Apportioning costs Flashcards
What must I know about apportioning costs? P95
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
Whatthe relationship between cost units and overhead costs? P96
- does not relate - specific unit
- shared amongst all cost units they relate to
- costs centre collection beforehand - function
What are the costs centres classified by function? P96
F SPA
* Finance - rising finance
* selling and distribution - attracting customers & delivering goods to them
* Production - factory overheads / operating overheads
* Administration - rent ,administrative, ooffice
What is absorption costing? P97
- Full costs- onne unit of output - proportion of the overheads
- proportion of the fixed costs - absorbed into products costs
What are the three stages involved in absorption costs ? P97
AAA
* Allocation
* Apportionment
* Absorption
How are the costs collected - absorption costing ? P97
- Cost centres - organisation’s operations
What is the allocation process of absorption costing? P97
- charging cos centes– costs incurred entirely by cost centre
- e.g. paint spraying machine to paint shop
- supervisor salary to cost centre they supervise
What is the apportionment process of absorption costing ?v P97
- sharing out a costs
- two or more different cost centres
- OR department
- suitable basis
What is the apportionment calculation? P98
total costs/ total quantity * quantity relating to cost centre
What could be a apportionment basis for gas? - p99
- Area of cost centre
- volume of cost centre
- number of radiators
What could be a apportionment basis for electricity ? - P99
- Area of cost centre
- volume of cost centre
- wattage of appliances ?
What could be a apportionment basis for inventories insurance? - P99
- value of inventories
What could be a apportionment basis for building insurance? - P99
- value of building used
- area of building used
What could be a apportionment basis for plant insurance?
- value of plant
What could be a apportionment basis for employer’s liability insurance ?
- payroll costs
- number of employees
What could be a apportionment basis for depreciation?
value of equipment
What could be a apportionment basis for telephones ?
number of extensions
What could be a apportionment basis for internet broadband ?
no of computer terminals
What could be a apportionment basis for maintenance?
- value of equipment
- area
What could be a apportionment basis for supervisor pay?
payroll costs
What could be a apportionment basis for rent?
area
What could be a apportionment basis for rates?
area
What could be a apportionment basis for canteen
number for employees
What is primary allocation & apportionment? P104
- OH costs - collected into each cost centre
- double check - costs centre totalls - total of the total column
Why does the method of allocation and apportionment need to be checked regularly ? P104
- still valid
- e.g. reorganisation of factory/ office departments = change in floor area
- supervisor salary costs - two department share
What are service departments? P104
- 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
What two stage approach is needed with service departments? P104
- Primary apportionment - all costs centres
- Secondary apportionment - production cost centres
What are the two methods used to charge service costs to production departments? P105
- Direct apportionment
- Step down method
What is direct apportionment? P105
- Provide services to production departments
- not any other service departmnets
What is the step down method? P105
- Not only production deparment
- other department
- reciprocal servicing
What must you remember about the step down method? P107
- Same as direct apportionment
- However - service to service apportioned 1st
- Share of costs incorporated - other service department
Once overhead costs have been allocated and apportioned, what is the next step? P110
- Mechanism - costs units absorb overhead costs
- number of ways - all with OAR
What is OAR? - P110
- budgeted value recovered
- unit passing through production department
What must then take place once the OAR has been calcuilated ? P112
applied to actual activity during period
What is the primary way of calculating OAR? P111
Total budget cost centre overheads / budgeted activity
How is the activity within the OAR calculation usually measured? P111
- Direct labour hours
- machine hours
How is direct labour overhead absorption rate calculated? P111
cost centre’s overhead / no of direct labour hours worked in cost centre
How would you calculate the actual overheads absrobed dduring production? P112
Actual hours * absorption rate
How is the machine hour overhead absorption rate approached? P112
- same as direct labour
- budgeted number of machine hours
- not budgeted number of direct labour hours
What is an alternative to machine hour and direct labour? P113
percentage of the direct labour cost
When is the OAR set? P114
- Beginning of the accounting period
- budgeted figures
- reasonable approximation - costs incurred & activity levels achieved
How is the OAR via direct labour % calculated ? P113
Overhead costs / total direct labour costs * product direct labour costs
When would machine hours be most appropriate? P114
- Highly automated
- production process constrained
How would a suitable absorption base be selected where both direct labour and machine hours are available ? P114
- greater number of hours
OR - the most impact on production
What should ann organisation do once a suitable absorption rate has been selected ? P114
- Review regularly
- e.g. increase automation = change to machine hours
What follows the application of OAR to actual activity? P115
- Entry into bookeeping system
- problem - different figures to actual overheads incurred
How are differences between overheads absorbed and overheads incurred dealt with? P115
Adjustment for under / over absorbed overheads
What is under absorption of overheads? P115
actual overheads > overheads absorbed
What is an over abosrption of overheads ? P115
actual overheads < overheads absorbed
What is the calculation for under absorbed overheads? P115
Overheads absored ( actual activity * OAR) - overheads incurred = MINUS DIFFERENCE
What is the calculation for over absorbed overheads ? P115
Overheads absored ( actual activity * OAR) - overheads incurred = POSITIVE DIFFERENCE
What does uunder absorption mean for the statement of profit / loss ? P116
- not charged enough overheads
- debited to P/L = decreases profit
What does over absorption mean for the statement of profit/ loss ? P116
- Too many charged overheads
- credited to P/L = Increases profit
When can overabsorption effect? P116
- OAR - budgeted figures
- overestiamated oar = uncompetative selling price
Why was activity based costings introduced? P117
- 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
What does activity based costings do ? P117
- Breaks down indirect costs into costs pools - nature
- e.g. production issues costs different to quality control procedures
What does each cost pool contain ? P117
- Cost drvier - drives costs & causes them to change
What are the 5 activity - based costing method steps ? P117
- main indirect activityies - form cost pools
- gather - relevnt costs into each cost pool
- identify cost driver - each cost pool
- calculate cost driver rate for eachh cost pool
- charge indirect costs - use of cost driver rate
How do you calculate cost driver rate ? P117
cost pool / cost driver
Which departments would activity- based be appropriate for? P119
- quality control department
- purchasing department
- stores department
What do the bookkeepng entries for overheads include? P120
- entries - transfer cost of overheads to work in progress
- entries for over/ under absorption of overheads
How is the production overhead account used and what entries are made? P120
- Control account
- overheads transferrsed to work in progress
- under/ over absorption of overheads - transferred to profit / loss
What is the double entry for production overheads charged to work in progress ? P120
Debit - work in progress
Credit - profuction overheads account
What is the double entry for over-absorbed overheads transferred to the statement of profit/loss P120
Debit - production overheads accoiunt
credit - statement P/L
What is the double entry for under absorbed overheads transffered to the statement of profit/ loss ? P120
Debit - statment P/L
Credit - production overheads account
What is an alternative way to bookkeep for overheads? P121
- Single under/ over absorption account - different departmental differences into
- balance - single transaction - profit/ loss - end of accoiuntiing period
What happens once the cost driver has been determined? Page 117
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
What happens once the cost driver has been determined? P117
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
