5. simple absorption

Question 1

what are overheads?

Answer 1

• all costs mostly indirect costs
• not direct materials, direct labour or direct expenses

Question 2

overheads:
1.
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2.
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-

Answer 2

1. are usually divided by function
   - production overheads
   - selling and distribution overheads
   - research and development overheads
   - administration overheads
2. can be
   - fixed
   - variable
   - semi variable

Question 3

overheads allocation process steps (4)

Answer 3

1. collection
2. classification
3. allocation and apportionment
4. absorption

Question 4

step 3: allocation and apportionment
1. allocation:
2. apportionment:

Answer 4

1. where whole items of cost can be charged to a cost centre
   - eg 3 departments each has its own supervisor
2. where overheads must be shared between more than one cost centre
   - eg 1 supervisor is responsible for 3 departments

Question 5

what is a cost driver

Answer 5

any factor that creates or influences the cost of an activity

Question 6

• types of cost - the method of apportionment

Answer 6

1- factory rent, rates etc. - floor area
2- depreciation of machinery - machinery value
3- canteen costs - number of employees/meals
4- machinery maintenance and repair - number of call-outs/orders
5- production supervisors’ salaries - number of employees

Question 7

what is a cost centre? (2)

Answer 7

• used to describe a location to which overhead costs are initially assigned to
• tend to be departments

Question 8

overhead analysis step by step (6)

Answer 8

1) List overheads as rows
2) Show cost centres (production and service departments or cost centres)
3) Allocate overheads where amounts and cost centres are known
4) Decide basis of apportionment and apportion remaining overheads
5) Calculate total overheads for all cost centres
6) Re-allocate and re-apportion service cost centres to production cost centres

Question 9

absorption rates equation

Answer 9

(total cost centre overhead) / (overhead base)