Cost Centres and Overhead Absorption

Question 1

What is a cost centre and why are the useful?

Answer 1

Cost Centre are sections of an organisation to which costs can be charged, they’re used to collect costs which can provide info for a manager.

Question 2

What is a profit centre?

Answer 2

Profit centres are sections of a business to which costs can be charged, income can be identified and profit can be calculated.

Question 3

What is an investment centre?

Answer 3

Investment centres are used to collect data about income, costs and the amount invested. In this way profit can be compared to the level of investment.

Question 4

How can indirect costs (overheads) be incorporated into product costs

Answer 4

3 methods:
Units of output
Direct labour hours
Machine hours

Question 5

Units of output method

Answer 5

Budgeted overheads/Units of output

85,000 overheads, 1700 units = 50 per unit

Question 6

Direct labour hours method

Answer 6

Budgeted overheads/Labour hours

85,000 overheads, 4000 hours = £21.25 per direct labour hours

More suitable when there is a variety of products, and the process is labour intensive

Question 7

Machine hours method

Answer 7

Budgeted Overheads/Machine hours

85,000 overheads, 5000 machine hours = £17 per machine hours

More suitable when the process is machine intensive.