MAPS - Chapter 4 - Overheads and expenses

Question 1

What must happen with overheads and direct costs?

Answer 1

These must be covered by revenue from output

Question 2

How can overheads be classified by function?

Answer 2

• Factory or production
• Selling and distribution
• Administration
• Finance

Question 3

What are responsibility centres?

Answer 3

The collective name of cost, profit, investment and revenue centres

Question 4

When might costs not need to be apportioned?

Answer 4

When an overheads belongs entirely in one centre

Question 5

What are examples of costs not needing to be apportioned?

Answer 5

• Supervisor wages who only works in one centre
• Rent of building in which there is only one centre
• Cost of indirect materials that have been issued to one particular centre

Question 6

What is apportionment of overheads?

Answer 6

The sharing of overheads over a number of responsibility centres to which they relate. Each centre is charged with a proportion of the overhead

Question 7

What are examples of the basis of apportionment?

Answer 7

Floor space, carrying amount of machinery, number of employees in each centre or labour hours worked in each centre

Question 8

How are costs allocated for service departments?

Answer 8

As they do not have cost units these costs must be reapportioned to the production departments to which overheads can be charged

Question 9

How could the overheads of a maintenance department be re-apportioned?

Answer 9

On the basis of value of machinery or equipment or on the basis of time spent in each production department

Question 10

How could the overheads of a stores and stationery department be re-apportioned?

Answer 10

On the basis of value of goods issued to production departments

Question 11

How could the overheads of a subsidised canteen be re-apportioned?

Answer 11

On the basis of the number of employees

Question 12

What two methods can be used to re-apportion service coasts to production cost centres?

Answer 12

• Either direct apportionment with service departments provide services to production departments only
• or the step-down method where service departments provide services to production departments and other service departments

Question 13

What do you do once overheads have been allocated or apportioned?

Answer 13

Ensure that the overheads are charged to cost units

Question 14

How do you calculate overhead absorption rates?

Answer 14

Total budgeted cost centre overheads / Total planned work in the cost centre

Question 15

How do you apply the overhead absorption rate?

Answer 15

Multiply the rate by the actual work done to see how much should have been absorbed

Question 16

What happens if the predicted amount absorbed is different to the actual amount spent?

Answer 16

If the amount absorbed is greater than you have over-absorbed your overheads and if it’s less then you have under-absorbed

Question 17

Why is it important to get the Overhead Absorption Rate (OAR) correct?

Answer 17

If you over-absorb you might have set your prices too high and missed out on sales. If you under-absorb the selling price might be too low, output might’ve been less than expected or actual overhead is more than expected.

Question 18

How do you transfer production overheads (amount absorbed) to production?

Answer 18

Debit production
Credit production overheads

Question 19

How do you credit over-absorbed overheads to the statement of profit of loss?

Answer 19

Debit production overheads
Credit statement of profit or loss
Here the amount over-absorbed reduces total cost and increases profit

Question 20

How do you charge under-absorbed overheads to the statement of profit or loss?

Answer 20

Debit statement of profit or loss
Credit production overheads
Here the amount under-absorbed adds to the total cost of production so reduces profit