Overview
The overhead distribution summary is a key component of cost accounting. It collates and summarizes the indirect costs incurred by an organization, distributing them across various departments or cost centers. This allocation helps organizations to gauge the true cost of their products or services, offering critical insights for budgeting and financial planning.
Indirect costs, also known as overheads, include expenses like utilities, rent, administrative salaries, and depreciation that are not directly tied to production but are essential for day-to-day operations.
Examples
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Manufacturing Company: A company produces furniture and incurs indirect costs such as utilities, supervisory salaries, and factory rent. The overhead distribution summary will allocate these costs to different production departments based on pre-defined criteria, such as machine hours used or square footage occupied.
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Service Company: A law firm incurs overheads including office rent, administrative salaries, and IT expenses. The overhead distribution summary will allocate these costs to different legal practice areas based on factors such as the number of staff or office space used.
Frequently Asked Questions (FAQs)
What is the main purpose of an overhead distribution summary?
The primary purpose is to allocate indirect costs accurately to cost centers or departments, ensuring that product costing reflects the true expenses incurred, and aiding in more informed budgeting and financial planning.
How are costs allocated in the overhead distribution summary?
Costs are often allocated based on drivers such as machine hours (for manufacturing), labor hours, square footage, and other relevant metrics that best represent the consumption of resources by different departments or cost centers.
What is the difference between direct and indirect costs?
Direct costs are expenses that can be directly attributed to the production of goods or services, such as raw materials and labor. Indirect costs (overheads) are not directly attributable to a specific product but are necessary for overall operations, such as utilities and rent.
How often is an overhead distribution summary prepared?
Typically, it is prepared regularly – monthly, quarterly, or annually – depending on the organization’s accounting cycle and reporting requirements.
Can overhead distribution summaries affect pricing decisions?
Yes, by providing detailed insights into the actual costs of production, they help in setting prices that cover both direct and indirect costs, ensuring profitability.
Related Terms
- Overhead Analysis Sheet: A document that provides detailed data on various overhead expenses, their sources, and methods of allocation.
- Cost Allocation: The process of assigning indirect costs to different departments, projects, or cost centers.
- Cost Center: A department or a function within an organization to which costs are charged for accounting and budgeting.
- Direct Costs: Costs that can be directly linked to the production of specific goods or services.
- Indirect Costs: Costs that are necessary for operations but cannot be directly attributed to a specific product or service.
Online Resources
Suggested Books
- Cost Accounting: A Managerial Emphasis by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- Introduction to Management Accounting by Charles T. Horngren and Gary L. Sundem
- Managerial Accounting by Ray H. Garrison, Eric Noreen, and Peter Brewer
Accounting Basics: “Overhead Distribution Summary” Fundamentals Quiz
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