Kaplan 4. Dealing with Fixed Overheads

Question 1

Overheads are costs which are not …

They are also known as …

Answer 1

Direct costs of production.

Indirect costs (may be production or non-production)

Question 2

Describe the 2 methods/approaches for dealing with Overheads

Answer 2

1. Apportionment and allocation of all Production Overheads may be used to atrrive at the ‘full’ cost per unit. (ABSORPTION COSTING)
2. You can use only Direct costs to arrive at the ‘marginal’ cost per unit and leave Indirect costs as a general overhead not related to units of output (MARGINAL COSTING)

Question 3

Describe the 2 steps used to divide production overheads between production units

Answer 3

1. Identify the indirect cost with a cost centre.
   (ALLOCATE, using APPORTION if its more than one cost centre).
   Use an ‘Equitable’ basis.
   May be a primary and secondary cost apportionment.
2. Identify the indirect costs of the cost centre from Step 1 with the Cost Units produced by that centre (ABSORPTION)

Question 4

Once costs are collected and allocated/apportioned to Production Cost centres… what are some common methods of absorption.

And what to remember

Answer 4

1. Rate per unit.
2. Rate per direct labour hour
3. Percentage of material cost
4. Percentage of wage cost
5. Percentage of total direct cost (prime cost)

Remember the result will ony ever be an approximate estimate of what that product actually costs.

In practice many biz use Direct labour or machine hour since it may be possible to associate some OHs either with labour time or machine time.

Question 5

It may be possible to analyse the total OH apportioned to each production department into fixed and variable elements.. in which case?

Answer 5

A variable OH rate per unit and a fixed OH rate per unit can be calculated.

Question 6

When asked to select appropriate accounting treatment it means

Answer 6

Is it.

Direct cost.

Charge to Production (usualy in a machine or lab hours OHR)

Allocate to (eg. admin OHs, Marketing OHs)

ABC charge to production cost centre

Question 7

Historically a DLR for absorption of all Fixed OHs was used..

Answer 7

This is because of labour-intensive production so quite reasonable to assume the more labour time the more production OHs were used…

Question 8

Dual impact of modern mechanised production methods…

Answer 8

A higher proportion of costs are machine-related.

The amount of labour time spent on a unit is far less representative of the units ‘use’ of production costs

Question 9

Mechanics of ABC

Answer 9

Similar o traditional costing system.

1. Identify cost drivers
2. Establish a cost centre for each cost driver
3. Costs are allocated to products by dividing the costs by the number of ‘transactions’