Overheads

Question 1

Types of manufacturing expenses?

Answer 1

1.Direct Expenses
2.Indirect Expenses

Question 2

what are direct expenses?

Answer 2

expenses that are fully traceable to the product, service or department that is being costed or in other words, the expenses which can be attributable directly to specific cost object.
Examples:
Raw Materials that are specifically used for the product in consideration.
Labour which is directly involved in converting the raw material.
Other expenses that are specifically incurred for the product

Question 3

What are indirect expenses?

Answer 3

are those expenses that incur in the course of making a product, providing of service or running department but which cannot be traced directly and fully to the product, service or department

Examples:
Labour which is not directly involved in the conversion of raw material but indirectly involved in making of the product.
Tools, spares and materials that are used in the machinery or equipment used in the production,
Factory rent if the factory premises are hired,
 Depreciation of machinery and equipment.
 Electricity and other utility expenses incurred for the production facilities

Question 4

manufacturing expenses comprise of?

Answer 4

The manufacturing expenses generally comprise:
a) Direct materials,
b) Direct labours and
c) Production / manufacturing / factory overheads.

Question 5

what is Prime Cost?

Answer 5

Dir Material cost + Dir Labour cost are called ‘Prime Costs’

Question 6

What is conversion cost?

Answer 6

In direct Labour cost+ Overhead cost

Question 7

Cost Behaviour?

Answer 7

Cost behaviors describe how costs change in response to changes in activity levels.
Understanding cost behaviors helps in analyzing cost structures and making informed business decisions.

Question 8

Types of cost behavior?

Answer 8

Costs are categorized as either variable or fixed.

Question 9

Variable cost?

Answer 9

Variable costs change proportionally with the level of activity
Variable expenses are fixed per unit but vary in total.

Question 10

Fixed Cost?

Answer 10

Fixed costs remain constant regardless of the level of activity.
Fixed expenses vary per unit but are fixed in total.

Question 11

Semi Variable Cost?

Answer 11

Some costs are semi-variable, combining fixed and variable components.

Question 12

Step Fixed Cost?

Answer 12

Step fixed costs remain constant until a certain activity level is reached, after which they change.

Question 13

Diff between Step fixed cost and semi-variable cost.

Answer 13

Step Fixed Costs
1. Remain constant within a specific activity range
2. Change abruptly when activity threshold is crossed
3.Not directly proportional to the level of activity
Examples: supervisor salaries based on labor hours/production levels
Semi-Variable Costs
1.Have both fixed and variable components
2.Fixed portion remains constant
3.Variable portion changes with activity level
Examples: utility bills, telephone bills

Question 14

what are production overheads?

Answer 14

Overheads related to production processes (manufacturing/factory overheads)
Examples: Salary of factory supervisor, depreciation of production machine, electricity cost, rent of factory premises
Can be fixed (e.g., rent of factory premises) or variable (e.g., electricity consumption)

Question 15

what are non-production overheads?

Answer 15

Overheads supporting overall business objectives
Examples: Salaries of sales, finance, HR, and IT teams, rent of building for non-production departments, depreciation of computers in non-production departments
Classified as administrative expenses, marketing, selling, and distribution expenses

Question 16

Administrative Expenses

Answer 16

Costs associated with general management of the organization
Examples: Fire extinguishing system implementation, overall security of business premises, accounting, finance, HR, and IT functions
Mostly fixed expenses charged to the profit and loss account

Question 17

Marketing, Selling, and Distribution Expenses

Answer 17

Expenses related to selling inventory to customers
Examples: Advertising, marketing strategies, customer information gathering, product distribution, after-sales services
Can be both fixed (e.g., salaries, cost of advertisement) and variable (e.g., sales commission, delivery charges

Question 18

Product Costs vs. Period Costs

Answer 18

Product costs are incurred to acquire or make goods for eventual sale (recognized as expenses when sale occurs)
Period costs are all other costs that are not part of the cost of goods
Period costs are expensed in the period incurred, not included in the cost of goods

Note: Administrative and marketing, selling, and distribution expenses are not part of the cost of the product but may be considered for internal reporting purposes, such as determining the contribution margin.

Question 19

Why we need to allocate indirect cost?

Answer 19

When more than one product is being produced using the same facilities, then they are allocated cost on individual basis. The costs that are directly attributable to the product can be easily allocated to that product. However, costs that are incurred in accumulation for all the products, need to be allocated on systematic basis. These are known as absorption of indirect cost

Question 20

How to absorb indirect production cost to product cost?

Answer 20

In order to absorb indirect production related cost to product cost, following steps should be followed:
1. Allocation
2.Apportionment
3.Re-apportionment

Question 21

What is allocation?

Answer 21

It is the process of allocating the individual cost element to specific cost center

Question 22

What is apportionment?

Answer 22

It is the process of allocating the common cost to more than one cost centers on fair basis.

Question 23

What is re-apportionment?

Answer 23

It is the process of apportioning the service department costs to production departments based on service provided by service cost centers to production cost centers. There are three different methods in dealing re-apportionment.
1.When service departments only provided services to production departments,then direct allocation method is used.
2.When one service department provides services to production departments along with other service department but with no reciprocity, then step down method is used.
3.Sometimes, each service department provides services to each other including production departments, then we use the reciprocal method.
4.Absorption Rate

Question 24

What is direct method of re apportionment?

Answer 24

In this method, no service department cost is transferred to other service department/s, rather it is apportioned to production departments only.

Question 25

What is Step down method?

Answer 25

In this method, one service department cost is transferred to other service department/s along with production department, but with no reciprocity.

Question 26

What is Aborption Rate

Answer 26

Next step is to calculate rate which is used to absorb production overheads to product or service cost. The rate can be single which is termed as composite rate or blanket rate and it can be separate rate for each department and is termed as departmental rates. The absorption rate/s can be calculated by using the following formula:

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑/𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐵𝑎𝑠𝑒 𝑡𝑜 𝑏𝑒 𝑈𝑠𝑒𝑑

Note: If the base is in cost, it is recommended to calculate the rate in percentage and in this situation, multiply the above formula with 100.

Question 27

What is Estimated factory overhead?

Answer 27

The estimated factory overhead is the amount of overheads that management expects to incur in the coming periods.

Question 28

What is base to be used?

Answer 28

Base to be used:
The following bases can be used for this purpose:
1. Physical output
2. Direct material cost
3. Direct labour cost
4. Prime cost
5. Direct labour hours
6. Machine hours
The selection of the base depends upon the nature or the function of the factory overhead.

Question 29

Company incurr which costs?

Answer 29

Production cost + non manufacturing cost

Question 30

Fixed OH ko ik product ki cost my kese dalain?

Answer 30

By using OAR
OAR=Budgeted FOH/Budgeted
output

Question 31

Over/(under) absoped overhead?

Answer 31

Absorbed/recovery=OAR*Actual
output
Actual FOH=

Compare them

Question 32

Entry of (under) absorbed OH

Answer 32

Inventory(exp out) Dr
P&L (loss) Dr
Cash (actual FOH) Cr

Question 33

Entry of Over absorbed OH

Answer 33

Inventory(exp out) Dr
Cash (actual FOH) Cr
P&L (Gain) Cr

Question 34

If standard hours and budgeted units are given in the question, what are the steps to find FOH per unit OR OAR per unit?

Answer 34

Step 1
if budgeted units and standard hours both are given;
Budgeted units*Standard hours=Budgeted unit hour

Step 2
OAR=Budgeted FOH/Budgeted Unit hour
OAR=Rs per unit hour

Step 3
Standard hour per unit*Rs/Unit hr=Rs/unit

Question 35

base for depreciation?

Answer 35

Dep kabhe b per hour basis pay ni ati time ki basis py ati

Question 36

Agar smjh na a ra ho k konsi base select karni tu kia krna?

Answer 36

tu Direct labor hour and direct machine hour my sy select kryn gy
depend upon nature and fuction of overhead
depend upon nature of business

Machine ya labor my sy jo ziada usko select krna

Question 37

Important point related to service department’s allocation.

Answer 37

Service department ki cost ko allocate krty waqt
pehly us cost ko allocate krna jo sab ko help kr ri
end py wo jo kisi ko hlp ni kr ri