is production department or service department.
In fact the production departments are engaged in producing goods where as service departments assist them in the process of production. Hence ultimately the service department costs need to be spread over the production department and only then the overheads can be charged to production.
This process of apportioning service department expenses among the production departments is called secondary distribution of overheads. In other words, secondary distribution is the reapportionment of service department expenses among the production departments after completion of primary distribution. While making secondary distribution, some common bases of apportionment are taken. The various bases commonly used for this purpose are shown in the following table:

Methods of Secondary Distribution
There are different methods of reapportionment of service department expenses among production departments. These are depicted in the following figure: 11.6.1 Direct Redistribution Method
In this method the costs of service departments are apportioned directly to the existing production departments. Even though there are other service departments in the same organisation, costs of one service department is not apportioned to other service departments. By adopting this practice the services rendered by one service department to other service departments are ignored. The following examples will make it clear.

Note:
(i) The amount within brackets indicates negative sign.
(ii) The basis for apportionment of General Overheads is direct labour wages.

Step Method
The defect of the direct redistribution method by ignoring the service rendered by one service department to other service departments is removed in this method.
In this method the services rendered by one service department to other service departments is considered while making apportionment. But one important aspect of this method is that a service department which renders service to another service department does not receive any services from the later. For example, there are three service departments ‘X’, ‘Y’ and ‘Z’.
The service department ‘X’ shall render services to ‘Y’ and ‘Z’, but shall not receive any services from them. Similarly Service Department ‘Y’ shall render service to ‘Z’ but shall not receive any service from ‘Z’. Service Department ‘Z’ shall not render any service to either ‘X’ or ‘Y’ Under such situation step distribution method of apportionment can be applicable.
Under this method the expenses of the most serviceable department is first apportioned to other service departments and production departments. Then the next service department is taken up for apportionment. This process shall continue till the last service department is apportioned only to the production departments.

Reciprocal Service Method
In the step method we noticed one defect that is the service department rendering services to other service departments does not receive any services from them. But very often we come across service a department which not only render services to other service departments but also receives services from them.
In other words, the services are rendered on reciprocal basis. For example, canteen as a service department renders services, to the employees of maintenance department. Hence cost of canteen must be apportioned to maintenance department. Now the maintenance department also renders services to the canteen and hence a part of its cost must be apportioned to canteen.
This method of reapportionment is known as ‘Reciprocal Service Method’. Here one thing must be remembered that the calculations become very complicated if we consider more than two service departments. Hence for all practical purpose we have taken two service departments while reapportioning under reciprocal service methods.
There are three methods of reapportionment of overheads under reciprocal service method. These are:
(i) Simultaneous Equation Method
(ii) Repeated Redistribution Method
(iii) Trial and Error Method

(i) Simultaneous Equation Method
Under this method simultaneous equations are developed and solved to ascertain the overhead costs of each service department. These overhead costs are then redistributed to production departments on the basis of given percentage. The application of this method is explained through the following illustration:

(ii) Repeated Redistribution Method
Under repeated redistribution method, first of all, the total overhead costs as per primary distribution are written below the respective departments. Then as per the percentage given for distribution of service department costs, the apportionment is made to production as well as service departments.
This distribution process is repeated for the service departments one after the other till the amount to be apportioned becomes very small to matter. Finally very small amounts apportioned to the service departments are ignored. Since the service department expenses are repeatedly distributed among all departments the method is known as repeated redistribution method.
This method has an added advantage that even if the number of service departments is more than two, the reapportionment can be done conveniently. For a better understanding the following illustration is given:

(iii) Trial and Error Method
This method is similar to the repeated redistribution method in many respects. Under this method the cost of service departments are apportioned only to the service departments in a repeated manner to find out the total cost of respective service departments.
After obtaining the total cost of each service departments, the secondary distribution is made as per the given percentages, which is almost similar to that of simultaneous equation method. The following illustration will explain this method.

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