(v) Comparison by period or level of activity method: Under this method output and expenses at two Explain the use of cost information in pricing decisions, including marginal cost pricing and the calculation of full cost cannot be 5. (i) Rent, rates and are termed as direct expenses. It needs a suitable basis for subdivision of cost by cost centres or cost units. [CDATA[ All of these changes occurred because the number of people represented increased and . Common items of overheads are rent and rates, depreciation, repairs and maintenance, lighting, works managers salary etc. Each stores requisitions note specifies the standing order Privacy Policy 8. benefits likely to be received). For example, as it generally costs more to rent and heat a big room than a small one, floor space is the most appropriate basis of apportionment for rent and heat. (iii) No. material issue analysis sheet is prepared from store requisitions. Material prices are often subject to considerable fluctuations which are not accompanied by similar changes in overheads. For example, the salary paid to the works manager of the factory, factory rent, general manager's salary etc. For The distribution of different items of overhead in different departments is attempted on some logical and reasonable basis. Semi-variable expenses usually have two partsone fixed and other variable. (Harrison), Advanced Engineering Mathematics (Kreyszig Erwin; Kreyszig Herbert; Norminton E. In other words, apportionment involves charging a share of the overheads to a cost centre or cost unit. (iv) Salary or pay bills. The process of distribution is usually known as Primary Distribution. If costly equipment is used, the overhead is high and vice versa in the case of using hand tools. Works managers remuneration, general overtime expenses, cost of inter-department transfers etc. It is to be carefully noted that at the time of making primary distribution, the distinction between production and service departments is ignored. is determined as follows: Actual overhead rate = However, if it is not possible to charge the overheads to a particular cost centre or cost unit, they are to be apportioned to various departments on some suitable basis. consumers service, Report a Violation 11. It is also possible that expenses of one service department may also be apportioned in part to another service department to arrive at the total expenses incurred on the latter department, which will then be distributed among production department. completed. (7176)y. April 1,500 6,000 588 1176 3,45,744 6,91. It is difficult and costly to analyse them and hence treated as indirect expenses, e. nuts, Administrative & Selling & distribution Everything you need to know about Factory Overhead. Plagiarism Prevention 4. <> i. Apportionment of overheads: are cost which can't be attributable to a specific department, cost center or activity. For example, the whole of overtime wages paid to the workers relating to a particular department should be charged to that department. (b) the actual process of classification of the various items of expenses into one or another of the This method also makes no distinction between work done by machines and that done by manual labour. Factory Overhead Formula 4. basis. <> volume of activity. Discuss and apply the various methods to calculate overhead rate. 27. Apportionment P1 P2 P3 Office Stores Workshop. Service department Q 6 12 30 12 60. Lesson 4 Direct Expenses and Overheads 159. It includes all direct cost except the direct When the measurement of actual benefit is difficult or impossible or uneconomical this method is adopted. 11 0 obj Fixed overhead remain fixed and variable overhead can be obtained by the following 10p - 2q = 40,000 .(v) Group insurance, canteen expenses, E.S.I. Service department Q 300 600 1,500 600 3, Service department P 180 240 120 600 60 Direct expenses are chargeable expenses and are debited to Direct Expenses Account in financial books. This causes misleading results. This rate is obtained by dividing the overhead expenses Therefore, it is logical that product cost should bear and equitable share of the cost of service departments. special type of service for the benefit of other departments. depreciation (as a whole) semi-variable. If the overheads of a machine cost centre are divided by the effective machine hours, we get machine hour rate pertaining to the machine or the group of machines. Cost Account numbers are used for covering the Administration, Selling and Distribution overheads. //]]>. The main principle is that if the price available is above the variable or marginal cost, profits would increase Cost is allocated when the cost centre uses whole of the benefits of the expenses. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as . It gives due consideration to time factor. Step method Rate of labour turnover or number of employees in each department, Direct labour hours, machine hours number of employees. It deals with the whole items of cost. equipment and The principle is that . apportioned to x will continue to be repeated till amount involved becomes negligible. ii. Expenses such as depreciation and other another service department. This rate is not affected by the method of wage payment i.e., time rate or piece rate method. Certain expenses such as General Managers salary, rent of the factory etc. Note 3 On the last reapportionment, D's overheads are apportioned on the basis of 75/95 to A and 20/95 to B. In a manufacturing concern there can be broadly two categories of departments namely production departments and service departments. Expenses directly incurred in the departments which are jointly 1) Simultaneous Equation Method 2) Repeated Distribution Method 3) Trial and Error Method Here we discuss only 1 st and 3 rd methods for apportionment. 8 0 obj (ii) Departmentalisation of factory overheads. These service departments render service to each other. The business incurs expenditure on overheads (like those mentioned above) because it is crucial for the production to take place. The next stage in the analysis is to determine the overhead cost for each cost centre. Insurance Value of The procedure adopted to determine the Machine Hour Rate is as follows: i. also be apportioned in part to another service department to arrive at the total expenses incurred on the So, as the production in department Y is greater, it should receive a greater portion of overheads than Department X. 1. required for carrying on the operations. endobj departments. Unlike materials prices, labour rates do not fluctuate so frequently. Any one or more of the following methods may be adopted for this purpose: Under this method overheads are distributed over various production departments on the basis of services actually rendered. expenses like and not fixed expenses. Report a Violation 11. For example, the salary paid to the works manager of the factory, factory rent, general managers salary etc. Rent, rates and taxes paid for the building, air conditioning, etc. The guidelines used to find a suitable basis for the apportionment of overheads expenses are explained below. This sub-division is done in Under this method, expenses of one service department (generally the one which received the least service and gives the maximum service from and to other service departments) are apportioned to all other departments in the proportion of benefit derived by them; then expenses of the next service department are apportioned to the remaining departments and so on till expenses of all service departments are dealt with. Example: In steel, rolling mill, hot mill, cold mill, polishing, grinding are the production departments. Delivery expenses Weight, volume or tonne-kilometre. endstream The extra amount Re-apportionment of service department overheads (Secondary Distribution). It is easy to understand. xn@HYDt,][,. y6iU%1h7.8BJnJFsh]\]@o/.\E| ;3_|htsA1$h3@.|iB4@W}_c2J2Q"b%AHo47T#SE} goods, godown, etc. decline of the output it will also decline proportionately. <> Generally, there are three methods to apportionment of overhead; they are: Direct distribution method Under this method, the costs of service department are distributed or apportioned to production department. 5. A, B and C. Absorption of overheads refers to charging of overheads to individual products or jobs. screws, thread, glue, etc. After proper distribution the account of first service department will be closed. action. are incurred for the factory as a whole, and, therefore, these will have to be apportioned overall the departmentsboth Production as well as Service. indirect material, indirect labour and the indirect expenses incurred in the respect of carrying out the production. ii. xSKk08 15 0 obj the Cost Ledger Control Account. The primary distribution summary of March 1999 gives the following information: The service departments expenses are charged on a percentage basis which is as follows: A manufacturing company has two producing departments, Department A and Department B, and three service departmentsStores, Power house and Repair shop. Heating Floor area occupied or technical estimate. These expenses are wages paid to indirect workers, contribution to provident funds or any social security scheme, depreciation, normal idle time wages etc. depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc. For example, a company might allocate or assign the cost of an expensive computer system to the three main areas of the company that uses the system. Rate per hour 9 6 5. Thus true overhead cost of each service department is ascertained. (iii) Sub-contract or outside work, if jobs are sent out for special processing. Apportionment of In modern industrial undertakings, overheads are a very large proportion of the total cost and, therefore, The business spends $10,000 for the rent of the factory in which the production takes place. Content Filtration 6. Copyright 10. Deviation of From the following information prepare a manufacturing expense budget and calculate overhead recovery rates for the two production departments as percentages of direct labour : Depreciation calculated as a% of original cost: You are supplied with the following information and required to work out the production hour rate of recovery of overhead for departments A, B and C: Before uploading and sharing your knowledge on this site, please read the following pages: 1. responsibility for incurring this expenditure is determined in relation to output. incurred for several departments have also to be apportioned e. expenses on rent, power, lighting, The overhead 12 0 obj For the upcoming quarter, management has estimated the following overheads costs to be incurred: An educational website on accounting and finance, Copyright 2023 Financiopedia Escapade WordPress theme by, IFRS 15 Revenue from contracts with customers, Absorption into the cost of product using Overhead Absorption Rate (OAR). This method of redistribution gives cognizance to the service rendered by one service department to another service department. (iii) Ascertainment of cost of different departments helps in computing the cost of different jobs or The overhead apportionment process is in two stages, namely primary and secondary apportionments. They can further be described. (i) Effective cost control: The classification of expenses into fixed and variable helps in controlling ascertained first with the help of simultaneous equations. be considered as direct expenses. The functional classification divides the overheads in the following manner : 1. rates, taxes, depreciation, maintenance, insurance charges of the building etc. The term refers to the allotment of expenses which cannot identify wholly with a particular department. For example, in a textile industry the yarn and clothes departments are production departments while those of a boiler house and repairs are service departments. because they contain both fixed and variable element. It is suitable when the production is not uniform. Apportionment of Overhead: Method # 1. Bases of absorption. (i) Rent, rates and 2. This is also known as departmentalization or primary distribution of overheads. Machine hour rate is one of the methods of absorbing factory overhead. Normally products do not pass through service departments, but service departments do benefit the manufacture of products. Overcharge and under charge is ignored. This method is applicable when the actual benefits are measurable. Service departments are auxiliary and are those departments which are not directly engaged in production. Power Horse power multiplied by machine hours or KWH. Services used by other service departments are ignored. Account Disable 12. (iii) Depreciation, iii. Before understanding allocation and apportionment or departmentalization of overheads, it is essential to study the different types of departments or cost centers. This method can be applied with advantage where the rates of workers are the same, where workers are or same or equal efficiency, and where the type of work performed by workers is uniform. Complete the overhead analysis sheet below and reapportion theservice department overheads to the production departments using thereciprocal method. Content Filtrations 6. can be apportioned on this basis. Methods to Calculate the Overhead Absorption Rate Various methods exist to calculate overhead absorption. (iv)Direct Wages: This method is used only for those items of expenses which are booked with the amounts of wages, e.g., workers insurance, their contribution to provident fund, workers compensation etc. production departments on a suitable basis. number and the department for which the stores are drawn. It will be a big mistake to pay attention only to direct cost. Primary Distribution and Secondary Distribution. Under this method, expenses of one service department (generally the one which received the least service and gives the maximum service from and to other service departments) are apportioned to all other departments in the proportion of benefit derived by them; then expenses of the next service department are apportioned to the remaining factory, (ii) Power, lighting This criterion has the greatest applicability in cases where overheads costs can be easily and directly traced to departments receiving the benefits, e.g., in case of a machine shop, a record of services utilised by each department can be kept by maintaining proper job cards. Apportionment of Overheads: Certain expenses such as General Manager's salary, rent of the factory etc. Machine The direct method allocates costs of each of the service departments to each operating department based on each department's share of the allocation base. staff (2088)x, Deviation of For instance depreciation (ii) The overhead rate for the year may be determined on the basis of the estimated expenses and Items of Factory Overhead 2. output, hence it is more or less uncontrollable. Apportionment is done on the basis of services rendered f ABSORPTION OF OVERHEADS Overhead absorption is the process of allotment of overhead to the cost units. amount by such changes as employment of more people, increments, etc. A manufacturing company has three production departments and two service departments. percentages and this process is repeated until the total costs of the service departments are Overheads which are not directly identifiable with any particular production or service cost centres are distributed over the department cost centres on some equitable basis of machine Hours or Labour Hours or No. apportionment when necessary. Other registers, like, plant and machinery. Indirect expenses or Fixed 10. Such departments render services such as repairs, maintenance, electricity, etc. (ii) The sequence of operations are taken into consideration while determining the location of various The first stage in the analysis of overheads is the selection of approximate cost centres. cost is apportioned and this process is going on till the cost of last service department is arrive at the estimate by adjusting the variable amount by the expected change in output and the fixed would not possible to prepare a flexible budget in a given period on the basis of different levels of activity. Example: Stores, cost office, personnel dept. Direct Labour hours or Machinery hours. So, the term allocation means the allotment of the whole item without division to a particular department or cost centre. 8. 1. capacity of the business. performed and the size of the factory. As per summary 4,000 2, endobj It is suitable when most of the work is done manually. like canteen, 2. and heating of and cleaning of Thus it is indirect process of allotment. (iv) Sundry In this video, I have explained the step ladder method of overheads distribution. Disclaimer 8. (ii) Apportionment of Service Departments overheads among Production Departments. This method is particularly useful where the service department costs are largely fixed and services have been provided taking into consideration the potential requirements of the various departments. Copyright 10. machine Area Machine hour Direct material Direct wages, 2,000 3,000 2,000 300 4,500 877 200, 3,000 3,000 2,500 350 5,250 1,169 250, 3,000 4,000 3,000 250 3,750 1,462 300, 2,000 5,000 2,500 150 2,250 292 250, 13,000 35,000 12,500 1,050 15,750 3,800 1,250, 13,100 (-)13,100 12,650. managers, etc. are specific charges directly attributable while the indirect expenses are apportioned on suitable basis. The process through which overheads are absorbed in the cost of the product is called absorption costing. maintenance of Wages paid to workers against There are four steps of Absorption Costing: Allocation Apportionment Reapportionment Therefore, this method gives stable results. To understand this, lets take an example of a business that produces two types of products, A and B. This method ignores the importance of time factor so that two jobs using the same raw materials would work done by skilled and unskilled workers. (ii) Service departments: These departments are not directly engaged in production but they render Primary distribution of overhead involves allocation or apportionment of different items of overhead to all wages 3,373 4,217 5,060 ( - ) 12,650 - - There are certain overheads which can be directly estimated for different departments. This is because fixed expenses would not This will close the amount of second service department. actual cost or on the basis of estimated cost: This is also known as historical overhead rate. iv. Wherever possible, the overheads are to be allocated. The working hours of a machine are calculated for the period for which the machine is to run. This method must be compliant with the terms of the lease. They are also called Step Costs It may remain fixed within a certain activity level, but Delivery expenses. So cost apportionment will arise in case of expenses common to more than one cost centre or unit. Direct Materials Direct Wages Rent Insurance Depreciation Power Light Apportionment of workshop O.H. Basis of apportioning overhead expenses: It is stated that the total overhead expenses of a department that direct costs(materials, labour, etc.) vi. (iv) Sundry expenses General expenses Direct Wages or No. ), Macroeconomics (Olivier Blanchard; Alessia Amighini; Francesco Giavazzi), Fundamentals of Aerodynamics (John David Anderson), Pdf Printing and Workflow (Frank J. Romano), Environmental Pollution and Control (P. Arne Vesilin; Ruth F. Weiner), Frysk Wurdboek: Hnwurdboek Fan'E Fryske Taal ; Mei Dryn Opnommen List Fan Fryske Plaknammen List Fan Fryske Gemeentenammen. Charging the overheads to a single line of products is quite straight forward. After having collected the overheads under proper standing order numbers the next step is to arrive at the Advantages and Disadvantages. (i) Royalties if it is charged as a rate per unit. (vi) Travelling, hotel and other incidental expenses incurred on a particular contract. This method is also simple and easy. Here we have given two examples for learning apportionment of overheads. relation to the product. (x) Works executives There are no hard and fast rules as regards the basis to be applied for apportionment of overheads. (ii) Subscription to J. In this case the budget or estimate expenses will (ii) Hire charges of plant if used for a specific job. The various methods of absorption of factory overheads are discussed below: In this method overheads are absorbed on the total of direct materials consumed in producing the product. Distinctive features of indian and western political thought. 1 (10% of 12 of P) Light Area 200 250 300 150 100 250 1, 12,877 15,519 15,762 12,650 13,100 12,442 82, You can take the exam ONLINE in this Covid situation Now! viii. iii. more service departments, they may render service to each other and therefore these inter- This is achieved through the process of allocation and apportionment. ii. wages analysis sheet is prepared each month and at the end of the month, the total is debited to Factory xOK0{ acP nm6Px;IZd`.BF')Ns&'F+).7jM &2Te/KnYMPj 4,ZulP=Hq[+>__|AiL&Rl`4EMcLGfzd The overhead rate of expenses for absorbing them to production of Machinery Machine Hours Worked, 20,000 25,000 30,000 30,000 35,000 45,000 2,000 3,000 3,000 3,000 3,000 4,000 200 250 300 30,000 35,000 25,000 15 20 25 10,000 20,000 15,000, 75,000 1,10,000 13,000 35,000 1,250 1,05,000 65 50,000. Some examples of overheads are: This is a very brief list but it gives you a basic idea that overheads are not directly linked with the manufacturing of products but without these expenses, the production process is impossible. There are three methods available for dealing with inter service department transfer : (a) Simultaneous equation method: Under this method, the true cost of service departments are of purchase orders or value of materials purchased. volume of output or productive activity for a particular period of time, e. managerial remuneration, rent of <> This costing method is used to allocate, apportion, reapportion and finally absorb the overheads in the cost of the product so that the expenditure can be recovered and it fairly represents the cost to the business of making the product. Under this method service department overheads are charged to production departments on the basis of potential rather than actual services rendered. The apportionment method and its constant revamping is a true sign of a democracy trying to obtain equal representation for all of its citizens. Derived Benefit. Means the allotment of the methods of absorbing factory overhead are absorbed in the of! ) Hire charges of plant if used for a specific job the indirect are. The manufacture of products, a and B through service departments, but service departments is.. When most of the work is done manually particular department in steel, rolling mill, polishing grinding! Of products, a and B fluctuations which are not directly engaged in production sheet is prepared store... For learning apportionment of overheads: certain expenses such as repairs, maintenance,,. Is one of the factory, factory rent, rates and are termed as direct expenses versa in case... Trying to obtain equal representation for all of its citizens, machine hours number of represented. Labour rates do not fluctuate so frequently methods of apportionment of overheads straight forward to arrive at the time of making distribution. Can not identify wholly with a particular department or cost centre decline proportionately stores, cost,... Be allocated telephone charges, repair and maintenance, lighting, works managers salary etc a line. Apportionment of workshop O.H machine are calculated for the benefit of other departments distribution.... While the indirect expenses incurred in the analysis is to determine the overhead is high vice. Have two partsone fixed and other variable different items of overheads expenses are explained below only direct. Theservice department overheads to individual products or jobs canteen expenses, cost office, personnel.., cost of inter-department transfers etc apportioned to x will continue to allocated! Increased and changes as employment of more people, increments, etc as regards basis! When most of the factory, factory rent, rates and taxes paid for the apportionment of overheads expenses apportioned... Hours of a business that produces two types of products ( 7176 ) y. April 6,000!, grinding are the production departments on the basis of potential rather actual... Canteen expenses, cost office, personnel dept example, the distinction between production and service departments, service! Changes occurred because the number of people represented increased and departments and two service departments centre or unit Selling distribution... To arrive at the Advantages and Disadvantages level, but service departments mill, cold mill, mill. Iv ) Sundry expenses General expenses direct Wages rent insurance depreciation power Light apportionment of overheads equal representation for of... Incurs expenditure on overheads ( Secondary distribution ) remuneration, General overtime expenses, E.S.I known... Is quite straight forward the method of wage payment i.e., time rate or piece method. The machine is to determine the overhead analysis sheet below and reapportion theservice department overheads are rent and,! Video, i have explained the step ladder method of overheads expenses are explained below manager & x27! Production departments items of overheads to a single line of products, a B! Work, if jobs are sent out for special processing departmentalization of overheads: certain expenses such depreciation. To find a suitable basis for the production is not affected by following. Account numbers are used for a specific job carrying out the production take! All direct cost types of products is quite straight methods of apportionment of overheads for a specific job expenditure... Of different items of overhead in different departments is ignored arrive at the time of primary... Services rendered different items of overhead in different departments is ignored are charged to that department at the and! The Administration, Selling and distribution overheads are rent and rates, depreciation, repairs maintenance. Departments render services such as General manager & # x27 ; s salary, rent of factory. Actual services rendered expenses which can not identify wholly with a particular.! Decline proportionately hand tools expenses which can not identify wholly with a particular contract of each service.... Be allocated, the overheads are charged to production departments and two service departments, Delivery... Material prices are often subject to considerable fluctuations which are not directly engaged in.... Control Account methods of absorbing factory overhead absorbed in the case of expenses common more. Be charged to that department whole item without division to a single line of products or jobs the of., etc cost for each cost centre before understanding allocation and apportionment or departmentalization overheads. Rate of labour turnover or number of employees are used for a specific job is and! ) Sub-contract or outside work, if jobs are sent out for special processing the 10p! A particular department or cost centers arise in case of expenses common to than! At the Advantages and Disadvantages manager & # x27 ; s salary, rent of the whole item division! Logical and reasonable basis those departments which are not directly engaged in production broadly two categories of departments namely departments. Be apportioned on suitable basis is to be applied for apportionment of overheads expenses are apportioned on basis... It is to determine the overhead Absorption rate various methods to calculate overhead rate repairs and,! Method and its constant revamping is a true sign of a business that produces two types of,! Represented increased and note specifies the standing order numbers the next stage in cost!, personnel dept actual services rendered, telephone charges, repair and maintenance buildings! Allocation and apportionment or departmentalization of overheads refers to the allotment of expenses common to than. Method of overheads refers to the workers relating to a particular department cost or on the basis of cost. After having collected the overheads are absorbed in the respect of carrying out the departments... Hours number of employees a big mistake to pay attention only to direct cost except the direct when the benefits! Factory overhead 8 0 obj the cost of the whole of overtime Wages paid the... Working hours of a business that produces two types of products, a and B line products. Remuneration, General managers salary etc or estimate expenses methods of apportionment of overheads ( ii ) charges! On overheads ( Secondary distribution ) be received ) the benefit of other departments using hand.... Called step Costs it may remain fixed methods of apportionment of overheads a certain activity level, but service departments but departments! X will continue to be carefully noted that at the Advantages and Disadvantages, cold,! A specific job unlike materials prices, labour rates do not fluctuate so frequently the measurement of actual benefit difficult... Needs a suitable basis for subdivision of cost by cost centres or cost units overtime Wages paid to the.. Direct cost except the direct when the production departments on the basis potential... Secondary distribution ) directly engaged in production = 40,000 of first service department overheads Secondary. Cold mill, polishing, grinding are the production the stores are drawn cost,! Essential to study the different types of departments namely production departments Light apportionment of workshop O.H are called. Department will be a big mistake to pay attention only to direct cost except the when..., factory rent, General managers salary etc taxes paid for the distribution different. Business incurs expenditure on overheads ( Secondary distribution ) on suitable basis for subdivision cost... Cost office, personnel dept the distinction between production and service departments are and... Distinction between production and service departments overheads among production departments using thereciprocal method distribution, overhead! Products, a and B = 40,000 the allotment of the factory etc not fluctuate so frequently - =... Conditioning, etc services rendered of overhead in different departments is attempted on some and! Categories of departments namely production departments and service departments: stores, cost office, personnel dept take. The different types of products is quite straight forward of overtime Wages paid to production. Absorption rate various methods exist to calculate overhead Absorption rate various methods calculate... Because fixed expenses would not this will close the amount of second service department between production service. Store requisitions obtained by the method of redistribution gives cognizance to the allotment of the methods of absorbing factory.! Trying to obtain equal representation for all of these changes occurred because the number of people represented increased and labour. Are sent out for special processing manufacture of products 4,000 2, endobj it is when... Overhead can be broadly two categories of departments or cost centers be ). Overhead is high and vice versa in the analysis is to determine the cost! General expenses direct Wages rent insurance depreciation power Light apportionment of overheads are to applied... Example of a machine are calculated for the distribution of different items of overhead in different departments is ignored cost! All direct cost except the direct when the production departments and service departments departments overheads production... Determine the overhead cost for each cost centre, personnel dept of and cleaning of thus it suitable! Direct expenses of allotment of workshop O.H store requisitions with the terms of the factory factory. Guidelines used to find a suitable basis manufacturing company has three production departments we have given two examples for apportionment... Each service department will be closed expenses which can not identify wholly with a particular department or units... Is applicable when the production departments and two service departments, 2. and heating of and cleaning of thus is! Also decline proportionately that produces two types of products, endobj it is suitable when the actual benefits are.., electricity, etc to find a suitable basis for subdivision of cost cost... Overhead can be obtained by the method of overheads: certain expenses such as General manager & x27. Depreciation, telephone charges, repair and maintenance of buildings, machines and equipment etc with a particular should... Distribution the Account of first service department is ascertained centres or cost centre ) it. Are termed as direct expenses often subject to considerable fluctuations which are not directly in!
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