Overhead Costs

Question 1

What are indirect costs?

Answer 1

Overheads (include production and non-production)

Question 2

What is absorption costing?

Answer 2

includes all production overheads (both fixed and variable) in addition to the prime cost within a products cost card

Question 3

What is marginal costing?

Answer 3

includes variable production overheads in addition to prime cost

Question 4

Create an absorption cost card?

Answer 4

Direct materials
Direct labour
Direct expenses
PRIME COST
Production overheads 
FULL PRODUCTION COST (absorption cost)

Question 5

What are the steps for absorption costing?

Answer 5

1. Direct costs can be allocated immediately to the correct centre
2. The overheads can then be apportioned across the departments based on a certain relevant basis
3. the total in overheads should be the same
4. Re-apportionment: spread cost of service departments to production departments (usually with headcount as basis for example)
5. Absorption- finding a way of charging the assigned overhead costs to the products being made

Question 6

What is the direct method?

Answer 6

The re-apportionment of service centres costs to production (ignore number of employees in the service deps and just make a percentage based on ones in the production centres)

Question 7

What are the two methods for taking into account the work the service departments do for each other?

Answer 7

repeated distribution method

Simultaneous equations

Question 8

How to do repeated distribution method?

Answer 8

1. Find the percentage value for how it should be distributed across production departments
2. divide the value in each of the service departments by this
3. Then add up all costs/numbers in column for the production departments

Question 9

What is the simultaneous equation method?

Answer 9

If stores and maintenance are the service centres then=
S=total production overheads of the stores
M=total production overhead of the maintenance
S=17,600+0.1M (as 10% will go to Maint)
M=10,000+0.2S (as 20% will go to stores)

Question 10

How do you calculate the OAR?

Answer 10

OAR=production overhead divided by activity level

Question 11

What is a pre-determined OAR?

Answer 11

Used when we want to calculate the budgeted amount

Question 12

How to calculate Pre-determined OAR?

Answer 12

Pre-determined OAR= budgeted overhead divided by budgeted activity level

Question 13

To calculate the absorbed overhead?

Answer 13

Absorbed overhead= Actual level of activity x pre-determined OAR

Question 14

What is a period end adjustment?

Answer 14

difference in the actual overhead for the year and the amount absorbed into the accounts

Question 15

How do you calculate under/over absorption?

Answer 15

1. Work out pre-determined OAR (budgeted overhead divided by activity level)
2. absorb overheads (OAR x Actual activity level)
3. Figure from the the difference between this and the actual overheads

Question 16

What is over and under absorption?

Answer 16

Absorbed overhead greater than actual overhead- over absorbed
Absorbed overhead less than actual overhead- under absorbed

Question 17

What is activity based costing?

Answer 17

1. split overheads into groups/categories to find what drives the cost ,)cost driver)- groups are known as cost pools
2. calculate an OAR for each cost pool based on the driver for that pool
3. absorb the overheads from each pool into the production of units using the OAR calculated