10 January 2010
The question raised is very important to understand basics of Cost Accounting.
The confusion raised by the students is that since there is no active role of the office administration in the production; then why it is treated as "production overhead."
The reason of treating it so is that the existence of whole Administrative Department is due to Production Facilities being continued in the company.
So these are indirectly related to the production.
If no production is there; there would be no need of the administrative staff.
However; since they are not directly related to the production hence these costs are known as overhead.
TAKE CARE THAT OVERHEADS ARE ALSO PART OF COST IN COST ACCOUNTING.
This is one of the querry raised by most of the students while reading cost accounting.
Generally; these are fixed overheads still it does not mean that these are not related to the production.
There are so many expenses which are treated as fixed overheads.
11 January 2010
Agreed with Mr. Surendra but further you have to also keep in mind following thing:
Although, Administrative department is indirectly involved in the production related activities therefore Expenses incurred on this is forming part of "Cost of Production", But whole amount spent on Administration will not be added into Cost of Production because Administration department also providing their services to other department as well as which are not related to Production,e.g., Sales Dept., Marketing Dept. etc.
Therefore, Whole amount should be divided into two parts: a) Part for Cost of Production b) Part after Cost of Production
So, part (b) would not be forming part of Cost of production because this is incurred after prodcution, this would be included in Sales & Marketing Exp.
Administration expenses should be divided on the basis of services prodivded to Production Cost Centers and Other Cost centers. In practically, these percentage would not be available therefore you can use 50:50 ratio for distribution these expenses, means 50% in production cost and 50% in Sales & Marketing Cost.
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