4. Overhead Costs Flashcards
What types of cost are included in overheads?
Indirect costs - production, selling and distribution and administrative overheads
What are the two methods of dealing with allocation of overheads in costing?
Absorption and marginal costing
What are the steps in absorption costing?
- Allocation
- Apportionment
- Re-apportionment
- Absorption
What is allocation?
To assign a whole item of cost, or of revenue, to a single cost unit, centre, account or time period
What is apportionment?
To spread indirect revenues or costs over two or more cost units, centres, accounts or time periods
What is re-apportionment?
The re-spread of costs apportioned to service departments to production departments
What sort of cost centres will be re-apportioned most often?
Service cost centres (e.g. canteen, stores)
What is the most common basis for re-apportionment?
Headcount
What is the method for re-apportionment of multiple service departments that does ignores work that these departments do for each other?
The direct method
What is the method for re-apportionment of multiple service departments that does takes into account the work that these departments do for each other?
The reciprocal method - either repeated distribution or simultaneous equations
What is absorption?
Once all overhead costs have been assigned to the production departments, they are then charged to the products that are being made
What is the equation for OAR (overhead absorption rate)?
Production overhead/activity level
When would we use cost per labour hour as a basis for OAR?
When activity is mainly manual
When would we use cost per machine hour as a basis for OAR?
When activity is mainly automated
When would we use cost per unit as a basis for OAR?
When a number of similar products are being produced
When would we use cost per percentage of direct labour cost as a basis for OAR?
When a number of different grades of labour are being used
When would we use cost per percentage of material cost as a basis for OAR?
When a number of different materials are being used
When would we use cost per percentage of prime cost as a basis for OAR?
When differing amounts of direct costs are being incurred
How is the OAR on our cost card calculated?
Budgeted overhead/budgeted activity level
How are absorbed overheads calculated during the period?
Budgeted OAR x actual level of activity
How do we work out the over/under absorbed overheads at period end?
(Budgeted OAR x actual level of activity) - (actual total overheads)
What will be the effect of the period end adjustment on profits if we had under absorbed overheads?
Profit reduced
What will be the effect of the period end adjustment on profits if we had over absorbed overheads?
Profit increases
What effect does an adverse actual expenditure difference have on overhead absorption?
Overheads would be under-absorbed as OAR too low
What effect does an favourable actual volume difference have on overhead absorption?
Overheads would be over-absorbed as OAR too high
What is activity based costing?
Overheads split into groups or categories based on what drives the cost - cost pools, an OAR is calculated for each pool and costs are absorbed on that basis
What drives the need for activity based costing?
Increasing level of automation and range of activities within a business
