Overheads and expenses Flashcards
What type of costs are direct costs and indirect costs ? P115
- Direct costs - product costs - each unit of output
- Indirect costs - period costs - not with each unit of output
What is the relationship between overheads annd costs units ? P115
- No relation = particular unit of output
- Shared amoungst - all costs units to which they relate
- e.g. costs of factory rent within costs of output
What is imporant to remember about accounting for overheads for profit ? P115
- overheads + direct costs must be included -covered by revenue from output
How do businesses begin to workout how to recover their overheads ? P115
- Budget overhead - advance on annual basis
- how to recover through output - use of overhead absorption rate
How are overheads usually classified in larger businesses , and what are the types of classifications ?P115
Function
Factory or production
Selling and distribution
Administration
finance
What are each functions or sections of the busienss likely to be known as ? P115
- Cost centre
What other types of centres in business, apart from costs centres ? P116
profit centres
investment centres
revenue centres
What are the four types of centres collectively known as ? P116
- Responsibility centres
What do we need to know about the business when dealing with overheads ? P116
- Responsibility centres
- depends on size of business and organisation of work
How are overheads collected into respnsbility centres ? P116
*type of costs
* Allocated
* apportioned
What is the purpose of allocating overheads ? P116
allocated to centre they belong to
What examples of allocations of overheads ? P116
- Wage of a supervisor - one centre
- rent of building - in which one centre
- indirect materials - to one centre
Allocation - centre to which belongs
What is th definition of allocation of overheads ? P116
- Charging - a particular responsbility centre- overhead entirely incurred
What is apportionment of overheads ? P116
- Sharing of overheads - number of responsibility centres to which they relate
- charged proportionally
What must be found to appportion costs between centres? P117
- Suitable basis or method must be found to apportion
- basis related to type of costs
- different methods = each type of overhead
What is a basis of apportionment for rent, rates ? P117
floor space
What is a basis of apportionment for heating, lighting P117
Floor space
What is the baiss of apportionment for building insurance ? P117
Floor space
What is the basis of approportionment for buildings depreciation? P117
Floor space
What is the basis of apportionment for machinery insurance ? P117
Costs/ Carrying amount of machinery
What si the basis of apportionment for the canteen ? P117
Number of employees
What is the basis of apportionment for supervisory costs ? P117
- Number of employees- each centee
- Supervisor labour hours worked
Why should allocation and approtionment of overheads be reviewed on a regular basis ? P117
- Still valid check
- E.g. Supervisor changing from 1 departments to 2
- building work - expanding floor space - apportionment basis reworked
What type of responsibility centre are departments that solely provide service within a business ? P121
- Cost centre
- overheads is charged
How are the costs of service departments dealt with ? P121
- No cost units charged
- costs of service re-apportioned - to production departments - cost units
What must be used when re-apportioning overhead costs from service departments to production departments ? P121
Suitable basesof re-apportionment
What are example of re-apportioning service departments using a suitable basis ? P121
- Maintenance department - value of machinery or equipment , time spent in production dep
- Stores/ stationery deparment - values of goods
- subsidised canteen - number of employees
What are the two methods for re-apportioning the costs of service departments to other departments ?p121
- Direct apportionmnt
- step down method
What is direct apportionement ? P121
- Service deparment to production only
What is the step down method ? P121
- Service department to production and other service departments
What order is taken with the step down method ? P122
- First - re-apportion overheads of service department (provides service to other departments; does not receive any other service)
- Second - re-apportion - service department (receives service from the other service department)
What must then happen once overheads have been allocated and apportioned to production cost centres ? P127
- Charged to cost units
- managmenet accounting - absorption/ recovery
Why must overheads be recovered ? P128
- To be profitable
- Selling price > direct costs and overheads
What are the two steps that must be followed to recover the overheads of an apartment ? P128
- Calculation of OAR
- Application of this rate to actual work done
What figures are the OAR calculated with ? P128
Estimated/ budgeted figures
How is the OAR calculated ? P128
Total budgeted cost centre overheads / total planned work in the cost centre
How must the amount of work within the OAR calculation be measured ? P128
- Suitable way
- e.g. Manufacturing business:
- direct labour
- machine hours
What is the direct labour hour method of overhead absorption ? P129
*production overhead absorbed on basis:
* Number of direct labour hours worked
* production is labour intensive
How is OAR calculated under direct laboour hours with the budgeted figures ? P129
- Total costs centre overheads/ totall planned direct labour hours of cost centre = costs per direct labour hour = OAR
How is the OAR applied to direct labour hours ? P129
Actual Direct labour hourds worked * OAR
What if you are required to apply the OAR to the direct labour hours worked, in a department of more than one employee?
- Direct labour hours * number of employees = total Direct labour hours
- OAR * total direct labour hours
What is the machine hour methos ? P129
- Production overheads absorbed on basis:
- Machine hours
- Production is machine intensive
How would you calculate OAR with machine hours using the budgeted figures ? P129
- Total cost centre overheads / total planned machine hours in cost cnere = costs per machine hour
How do you apply the OAR with machine hours ? P129
Machine hours worked * overhead absorption rate = overheads abssorbed
What is the service sector– hourly rate (or sale price/ unit method) ?P130
- e.g. accountants , solicitors
- Overheads Absorbed - chargeable time / sales prices/ units sold
How is OAR calculaed using chargeable time ( budgeted figures) ? P130
Total planned cost centre overheads/ total planned chargeable hours of cost centre = costs per hour of chargeable time in costs centre
How do you apply the OAR using chargeable time ? P130
Chargeable hours ( sales price/units sold) * overhead absorption rate = overhead absorbed
What is the service sector - miles travelled method of overhead absorption ? P131
Absorbed - miles travelled
How do you calculate the overhead absorption rate for miles travelled using budgeted figures ?P131
Total cost centre planned overheads / total planned miles travelled in cost centre = costs per miles travelled
How do you apply the OAR using the miles travelled method ? P131
Miles travelled * overhead absorption rate = overhead absorbed
How would you select a method of overhead absorption ? P131
One OAR per department = reason cost incurred
e.g. Machine based costs centre
: overheads incurred related to machinery
: machine hour basis
Why is it imprtnat to select the best method forf overhead absorption annd what must be done with ovehead methods regularly ? P132
- Wrong decision - basis of costing information
- check still valid
Why are pre-determined rates within overheads used ? P132
estimates
Avoids calculating rate regularly - changes in short amount of time
smoothed- fluctuations of activity and costs - over longer accounting periods
What are over and under ovehread absorptions ? P132
- Difference - total amount of overhead absorbed (recovered) : total amount spent on overheads
Why can over-absorbed overhead absorption be deterimental to profit ? P133
- Seemingly - ‘bonus’, profit set higher
- overhead rates set too high = sales lost = selling price too high
Why is under-absorption of overheads deterimental to profit ? P133
costs to business - reduce profit
Why could an overhead be under-absorbed ? P133
- Output Selling price too low
- output less than expected
- actual overhead more than expected
What are the bookkeeping entries for overheads account used for ? P134
- Transfer- costs of overheads to productionn
- credit over-absorbed overheads - statement of P/L
- debit under-absorbed overheads - statement of P/L
What is the double entry for transferring production overheads ( amount absorbed) to production ? P134
- Debit: production
- Credit: production overheads
What is the double entry for crediting over-absorbed ? P134
- Debit : production overheads
- Credit: statement of P/L
- Reduces total costs - production
- Increases profits
wnb
What is the double entry for under-absorbed overheads to the statement of profit/loss ? P134
- Debit - statement of P/L
- Credit - production overheads
- Adds to total costs of productions
- Reduces profits
