Codification of overheads: Meaning and Methods.

 Q. What do you mean by codification of overheads? Discuss the various methods of codification. 

Ans. Meaning of Codification of overheads: When the collected overheads are grouped according to their class it is known as classification of overheads. Each group or class is given a code number to help in maintaining mechanised accounting and secrecy in the system. This code allotment procedure is known as codification. Codification may be done by any of the following methods:

(i) Numbers

(ii) Alphabets

(iii) Combination of numbers and alphabets

(iv) Symbols

Methods of Codification: The various methods of codification are as follow:

(1) Numerical Numbers: Under this method the various groups are alloted numerical numbers so that one group of overhead may represent one standing order number. As for example 

No. 1 to 20 Indirect Material 

       21 to 30 Indirect Labour

       31 to 37 Idle Time

       38 to 43 Overtime 

       44 to 50 Insurance 

       51 to 54 Rent

       55 to 70 Depreciation 

       51 Rent of factory

       52 Rent of Office Building 

       53 Rent of Warehouse 

       54 Rent of Branch Office

(2) Alphabets: Under this method, alphabets are alloted to each overhead. These alphabets help in memory and identification of overheads. For example, 

PO – Power

RE – Repair

DE – Depreciation 

CA – Carriage

MA – Maintenance 

(3) Combination of Alphabets and Numericals: Under this method both of the above methods are combined into one. Under this method, alphabet stands for head of expenses and number shows further analysis of expenses. As for example,

RE1 = Repair to factory building

RE2 = Repair to office building 

RE3 – Repair to warehouse 

RE4 – Repair to vehicle

RE5 – Repair to furniture 

Again repair to furniture can be divided into further code number.

RE5.1 – Repair to factory furniture 

RE5.2 – Repair to office furniture 

RE5.3 – Repair to warehouse furniture and so on.

(4) Symbols: This method is used in those concerns which are working under mechanised system with punched card accounting. The nine digit punched card is divided into four parts.

00/000/00/00

The first part of two digits represents class of overhead i.e., fixed or variable. The second part of three digits represents head of overhead (i.e. idle time etc.), the third part of two digits signifies analysis of expenses (i.e. waiting for material). The fourth part of two digits represents the cost centre (i.e. assembly shop).

   For example symbol 10/120/01/07

Stands for 10 for variable cost, 120 for idle time, 01 for waiting of material, 07 for assembly shop.

Code.                       Stands

10/120/01/07.        Variable/Idle Time/Waiting for material/Assembly Shop