Secondary distribution of Overhead | Criteria | Bases | Methods

Secondary distribution of Overhead

The production departments do not produce any goods and services without getting any service from the service departments. Hence, there is logic that the cost of production should include the costs of service departments. Based on this logic, the total expenses of service departments are to be apportioned only to the production departments on suitable basis.

The process of redistribution of cost of service departments among production departments on suitable basis is known as secondary distribution. In making the secondary distribution, there is a distinction of production departments and service departments.

Criteria for Secondary Distribution of Overhead

The following is the criteria for determining the basis for apportionment of cost of service departments among production departments.

1. Services Received.

2. Analysis of Survey or Survey of existing conditions.

3. The ability to pay basis.

4. Efficiency or Incentive method,

5. General use indices.

Bases for Secondary Distribution of Overhead

The following bases are commonly used by many organizations for second distribution of overhead.

Methods of Secondary Distribution of overhead (Redistribution)

First, the management should determine the basis for redistribution of service departments. Then, the actual redistribution can be done by any one of the following methods.

1. Direct Redistribution Method

Under this method, the costs of one service department are apportioned only to the production departments ignoring the service rendered by one service department to another. If this method is followed, the number of secondary distribution will be equal to number of service departments.

2. Step Method

This method is also known as non-reciprocal method. This method ignores the service rendered by one service department to another. Moreover, there is no two-way distribution of costs between two service departments. It means that the costs of one service department cannot be distributed to other service departments even though service rendered to them.

For example: Canteen expenses are distributed to stores department because canteen renders service to stores department employees. But, no part of stores department cost is not distributed to canteen even if stores department render service to canteen.

Sometimes, large service department costs are distributed first. Then, next large service department costs are distributed. In this way, least service department costs are distributed finally. The cost of last service department is distributed only among production departments. Some authors have the view of distribution of cost of service department with largest amount first.

3. Reciprocal Service Method

Under this method, the costs of one service department are distributed to other service department on the basis of rendering service. Here, there is a two-way distribution of costs between two service departments. It means that the costs of one service department can be distributed to other service departments if service rendered to them.

The full operating cost of a service department cannot be known till inter department transactions among the service department are taken into account. The service department costs may be controlled to some extent.

4. Trial and Error Method

Under this method, the cost of one service department is apportioned to another service department. Now, the cost of another service department plus the share of costs received from the first service department is again apportioned to first service department. In this way, this process is going on till the balancing figure becomes negligible.

5. Repeated Distribution Method

This method is otherwise called as continued distribution and attrition method. The service department costs are distributed to other service departments and production departments on agreed percentage. In this way, this process is repeated till the costs of service department are too small. Then, the costs of service department are distributed only among production department.

6. Simultaneous Equation Method

Under this method, the total costs of service departments are ascertained with the help of simultaneous equation. Then, the costs of service departments are apportioned on agreed percentage only among production departments.

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