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Saturday, April 12, 2014

Apportionment of Overheads Examples

As we know, Apportionment of overhead  means to divide total cost of overhead among different departments or branches or cost centers of a company. So, for knowing it detail, it is better to understand it with practical examples. 


Here we have given two examples for learning apportionment of overheads. 

1st Example 

The Bengal Wholesale Co. is making a study of the relative profitability of the two products it handles. In addition to direct costs, indirect distribution costs to be allocated between the two products are as follows. 

Inventory charges (taxes, insurance etc.) Rs. 7800, Storage costs  (warehousing etc.) Rs. 14000, packing and shipping costs Rs. 72000, Salesman salaries Rs. 85000. Order entry and billing Rs. 45000.

The following information is available :


Product A
Product B
Selling Price per unit Rs.
50
100
Cost per unit Rs.
30
60
Annual Sales (units)
10000
8000
Average Inventory (units)
1000
800
Number of one time invoices
2500
2000



One unit of product A requires a storage space twice as much as product B. The cost to pack and ship one unit is the same for both. 

Salesman are paid salary plus 5% commission on sales and equal amount of efforts are put forth on the sales of each of the products.

(A )(Set up a schedule showing how you would apportion the indirect distribution overhead between products. )

(B) (Prepare the statement showing the relatively profitability of the two products) 

(A )Schedule Showing the Apportionment of Indirect

 Distribution Overheads 

Items
Basis of Apportionment
Total (in Rs.)
Product A (in Rs.)
Product B (in Rs.)
Inventory Charges
Average Inventory Value
( 1000X30) : (60X 800)
{30 :48}
7800
3000
4800
Storage Cost
Average Inventory and storage space

(1000:400)
14000
10000
4000
Packing and Shipping Cost
Annual Sales (units)
10:8
72000
40000
32000
Salesmen’s salaries
Equal Proportion
85000
42500
42500
Commission
Annual Sales Value

A 5% on 500000
B 5% on 800000
65000
25000
40000
Ordering entry and billing (25:20)
No. of invoices
45000
25000
20000



145500
143300

(B) Comparative Statement of Profitability 


Product A
 (in Lakh Rs.)
Product B
(in Lakh Rs.)
Annual Sales Value (A)
5 .00
8.00
Less Cost of Sales
3.00
4.80
Gross Profit
2.000
3.200
Less Indirect Distribution Overheads
1.455
1.433
Profit (B)
0.545
1.767
Profitability (B/A X 100)
10.9%

22.1%




2nd Example 

A  match factory sells its goods in four district zones - south, north, east and west. You have been given the following particulars in respect of each zone

Zone
Net Sales (In lakhs) (in Rs.)
No. of salesmen (in Rs.)
Average mileage covered
Advertising budget
Stock held at time (in lakhs)
Transportation charges
South
5.00
30
3000
25%
2.00
25%
North
13.50
50
4500
30%
5.00
50 %
East
3.50
20
2700
25%
1.50
15 %
West
3.00
25
2400
20%
1.50
10 %


The following are the expenses of the previous year:

Sales manager and his establishment ............Rs.124000
Travelling representatives salaries ................Rs. 72000
Travelling representatives travelling allowance Rs.24000
Advertising................................................. Rs.48000
Godown rent at out-station
south zone Rs. 15000 
north zone Rs. 21000
east zone Rs. 9600
west zone Rs. 7200
---------------------------
                  
............................................................Rs. 52800

Insurance on inventories at out stations ....Rs.24400
commission on the sales @ 2 and 1/2% .....Rs.62500
Transportation charges outward Rs. 6......... Rs.72000
---------------------------------------------------------------
........................................................479700
==================================

You are required to compute selling overhead rates as a percentage of sales on the basis of apportionment.

Particular
Basis of Apportionment
Total
Zones



South
North
East
West
Sales managers and his establishment
Sales
(10:27:7:6)
124000
24800
66960
17360
14880
Traveling representative salaries
No. of salesmen
(6:10:4:5 )
72000
17280
28800
11520
14400
Travelling allowance
No. or salesmen X mileage
24000
5035
12587
3021
3357
Advertising
Budget rates
(25:30:25:20)
48000
12000
14400
12000
9600
Godown rent at outstation
Direct
52800
15000
21000
9600
7200
Insurance on inventories
Value of stock
(4:10:3:3)
24400
4880
12200
3660
3660
Commission on sales
2 and ½ on sales
62500
12500
33750
8750
7500
Transport charges (outward)
As given
(5:10:3:2)
72000
18000
36000
10800
7200


479700
109495
225697
76711
67797



21.9%
16.72%
21.91%
22.60%








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