Tuesday, April 12, 2016

Codification of Overheads - Meaning, Essential, Advantages and Methods

Codification of Overheads
Codification is a process of representing each item by a number, the digits of which indicate the group, the subgroup, the type and the dimension of the item.  It is always advisable to codify the overhead expenses. Codification helps in easy identification of different items of overheads. There are numerous items of overheads and a code number to each one will facilitate identification of these items easily. Codification can be done by allotting numerical codes or alphabetical codes or a combination of both. Whatever system is followed, it should be remembered that the system is simple for understanding and easy to implement without any unnecessary complications.
Objectives of Codification:
The main objectives of codification of overheads are:
1.       To group items of overheads of similar nature as these may be apportioned using the same basis.
2.       To facilitate allocation and apportionment of overheads to different departments or cost centres.
3.       To have analysis of overhead expenses for control purposes.
4.       To reduce the task of maintaining a huge number of accounts.
5.       To help the task of machine accounting system in a large organisation.
Requirements of a System of Codification of Overhead Expenses:

The basic requirements of a system of codification of overhead expenses are:
1.       It should classify the expenses according to nature, object or function in order to distinguish each element or group from the other.
2.       It should be simple and easy to comprehend, it should be easy to memorise.
3.       It should be concise and preferably numerical to facilitate mechanisation of accounts.
4.       It should be flexible i.e. there should be enough provision for inclusion of new items.
5.       It should conform to the statutory requirements as specified in the Scheduled VI of the Companies Act.
6.       It should be economical and according to the needs of the concern.
7.       It should facilitate the process of allocation, apportionment and absorption of overheads.
Advantages of Codification
1.       It enables systematic grouping of similar items and avoids confusion caused by long description of the items.
2.       It serves as the starting point of implication and standardization.
3.       It helps in avoiding duplication of items and results in the minimisation of number of items, leading to accurate records.
4.       It helps in allocation and apportionment of overheads to different cost centres.
5.       It assists the grouping of overheads for cost control.
6.       It helps in reducing clerical efforts to the minimum.
Methods of Codification
There are different methods used for codification. The following are the three important methods used:
1.       Numerical Codes Method.
2.       Decimal Codes Method.
3.       Codes with a Combination of Numbers and Alphabets.
1.       Numerical Method: Under this method, numerical codes are assigned to each item of expenses. For example,
100 Indirect labour.
400 Power.
500 Maintenance.
800 Fixed charges.
2.       Decimal Codes: Under this method, the whole numbers are allotted to indicate master group and the decimals indicate the sub-group. For example,
Factory Overheads:
1.1.1 Indirect materials.
1.1.2 Consumable stores.
1.1.3 Lubricating oils.
3.       Codes with a Combination of Numbers and Alphabet : Under this method the alphabet indicates the main group and the type of expenses is indicated by the numerical. For example,
Rl - Repairs to machinery.
R2 - Repairs to plant.

R3 - Repairs to furniture.

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