Lecture 3 Flashcards
What are overheads
In accounting, overhead refers to indirect costs that cannot be directly attributed to a specific product, service, or department
What is overhead allocation
Overhead allocation is the process of assigning indirect costs (overhead) to a specific cost object
Allocated overhead =
AllocatedOverhead=TotalOverheadCostXTotalBase/BaseforSpecificCostObject
What does Overhead apportionment involve
Overhead apportionment involves dividing the total overhead costs among different cost centres or departments based on a fair and reasonable basis
When is overhead apportionment done
Overhead apportionment is done when the overhead costs cannot be directly traced to specific departments
When does apportionment generally occur
Apportionment generally occurs when there are shared costs that need to be divided among various departments
ApportionedOverhead=
ApportionedOverhead=TotalOverheadCost×
Department’sRelevantShare/TotalShare
What is overhead reapportionment
Overhead reapportionment is the process of redistributing the overhead costs from one department to others
When is overhead reapportionment typically done
Overhead reapportionment is typically done when the overhead costs have initially been apportioned to service or support departments
What methods does overhead reapportionment typically follow
Overhead reapportionment usually follows a step-down or reciprocal method
What is the step down method
The step down method is when one service department’s costs are allocated to other departments in a set order
How does the reciprocal method work
The reciprocal method works as service departments’ costs are allocated to each other based on the level of service provided
What is absorption costing
Absorption costing is a method where all costs are absorbed into the cost of a product
Where are fixed manufacturing overheads allocated with absorption costing
With absorption costing fixed manufacturing overheads are allocated to each unit produced, along with variable costs
What are the key features of absorption costing
Key features of absorption costing are:
- All costs are included
- Required by GAAP
- Fixed costs are treated as product costs
Formula for absorption costing
Formula for Absorption Costing:
UnitCost = DirectMaterials + DirectLabour + VariableManufacturingOverhead+ Allocate FixedManufacturingOverhead
What is marginal costing
Marginal costing is a method where only variable manufacturing costs are assigned to a product
What are fixed manufacturing costs treated as with marginal costing
With marginal costing fixed manufacturing costs are treated as period costs and are not allocated to the product cost
What are the key features of marginal costing
Key features of manufacturing costing are:
- Only variable costs included
- Fixed costs as period costs
- Useful for decision making
Why is marginal costing often used for internal decision making
Marginal costing is often used for internal decision-making because it clearly shows how variable costs change with production levels
Formula for marginal costing
Marginal cost = Direct materials + Direct labour + Variable manufacturing overhead
Does absorption or marginal costing have a higher unit cost
Absorption costing has a higher unit cost as fixed costs are included
