Apportioning costs Flashcards

1
Q

What must I know about apportioning costs? P95

A

Recovery rate: - ABI
* calculate - appropriate cost drivers
* calculate -suitable bases of absorption
* Interpret significance - under/over recoveries of overhead costs

Costs - UPAS
* calculate the over/under absorption of costs
* make costs journals postings
* concept of activity base costing
* attribute overhead cosTs to production and** s**ervice centres- direct and step down

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2
Q

Whatthe relationship between cost units and overhead costs? P96

A
  • does not relate - specific unit
  • shared amongst all cost units they relate to
  • costs centre collection beforehand - function
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3
Q

What are the costs centres classified by function? P96

A

F SPA
* Finance - rising finance
* selling and distribution - attracting customers & delivering goods to them
* Production - factory overheads / operating overheads
* Administration - rent ,administrative, ooffice

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4
Q

What is absorption costing? P97

A
  • Full costs- onne unit of output - proportion of the overheads
  • proportion of the fixed costs - absorbed into products costs
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5
Q

What are the three stages involved in absorption costs ? P97

A

AAA
* Allocation
* Apportionment
* Absorption

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6
Q

How are the costs collected - absorption costing ? P97

A
  • Cost centres - organisation’s operations
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7
Q

What is the allocation process of absorption costing? P97

A
  • charging cos centes– costs incurred entirely by cost centre
  • e.g. paint spraying machine to paint shop
  • supervisor salary to cost centre they supervise
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8
Q

What is the apportionment process of absorption costing ?v P97

A
  • sharing out a costs
  • two or more different cost centres
  • OR department
  • suitable basis
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9
Q

What is the apportionment calculation? P98

A

total costs/ total quantity * quantity relating to cost centre

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10
Q

What could be a apportionment basis for gas? - p99

A
  • Area of cost centre
  • volume of cost centre
  • number of radiators
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11
Q

What could be a apportionment basis for electricity ? - P99

A
  • Area of cost centre
  • volume of cost centre
  • wattage of appliances ?
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12
Q

What could be a apportionment basis for inventories insurance? - P99

A
  • value of inventories
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13
Q

What could be a apportionment basis for building insurance? - P99

A
  • value of building used
  • area of building used
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14
Q

What could be a apportionment basis for plant insurance?

A
  • value of plant
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15
Q

What could be a apportionment basis for employer’s liability insurance ?

A
  • payroll costs
  • number of employees
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16
Q

What could be a apportionment basis for depreciation?

A

value of equipment

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17
Q

What could be a apportionment basis for telephones ?

A

number of extensions

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18
Q

What could be a apportionment basis for internet broadband ?

A

no of computer terminals

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19
Q

What could be a apportionment basis for maintenance?

A
  • value of equipment
  • area
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20
Q

What could be a apportionment basis for supervisor pay?

A

payroll costs

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21
Q

What could be a apportionment basis for rent?

A

area

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22
Q

What could be a apportionment basis for rates?

A

area

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23
Q

What could be a apportionment basis for canteen

A

number for employees

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24
Q

What is primary allocation & apportionment? P104

A
  • OH costs - collected into each cost centre
  • double check - costs centre totalls - total of the total column
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25
Q

Why does the method of allocation and apportionment need to be checked regularly ? P104

A
  • still valid
  • e.g. reorganisation of factory/ office departments = change in floor area
  • supervisor salary costs - two department share
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26
Q

What are service departments? P104

A
  • Not see products as made e.g. canteen/ production office = service department
  • service department oh - approtioned - cost centres products pass through
  • all OH costs - captured in production costs centres
  • All overhead costs - unit costs of a product
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27
Q

What two stage approach is needed with service departments? P104

A
  • Primary apportionment - all costs centres
  • Secondary apportionment - production cost centres
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28
Q

What are the two methods used to charge service costs to production departments? P105

A
  • Direct apportionment
  • Step down method
29
Q

What is direct apportionment? P105

A
  • Provide services to production departments
  • not any other service departmnets
30
Q

What is the step down method? P105

A
  • Not only production deparment
  • other department
  • reciprocal servicing
31
Q

What must you remember about the step down method? P107

A
  • Same as direct apportionment
  • However - service to service apportioned 1st
  • Share of costs incorporated - other service department
32
Q

Once overhead costs have been allocated and apportioned, what is the next step? P110

A
  • Mechanism - costs units absorb overhead costs
  • number of ways - all with OAR
33
Q

What is OAR? - P110

A
  • budgeted value recovered
  • unit passing through production department
34
Q

What must then take place once the OAR has been calcuilated ? P112

A

applied to actual activity during period

35
Q

What is the primary way of calculating OAR? P111

A

Total budget cost centre overheads / budgeted activity

36
Q

How is the activity within the OAR calculation usually measured? P111

A
  • Direct labour hours
  • machine hours
37
Q

How is direct labour overhead absorption rate calculated? P111

A

cost centre’s overhead / no of direct labour hours worked in cost centre

38
Q

How would you calculate the actual overheads absrobed dduring production? P112

A

Actual hours * absorption rate

39
Q

How is the machine hour overhead absorption rate approached? P112

A
  • same as direct labour
  • budgeted number of machine hours
  • not budgeted number of direct labour hours
40
Q

What is an alternative to machine hour and direct labour? P113

A

percentage of the direct labour cost

41
Q

When is the OAR set? P114

A
  • Beginning of the accounting period
  • budgeted figures
  • reasonable approximation - costs incurred & activity levels achieved
42
Q

How is the OAR via direct labour % calculated ? P113

A

Overhead costs / total direct labour costs * product direct labour costs

43
Q

When would machine hours be most appropriate? P114

A
  • Highly automated
  • production process constrained
44
Q

How would a suitable absorption base be selected where both direct labour and machine hours are available ? P114

A
  • greater number of hours
    OR
  • the most impact on production
45
Q

What should ann organisation do once a suitable absorption rate has been selected ? P114

A
  • Review regularly
  • e.g. increase automation = change to machine hours
46
Q

What follows the application of OAR to actual activity? P115

A
  • Entry into bookeeping system
  • problem - different figures to actual overheads incurred
47
Q

How are differences between overheads absorbed and overheads incurred dealt with? P115

A

Adjustment for under / over absorbed overheads

48
Q

What is under absorption of overheads? P115

A

actual overheads > overheads absorbed

49
Q

What is an over abosrption of overheads ? P115

A

actual overheads < overheads absorbed

50
Q

What is the calculation for under absorbed overheads? P115

A

Overheads absored ( actual activity * OAR) - overheads incurred = MINUS DIFFERENCE

51
Q

What is the calculation for over absorbed overheads ? P115

A

Overheads absored ( actual activity * OAR) - overheads incurred = POSITIVE DIFFERENCE

52
Q

What does uunder absorption mean for the statement of profit / loss ? P116

A
  • not charged enough overheads
  • debited to P/L = decreases profit
53
Q

What does over absorption mean for the statement of profit/ loss ? P116

A
  • Too many charged overheads
  • credited to P/L = Increases profit
54
Q

When can overabsorption effect? P116

A
  • OAR - budgeted figures
  • overestiamated oar = uncompetative selling price
55
Q

Why was activity based costings introduced? P117

A
  • Absorping fixed costs with one basis = too simplistic
  • production methods & batch sizes impact development of production costs
  • new intergrated production methods = inappropriate machine hours/ direct labour hours
56
Q

What does activity based costings do ? P117

A
  • Breaks down indirect costs into costs pools - nature
  • e.g. production issues costs different to quality control procedures
57
Q

What does each cost pool contain ? P117

A
  • Cost drvier - drives costs & causes them to change
58
Q

What are the 5 activity - based costing method steps ? P117

A
  1. main indirect activityies - form cost pools
  2. gather - relevnt costs into each cost pool
  3. identify cost driver - each cost pool
  4. calculate cost driver rate for eachh cost pool
  5. charge indirect costs - use of cost driver rate
59
Q

How do you calculate cost driver rate ? P117

A

cost pool / cost driver

60
Q

Which departments would activity- based be appropriate for? P119

A
  • quality control department
  • purchasing department
  • stores department
61
Q

What do the bookkeepng entries for overheads include? P120

A
  • entries - transfer cost of overheads to work in progress
  • entries for over/ under absorption of overheads
62
Q

How is the production overhead account used and what entries are made? P120

A
  • Control account
  • overheads transferrsed to work in progress
  • under/ over absorption of overheads - transferred to profit / loss
63
Q

What is the double entry for production overheads charged to work in progress ? P120

A

Debit - work in progress
Credit - profuction overheads account

64
Q

What is the double entry for over-absorbed overheads transferred to the statement of profit/loss P120

A

Debit - production overheads accoiunt
credit - statement P/L

65
Q

What is the double entry for under absorbed overheads transffered to the statement of profit/ loss ? P120

A

Debit - statment P/L
Credit - production overheads account

66
Q

What is an alternative way to bookkeep for overheads? P121

A
  • Single under/ over absorption account - different departmental differences into
  • balance - single transaction - profit/ loss - end of accoiuntiing period
67
Q

What happens once the cost driver has been determined? Page 117

A

Rate per cost driver calculated
Indirect costs > each product = use of the cost driver
Products generating high levels of activity = higher level of those direct costs

68
Q

What happens once the cost driver has been determined? P117

A

Rate per costs calculated = costs pools / cost driver
Indirect costs > different products = use of the cost driver
Products charged with highest level of activity = higher level of those direct costs