Collection Of Overhead

For proper accounting and effective control, overhead expenses are classified into a number of suitable account heads for each type of expenditure. Similar expenses are then grouped under a major account head. Such account headings are given code numbers, which could either be alphabetical or numerical or a combination of both. However, for the purpose of mechanised accounting or computerisation, numerical coding structure is more useful.  For collection of overhead expenses, it is necessary to relate each item of expense to the cost centre where the expense has been incurred. Therefore, code numbers should be allotted to cost centres also with division into major, minor and detail heading. Expense code numbers allotted to factory overheads are known as ‘Standing Order Numbers’, whereas those allotted to administration, selling and distribution expenses are termed as ‘Cost Account Numbers’.  The method of compilation is, however, same for both types of code numbers. While preparing code structure, it should be borne in mind that

• Each code should be clearly defined, leaving no room for confusion or ambiguity, and
• The structure should be flexible enough for inclusion of items in future.

The allocation of code numbers can be done in a number of ways, using alphabetic or numerical methods. Each organisation will have its own method depending on the needs of the accounting system.

Documents for Collection of Overheads

The main sources from which overhead expenses are collected are as follows — (i) Stores requisition, (ii) Invoices, (iii) Cash book, (iv) Wages analysis, (v) Other registers and reports, (vi) Journal entries.

• Stores requisition. Indirect materials like soap, oil, cotton waste, grease, brushes, brooms, etc. are issued from stores on the basis of stores requisition notes which are priced and charged to the cost centre which used them.
• Invoices. Invoices for material and services are entered in purchase journal with proper accounts code and cost centre codes before making payments. Purchase Journal, if manually maintained, contains separate columns for materials and overhead expenses along with advance payment and accrued charges.
• Cash book. Where cash transactions occur for the procurement of material and services, cash book is analysed and indirect expenses are collected under account code and cost centre code wise.
• Wages analysis book. Wages analysis indicates overheads control accounts to which salaries and wages are to be booked.
• Other registers and reports. For collection of depreciation amount, plant or fixed assets register has to be scrutinised. Similarly, for scrap, waste and spoiled work or idle facilities, relevant reports have to be referred.
• Journal entries. Monthly apportionments from payments in advance like insurance and tax, accruals for unpaid salaries and wages or rent, notional charges for rent, interest, etc. are all collected from Journal entries.