Codification of Overheads

A factory of any size incurs hundreds of separate items of overhead every month. Referring to each of them by a long descriptive name — 'depreciation of grinding machine in the machine shop' — would be clumsy, slow and prone to error when the same item is recorded again and again. Codification is the technique of giving every item (and group) of overhead a short, systematic code number or symbol so that it can be recorded, collected and analysed quickly and without confusion.

Meaning. Codification means allotting a definite code — usually a number, sometimes a combination of letters and numbers — to each standing order (each type of indirect expense) and to each cost centre or department, so that every overhead item can be identified and grouped by its code rather than by its full description.

Methods of codification. Codes may be built in different ways:

• Straight numbering — each item is simply given the next number in sequence (01, 02, 03 …).
• Numerical codes with a group logic (block/decimal codes) — a block of numbers is reserved for each group; for example, 100–199 for factory overhead, 200–299 for administration overhead, 300–399 for selling overhead, so that the first digit itself tells you the function.
• Mnemonic (alphabetical) codes — letters that suggest the item, such as 'REP' for repairs or 'DEP' for depreciation.
• Combination (alpha-numeric) codes — letters and numbers together, such as 'F-101' for a particular factory overhead item.

Advantages of codification:

• It makes recording and collecting overhead quick and reduces clerical work.
• It avoids confusion between items with similar descriptions.
• It groups related items automatically, making analysis and reporting easier. …