Functional analysis of general costs

General costs can be categorized according to the body responsible for cost accounting. Generic cost-related classifications include additional production costs, sales and distribution costs, and administrative costs. Generally, most of the overheads are graded in this way, but some of the overheads are generally related to the organization and are generally considered as general costs.

Articles focus on manufacturing costs. Production is the function that fits the raw materials into the finished product of the body. The production department is usually divided into several classes. Some of these are directly related to the manufacturing process. These are called production cost centers, for example, the cutting department and the finishing department.

Other members of the production department are not directly related to the manufacturing process but provide support services for the production. These include service cost centers, and examples include the maintenance department and stores.

Review and Allocation

The first step in the analysis of manufacturing overheads is to select the right cost centers. Selection depends on a number of factors including the required level of control and the availability of information.

By selecting the right cost centers, the next step in the analysis is to determine the overall cost of each cost center. This is achieved through the distribution and division process

Cost allocation is possible when identifying costs that can be attributed to a given cost center. For example, the wage of the wrapper class leader can be divided into the packing class costs. There is no need to split payment costs between several different cost centers.

Cost sharing is needed if costs can not be allocated to a given cost center. In this case, the costs are divided by two or more cost centers based on the estimated benefit received by each cost center. As far as possible, the basis of the sharing is chosen to reflect this benefit. For example, rents and prices can be divided according to the space requirement occupied by each cost center

Charging the overhead costs to fitable cost units

The last stage of the analysis of general costs is units produced at production centers. This is sometimes referred to as an overload.

First, we need to measure the level of production achieved. Numerous measures can be applied but the most common are:

Physical units manufactured;

Working hours worked;

Operating Hours

In a standard costing environment, two methods based on an hourly rate take on the use of standard working hours and standard machine hours on an absorption basis

It is very likely that different manufacturing units are measured in different ways. The aim is to apply a measure that reflects the nature of the work involved. Physical unit measurement is theoretically the simplest, but only valid if all the products produced require the same resources.

The generic cost of each production cost center is then divided by the sum of the production volume as the total cost attributable to each unit. This is the technique of absorption and exemplifies the example of distribution and division

. The output of the machining section shall be measured by the number of hours worked, while the assembly and finishing classes shall be measured on the basis of the number of direct working hours. The reason for this is the number of machine and direct work hours for each department as shown in the original data.

Calculation of the absorption rate calculates that the costs are divided by the appropriate expenditure of the organizational unit

Using the Generic Absorption Rate [19659002] In the case where an absorption method is used based on direct hours or machine hours, direct costs are obtained by multiplying the time per unit by the hourly absorption rate

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