Accounting for Overheads

Question 1

What is the use of Cost Information?

Answer 1

• Cost Control: Compares actual and planned costs
• Aid Planning: Use past events to predict the future events
• Inventory Valuation: Finished goods or W.I.Ps
• Set-Selling Prices: Set Prices on cost-plus basis
• Ascertain Profitability: Inform decisions during scarcity

Question 2

What are some definitions of cost breakdowns

Answer 2

• Cost Units: Unit of product produced (Output-Dependant)
• Cost Centres: Breaking overall firm down into sections
• Indirect Costs: Cannot be charged directly to the cost units
• Direct Costs: Can be charged directly to the cost units
• Production department: Responsible for producing and generating income
• Services department: Support services to the production department (HR); make no income but are used in production

Question 3

How does an organisation price goods?

Answer 3

• 1. Allocate DIRECT COSTS to COST UNITS
• 2. Apporting INDIRECT COSTS to COST CENTRES
• 3. Reapportion of SERVICE DEPARTMENT COSTS to PRODUCTION DEPARTMENT
• 4. Absorption of PRODUCTION DEPARTMENT COSTS into COST UNITS