Business

Basis of Charging Indirect Expenses to Producing Departments

Apart from Expenses, Indirect Expenses such as power, light, rent, and depreciation of factory, when shared by all departments, can understandably not be charged directly to a department, be it producing or service. These indirect expenses do not originate with any specific departments. They are incurred for all to use and therefore, be prorated to any or all departments using them. The selection of fair bases for such distributions requires careful study.

Selecting appropriate bases for the distribution of these indirect expenses or  general factory costs is difficult and in some instances, rests on an arbitrary decision. To charge every department with its fair share of indirect expenses, like rent, a basis using some factor common to all departments must be found. Square footage is such a basis, and in many cases is used for prorating rent expense. In plants with departments occupying parts of the factory with ceilings of unequal height, cubic measurement rather than square footage might be used. Areas occupied by stairways, elevators, escalators, corridors, aisles, and so forth must also be considered. Some of the general factory or indirect expenses that require prorating, together with the bases most commonly used.

After the distribution bases have been selected, a survey of the factory must be made to secure the information needed to permit the distribution. Information such as total square footage and its breakdown by departments, number of employees in each department, investment in machinery by departments, and estimates of kilowatt-hours (kwh) and horsepower-hours (hph) to be used are items listed in the survey. Again to say, selecting appropriate bases for the distribution of these indirect expenses or  general factory costs is difficult and in some instances, rests on an arbitrary decision and the selection of fair bases for such distributions requires careful study. For More information search the term.

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