Costing and Control of Administrative, selling and Distribution Overhead

Chapter 11Made By: Anuj Nijhon

Administrative Overheads• Administrative Overheads are incurred for planning, general

management and control of an organization.• The administrative overheads include the following cost items:

– Indirect material: planning stationery used in office, other office supplies

– Indirect labor: salary allowances of office and administrative staff including board of directors, salary allowances of legal advisor officer and staff

– Indirect expenses: 1- office rent, rates, and insurance 2- office lighting, heating, and cleaning 3- depreciation and repair of office building, 4- legal charges, 5- bank charges, 6- trade subscriptions and donations 7-miscellaneous office expenses.

Accounting Methods

• These are three methods of accounting of administrative overheads:

• Transfer to cost profit and loss account.• Apportionment to manufacturing, selling and

distribution divisions.• Addition as a separate item of cost

• Transfer to Costing Profit and Loss Account• According to this method, administrative

overheads are treated as period costs to be excluded from product costs for two reasons:

– They are mainly fixed cost which do not vary with production/sales

– There is no equitable basis to charge them to other products

Apportionment to manufacturing and selling and distribution divisions

• This method recognizes only two basic functions of a manufacturing organization namely:

– Manufacturing– Selling and distribution

Addition as a separate item of cost

• Depending upon the suitability and equitability under the given circumstances, the administrative overhead rate can be computed using one of the following bases:– Sales value/quantity– Cost of sales/ selling cost– Work / manufacturing cost– Conversion costs– Production units– Gross Profit

Selling and Distribution Overheads

• Selling overheads are costs incurred in selling to existing customers, retaining customers and in promoting sales to potential customers. They consist of following items:– Direct selling cost: such cost are incurred for obtaining

orders, market research, and supply of goods to customers.– Advertising and sales promotion cost– Credit and Collection Costs: include expenses relating to

collection of receivables and bad debts.– Financial and general Administrative cost: included in this

category are 1- royalty on sales 2- discounts and allowances 3- sales invoicing 4- accounts

• Distribution overheads begins when a order has been obtained, and generally end when goods are to be dispatched. They include the following:– Transportation costs– Warehousing and storage costs– Financial and General Administration

Accounting of Selling and Distribution Overheads

• The accounting of selling and distribution overheads involve three stage analysis:

• By nature/object• By function/cost centre• By product/cost units