Codification of Overheads- Objectives, Merits and Methods

Codification of Overheads

What is the Codification of Overheads?


Codification of Overheads refers to the process of assigning the production items by numbers, decimals, groups, subgroups. It is helpful to easily identify the different production items. Normally it is represented in simply numerically or alphabetically. In some situations, it is also represented in Decimals, Alphanumeric etc. Codification of Overheads plays a very important role in Cost Accounting. It comes under the Classification of Overheads. In simple words, Codification means to give representation to the production items by the different names so that it will be easy to understand, remember and identified.


Objectives of Codification of Overheads


  • It helps in grouping similar Overhead Items for easy identification and apportionment.
  • Reduce the Burden of handling a large number of Overheads Accounts.
  • To have a Complete Check and analysis of all the Overhead Items in terms of Comparison, Improvements, control purposes.
  • Aids for allocation and apportionment of Overheads of the departments or Cost Centres and Units.
  • For Big Enterprises, it helps in managing the tasks of Machine Accounting System.

Essentials or Requirements


  • The Codification of Overheads System should be easy to understand.
  • It should be easy to remember.
  • The Representation of codes should be concise and helps in easy identification.
  • It should be flexible and different provisions for the new production items.
  • It should fulfil the requirements as per mentioned in Schedule VI of the Companies Act.
  • Codification of Overheads should be according to company requirements.
  • It should be divided into different portions.

Methods of Codification of Overheads


There are simply three methods of the Codification of Overheads that are as follows-


  • Numerical Coding Method- Under this Method of Codification of Overheads, codes are assigned in the form of numbers to the overhead items. For Example- Indirect Labour is assigned by 200, Stationary Charges are assigne by 400, Maintenance- 50 etc.

  • Decimal Coding Method- In this Method, numbers assign the Main Group and the decimal assign the subgroup. For Example- Factory Overheads is assigned by 1. It includes Indirect Materials, Repairs, Oils that will be assigned by 1.1 and 1.2 respectively.

  • Course with the Combination of No. and Alphabets- In this, Codes are assigned with the combination of both Numbers and Alphabets. For Example- R represents the Repairs. Then R1 will represent the Repairs of Machinery, R2 for Repairs of Cars, R3 for Repairs of Equipment.

Merits


  • It helps in removing the complexity of learning the long Description of Production Items.
  • Lessen the Duplication of production items and minimizing the no. of units.
  • Helps in allocation and apportionment of overheads to different cost units and centres.
  • It helps in controlling the cost of all the group of Production Items.

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