Overhead Cost

Question 1

What are overheads made up of??

Answer 1

Indirect material
Indirect labour
Indirect expenses

Question 2

Absorption costing principles

Answer 2

Direct costs are assigned to cost units along with production overheads using an overhead absorption rate

Question 3

What overhead is included in inventory valuation?

Answer 3

Only production overhead is included in the valuation of product

Question 4

What overhead is included in product costing & profitability purposes?

Answer 4

All overheads are included and need to be considered

Question 5

Production cost centres

Answer 5

Cost centres that actually produce goods

Question 6

Service cost centres

Answer 6

Provide necessary services to production cost centres

Etc : Stores, maintenance, canteen

Question 7

Allocation

Answer 7

Assigning any specific production overheads to individual cost centres that have incurred them

Question 8

Apportionment

Answer 8

Joint overheads are shared/distributed among the cost centres that incur them on an appropriate basis

Question 9

Reapportionment

Answer 9

Overheads of the service cost centres apportioned to production cost centres on an appropriate basis

Question 10

Overhead absorption rate

Answer 10

Attributing overhead to a product or service, based for example on direct labour hours or machine hours

Question 11

Predetermined absorption rate

Answer 11

Set annually, in the budget

= Budgeted overhead/ Budgeted level of activity

Question 12

Why do we need to predetermine absorption rate

Answer 12

○ Many actual overheads are not known until the end of the year - - inconvenient to wait until the year end

○ A way to constantly evaluate the profitability of manufacturing

Question 13

Can we calculate overhead more regularly such as each month ?

Answer 13

It is possible, but :

► Actual overheads from month to month would fluctuate randomly –> Overhead change then depend on random changes/events –> Misleading for costing purposes –> Administratively & clerically inconvenient to deal with

► Production output may vary each month –> Administration & control problems

Question 14

Examples of bases of absorption

Answer 14

• Rate/machine hour
• Rate/labour hour
• Rate/unit –> all units identical
• Percentage of direct material cost
• Percentage of direct labour cost
• Percentage of prime cost

Question 15

Reasons for under/over absorbed overhead

Answer 15

○ Actual overhead cost≠ budgeted overhead cost
○ Actual activity level ≠ budgeted activity level
○ Both actual overhead cost & activity level ≠ budgeted

Question 16

Double entry for under-absorption

Answer 16

Dr SOPL
Cr Production overhead control

Question 17

Double entry for over-absorption

Answer 17

Dr Production overhead control
Cr SOPL

Question 18

Inventory valuation using AC

Answer 18

○ Closing inventory = Full production cost
○ Cost of sales = Include previous fixed overhead & exclude some fixed overhead in current period
-
** the excluded one will be c/f in closing inventory & charged to next accounting period

Question 19

Inventory valuation using MC

Answer 19

○ Closing inventory = Marginal production cost
○ Fixed cost charged in full against profit of period incurred

Question 20

Profit statement under AC

Answer 20

1. Sales - Cost of sales (production cost) = Gross profit

2.
Gross profit - Non production overheads = Net profit

Question 21

Profit statement under MC

Answer 21

1.
Sales - All variable cost (sold) = Contribution

2.
Contribution - Fixed costs = Net profit