4. Overhead Costs

Question 1

What types of cost are included in overheads?

Answer 1

Indirect costs - production, selling and distribution and administrative overheads

Question 2

What are the two methods of dealing with allocation of overheads in costing?

Answer 2

Absorption and marginal costing

Question 3

What are the steps in absorption costing?

Answer 3

1. Allocation
2. Apportionment
3. Re-apportionment
4. Absorption

Question 4

What is allocation?

Answer 4

To assign a whole item of cost, or of revenue, to a single cost unit, centre, account or time period

Question 5

What is apportionment?

Answer 5

To spread indirect revenues or costs over two or more cost units, centres, accounts or time periods

Question 6

What is re-apportionment?

Answer 6

The re-spread of costs apportioned to service departments to production departments

Question 7

What sort of cost centres will be re-apportioned most often?

Answer 7

Service cost centres (e.g. canteen, stores)

Question 8

What is the most common basis for re-apportionment?

Answer 8

Headcount

Question 9

What is the method for re-apportionment of multiple service departments that does ignores work that these departments do for each other?

Answer 9

The direct method

Question 10

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?

Answer 10

The reciprocal method - either repeated distribution or simultaneous equations

Question 11

What is absorption?

Answer 11

Once all overhead costs have been assigned to the production departments, they are then charged to the products that are being made

Question 12

What is the equation for OAR (overhead absorption rate)?

Answer 12

Production overhead/activity level

Question 13

When would we use cost per labour hour as a basis for OAR?

Answer 13

When activity is mainly manual

Question 14

When would we use cost per machine hour as a basis for OAR?

Answer 14

When activity is mainly automated

Question 15

When would we use cost per unit as a basis for OAR?

Answer 15

When a number of similar products are being produced

Question 16

When would we use cost per percentage of direct labour cost as a basis for OAR?

Answer 16

When a number of different grades of labour are being used

Question 17

When would we use cost per percentage of material cost as a basis for OAR?

Answer 17

When a number of different materials are being used

Question 18

When would we use cost per percentage of prime cost as a basis for OAR?

Answer 18

When differing amounts of direct costs are being incurred

Question 19

How is the OAR on our cost card calculated?

Answer 19

Budgeted overhead/budgeted activity level

Question 20

How are absorbed overheads calculated during the period?

Answer 20

Budgeted OAR x actual level of activity

Question 21

How do we work out the over/under absorbed overheads at period end?

Answer 21

(Budgeted OAR x actual level of activity) - (actual total overheads)

Question 22

What will be the effect of the period end adjustment on profits if we had under absorbed overheads?

Answer 22

Profit reduced

Question 23

What will be the effect of the period end adjustment on profits if we had over absorbed overheads?

Answer 23

Profit increases

Question 24

What effect does an adverse actual expenditure difference have on overhead absorption?

Answer 24

Overheads would be under-absorbed as OAR too low

Question 25

What effect does an favourable actual volume difference have on overhead absorption?

Answer 25

Overheads would be over-absorbed as OAR too high

Question 26

What is activity based costing?

Answer 26

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

Question 27

What drives the need for activity based costing?

Answer 27

Increasing level of automation and range of activities within a business