Chapter 6: Overheads Flashcards
Define expenses
Expenses are costs incurred, other than material and labour costs
Give some examples of direct and indirect expenses.
Direct expenses - patent costs and sub-contracted charges
Indirect expenses - rent, gas, electricity
Define production overheads and give some examples.
Production overheads are the indirect costs associated with production.
E.g. heat, light and rent
Define non-production overheads and give some examples.
Non-production overheads are not included in directly making a product.
E.g. administration, distribution, finance and legal
Why are overheads allocated or apportioned and when would we use each?
Overheads can support multiple cost centres, such as electricity. This will support production and service departments, so the overhead cost will need to be divided.
Allocation is used when an overhead relates entirely to one cost centre, and apportionment is when it relates to more than one cost centre.
What is the most suitable basis for the following overheads?
Indirect materials - allocate
Rent - area (sq m)
Electricity - Kw hours consumed
Machine depreciation - machine value
Building maintenance - area (sq m)
Define re-apportionment.
Reapportionment is the re-allocation of the cost of a service centre across production centres, based on how much each production centre benefits from or uses that service.
Define overhead absorption
Overhead absorption is the process of adding the overhead costs to the total cost of each unit produced.
How do you calculate the overhead absorption rate (OAR)?
OAR = total budgeted overhead/total budgeted activity
Define over-absorption and what this means for profits.
Over-absorption is when the budgeted OAR indicates a larger amount of overhead allocated to products than the actual overhead costs incurred.
This means that profits may appear higher than they really are because the reported expenses seem lower than the actual costs.
Define under-absorption and what this means for profits.
Under-absorption is when the budgeted OAR indicates a smaller amount of overhead allocated to products than the actual overhead costs incurred.
This means that profits may appear lower than they really are because the reported expenses seem higher than the actual costs.
What are the four steps to account for production overheads in the production overhead control account?
1. Total indirect costs
Debit production overheads, credit bank
2. Overheads that are absorbed
Debit production or WIP, credit production overheads
3. Under or over-absorption
• Over-absorption - Debit production overheads, credit P&L
• Under-absorption - Debit P&L, credit production overheads
