cost accounting
This query is : Resolved
10 January 2010
why is administrative overhead forming part of cost of production in cost accounting????????
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.
This is one of them.
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.
This is one of them.
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.
Regards!!!
Dinesh S. Adhikari
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.
Regards!!!
Dinesh S. Adhikari
11 January 2010
Thanks Mr. Adhikari,
You have added value in the answer on the issue.
Apparently; you have more "adhikar" on cost accounting being a member of CWA.
You have added value in the answer on the issue.
Apparently; you have more "adhikar" on cost accounting being a member of CWA.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- About TDS & Income Tax
- Scrutiny and reopening of past returns
- Pass word to open justification report for Q1 for FY 2026-27
- PPF interest-As Exempt Income disclosure
- Section 194JA & JB Income which ITR Form to use
- Type of Capital Gain
- Booth for sales promotion
- F & O PROFIT REPORTING FOR AY 2026-27
- Grand in aid
- Accounting with Claude
- TDS on Rent received on redevelopment of building
- Tax on Deemed Capital Gain
- Indian IT Portal issue in computing tax as per UK-India DTAA
- Capital Gains on sale of residential flat
- Upload Level ValidationITR3Category of Defect B/D
- PF Taxable Income
- Clarification on Tax Audit Applicability and Reporting of F&O Transactions in ITR-3
- Interest credited in FY2025-2026 & TDS therein by EPFO does not reflect in AIS or Form 26AS
- 44ad eligble money lending interest
- Taxation in the hands of Landowner under JDA
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
Subscribe to Pro
Join an elite circle of professionals
CAclubindia
