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Overheads and expenses Flashcards

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1
Q

What type of costs are direct costs and indirect costs ? P115

A
  • Direct costs - product costs - each unit of output
  • Indirect costs - period costs - not with each unit of output
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2
Q

What is the relationship between overheads annd costs units ? P115

A
  • 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
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3
Q

What is imporant to remember about accounting for overheads for profit ? P115

A
  • overheads + direct costs must be included -covered by revenue from output
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4
Q

How do businesses begin to workout how to recover their overheads ? P115

A
  • Budget overhead - advance on annual basis
  • how to recover through output - use of overhead absorption rate
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5
Q

How are overheads usually classified in larger businesses , and what are the types of classifications ?P115

A

Function
Factory or production
Selling and distribution
Administration
finance

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6
Q

What are each functions or sections of the busienss likely to be known as ? P115

A
  • Cost centre
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7
Q

What other types of centres in business, apart from costs centres ? P116

A

profit centres
investment centres
revenue centres

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8
Q

What are the four types of centres collectively known as ? P116

A
  • Responsibility centres
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9
Q

What do we need to know about the business when dealing with overheads ? P116

A
  • Responsibility centres
  • depends on size of business and organisation of work
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10
Q

How are overheads collected into respnsbility centres ? P116

A

*type of costs
* Allocated
* apportioned

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11
Q

What is the purpose of allocating overheads ? P116

A

allocated to centre they belong to

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12
Q

What examples of allocations of overheads ? P116

A
  • Wage of a supervisor - one centre
  • rent of building - in which one centre
  • indirect materials - to one centre
    Allocation - centre to which belongs
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13
Q

What is th definition of allocation of overheads ? P116

A
  • Charging - a particular responsbility centre- overhead entirely incurred
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14
Q

What is apportionment of overheads ? P116

A
  • Sharing of overheads - number of responsibility centres to which they relate
  • charged proportionally
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15
Q

What must be found to appportion costs between centres? P117

A
  • Suitable basis or method must be found to apportion
  • basis related to type of costs
  • different methods = each type of overhead
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16
Q

What is a basis of apportionment for rent, rates ? P117

A

floor space

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17
Q

What is a basis of apportionment for heating, lighting P117

A

Floor space

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18
Q

What is the baiss of apportionment for building insurance ? P117

A

Floor space

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19
Q

What is the basis of approportionment for buildings depreciation? P117

A

Floor space

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20
Q

What is the basis of apportionment for machinery insurance ? P117

A

Costs/ Carrying amount of machinery

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21
Q

What si the basis of apportionment for the canteen ? P117

A

Number of employees

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22
Q

What is the basis of apportionment for supervisory costs ? P117

A
  • Number of employees- each centee
  • Supervisor labour hours worked
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23
Q

Why should allocation and approtionment of overheads be reviewed on a regular basis ? P117

A
  • Still valid check
  • E.g. Supervisor changing from 1 departments to 2
  • building work - expanding floor space - apportionment basis reworked
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24
Q

What type of responsibility centre are departments that solely provide service within a business ? P121

A
  • Cost centre
  • overheads is charged
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25
How are the costs of service departments dealt with ? P121
* No cost units charged * costs of service re-apportioned - to production departments - cost units
26
What must be used when re-apportioning overhead costs from service departments to production departments ? P121
Suitable basesof re-apportionment
27
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
28
What are the two methods for re-apportioning the costs of service departments to other departments ?p121
* Direct apportionmnt * step down method
29
What is direct apportionement ? P121
* Service deparment to production only
30
What is the step down method ? P121
* Service department to production and other service departments
31
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)
32
What must then happen once overheads have been allocated and apportioned to production cost centres ? P127
* Charged to cost units * managmenet accounting - absorption/ recovery
33
Why must overheads be recovered ? P128
* To be profitable * Selling price > direct costs and overheads
34
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
35
What figures are the OAR calculated with ? P128
Estimated/ budgeted figures
36
How is the OAR calculated ? P128
Total budgeted cost centre overheads / total planned work in the cost centre
37
How must the amount of work within the OAR calculation be measured ? P128
* Suitable way * e.g. Manufacturing business: * direct labour * machine hours
38
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
39
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
40
How is the OAR applied to direct labour hours ? P129
Actual Direct labour hourds worked * OAR
41
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
42
What is the machine hour methos ? P129
* Production overheads absorbed on basis: * Machine hours * Production is machine intensive
43
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
44
How do you apply the OAR with machine hours ? P129
Machine hours worked * overhead absorption rate = overheads abssorbed
45
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
46
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
47
How do you apply the OAR using chargeable time ? P130
Chargeable hours ( sales price/units sold) * overhead absorption rate = overhead absorbed
48
What is the service sector - miles travelled method of overhead absorption ? P131
Absorbed - miles travelled
49
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
50
How do you apply the OAR using the miles travelled method ? P131
Miles travelled * overhead absorption rate = overhead absorbed
51
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
52
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
53
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
54
What are over and under ovehread absorptions ? P132
* Difference - total amount of overhead absorbed (recovered) : total amount spent on overheads
55
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
56
Why is under-absorption of overheads deterimental to profit ? P133
costs to business - reduce profit
57
Why could an overhead be under-absorbed ? P133
* Output Selling price too low * output less than expected * actual overhead more than expected
58
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
59
What is the double entry for transferring production overheads ( amount absorbed) to production ? P134
* Debit: production * Credit: production overheads
60
What is the double entry for crediting over-absorbed ? P134
* Debit : production overheads * Credit: statement of P/L * Reduces total costs - production * Increases profits
61
# 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

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