Overhead Analysis Flashcards
What does allocation and apportionment focus on?
The costs of a business can either be classified as Direct or Indirect. Allocation and apportionment focuses on the indirect costs of the business.
What are Indirect Costs?
Indirect costs are not directly linked to the manufacturing process, but are incurred by other processes which are necessary to enable the production process to be carried out. These expenses are classified as overheads.
What are Direct Costs?
Direct costs are costs that can be attributed to a specific product or service, and they do not need to be allocated to the specific cost object.
What is Overhead Analysis?
Overhead analysis is the process hereby an amount for each overhead is included in the total cost of the product.
What is Cost Centre?
This refers to any part of a business where production takes place and to which costs can be charged eg department, item of equipment, machine or person. Cost centre are used to collect overheads for charging on to products which used the cost centre.
What are some examples of Cost Centre?
- Machine shop
- Assembly Area
- Paint Shop
- Finishing Dept
- Quality Control
- Canteen.
What can these cost centres be classified as?
- Production cost centre
- Process cost centre
- Service cost centre
What is a production cost centre and process cost centre?
A production cost centre and process cost centre is a department where production takes place resulting in a product which may be completely finished and ready to sale or a product which requires to be further processed before it is ready for sale.
What is service cost centre?
A service cost centre is a department which provides a service to the production areas of the factory. Without the existence of this cost centre the production cost centre would find it difficult to manufacture the goods. Examples of service cost centres are maintenance depts, HR depts and canteen depts.
What is Cost Unit?
A cost unit is the product, service or time period which finally absorbs all costs including overheads from cost centres.
What are examples of Cost units?
- Tyre
- Canteen meal
- Tin of beans
- Tonne-mile
What are the 2 main objectives when carrying out overhead analysis?
- To enable cost control
- To ascertain products/job costs
What are the 3 stages these objectives can be carried out?
- Allocation of overheads
- Apportionment of overheads
- Absorption of overheads
Stage 1: What is the allocation of overheads? (MAIN)
Allocation takes place when the overhead cost can be identified directly with a particular department. It is a cost which is unique to that particular department and the department is charged with the actual overhead it has incurred e.g. indirect materials and maintenance.
Stage 2: What is apportionment of overheads? (MAIN)
Apportionment takes place when the overhead cost cannot be identified with a particular department. The overhead relates to the business as a whole instead of individual departments. Each department is charged its share of the total overhead using an equitable basis e.g. rent is apportioned according to the floor area occupied by each department.
What are examples of bases?
- Area
- Value of Fixed Assets
- No of Employees
- Value of Machinery
- Kw hrs
Examples of overheads absorption (recovery) rates?
- rate per direct labour hour
- rate per direct machine hour
- percentage of direct material cost
- percentage of direct labour cost
- percentage of prime cost
- rate per unit produced
Why is a overhead over absorbed or under absorbed?
- If our total overheads charged for the year is higher than the actual overheads for the year then we have over-absorbed by the difference.
- If our total overheads charged for the year is lower than the actual overheads turn out to be for the year then we have under absorbed by the difference.
How will under or over absorbing going to affect profit?
- Any under-absorbed overheads should be added to the total costs before calculating profit.
- Any over-absorbed overheads should be deducted to the total costs before calculating profit.
Factory-wide Overhead Absorption rates….
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