Collection and Classification of Overheads

After the overheads have been classified as factory, office and selling, it will be advisable to group items covered by each category under suitable account headings. For example, depreciation may relate to factory buildings, factory plant, factory furniture, etc. It will be appropriate to group all items of depreciation relating to factory assets at one place under a common heading ‘Depreciation’ with suitable sub-heading. This grouping of like items with the like is necessary to collect overhead items in a convenient and expeditious manner. The guiding principle selecting such headings must be that the headings are clear and unambiguous so that these may not be confused with each other. Usually, a code number is allotted to each heading of expense.

Allotment of codes to individual heads of expense is termed as codification of overheads. It may be defined as a technique of short description of a particular head, which is otherwise lengthy. It also ensures secrecy and ease in classification, accounting and control. Codes are particularly useful under computerized system of accounting. Codification may be done according to any one of the following methods.

(i) Numerical method: According to this method numbers are allotted to each heading and sub-heading of expense.

(ii) Alphabetical or mnemoric method: According to this method, the alphabets are used for identifying the expenses of cost centres.

(iii) Alphabetical cum numerical method: According to this method the alphabet denotes the main expenditure while the numerical denotes its sub-division.

Code numbers given to different items of overheads are listed in a schedule or manual for ready reference. No standard list of these code numbers can be suggested since the number and types under which the overheads may be grouped depend upon the size of the factory, the nature of industry and the degree of control required.

Standing order and cost account numbers

The code number given to a factory overhead item is termed as standing order number and that to an administration or selling and distribution item as a cost account number. A card is maintained for every standing order or cost account number.

Entries in the card are made periodically from purchases journal, stores requisitions, petty cash books, wages analysis book etc. for example, consumable stores is an item of factory overhead. If the stores have been purchased and supplied directly to the factory, the information will be there in the Purchase Journal. In case stores were first received by the storekeeper and then issued, the information can be obtained from the stores requisitions. The details regarding the source of information are entered in reference column.

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