What is Administrative Overhead and how is it treated in Cost Accounting?

December 10th, 2010 Comments off
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Administrative overhead:

  • Costs relating to formulating policy, directing and controlling operation of an undertaking
  • Not related directly to production activity or function.
  • On a norm, administration overhead are all expenses incurred on policy formulation, direction, control, office administration,etc

What are the methods to treat Administrative overhead in Cost Accounting:

(a)    Charge to Costing Profit & Loss Account since these costs as mentioned are related to formulation of policy, etc. Hence it should go directly to the Costing Profit & Loss account

(b)   Apportion between production and selling & distribution: this method assumed that administrative overheads reincurred both for production and for selling & distribution. Hence, these overheads should be apportion on an equitable basis between production and distribution activity

(c)    Treat as a separate element of total cost: Administration overhead is treated as a distinct and identifiable operation of the organization necessary to carry on its activity. Hence these overheads are recovered separately on some equitable basis which may be by cost or sales basis.

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