over/(under) allocation or recovery of the fixed overheads

Question 1

The need to adjust for an over/(under) recovery of fixed overheads arises where a budgeted overhead
allocation rate is used to allocate the fixed manufacturing overheads to production
or services based on an actual volume of activity

Answer 1

In addition, an over/(under) allocation will only arise if there is a difference between budgeted
and actual volumes / or cos

Question 2

Since Ta-ta SA does not use a budgeted overhead allocation rate (as they do not absorb fixed
manufacturing overheads but recognises the actual fixed overheads as they are incurred),
an over/(under) allocation of fixed overheads will not occur.

Answer 2

ALTERNATIVE

As Ta-ta SA are not absorbing fixed costs they must be using a variable costing system

With a variable costing system, fixed costs are treated as a period cost and therefore no
over/(under) allocation of fixed costs can arise

Question 3

As Ta-ta SA does not allocate itsfixed overheads based on the services it delivers, there is no
shortcoming in the accounting system.

Answer 3

However, from a cost control and pricing decision perspective, benefit can be gained by
allocating overheads to products and services

Question 4

From a cost control perspective, the allocation of fixed overheads enables any under or over- recoveries
to be analysed in detail and separated between that part of the under/over recovery that was
controllable (therefore not part of the service cost) and that part which was
unavoidable (therefore included in the cost of the service).

Answer 4

From a pricing decision perspective, the allocation of fixed overheads to services helps
ensure that all committed costs are recovered in the long-term.