Overheads (PART B +MA/FA) Flashcards
what are the objectives?
to look at cost appointment, allocation and absorption
what are overheads costs?
costs that are not directly related to any business activity, product or service, but required in the generation of profit
cant be charged directly to cost units
not linked to what you produce but still have to do it
rent
why do we need product cost information?
- know in advance wheat something is going to cost to produce
- by preparing your actual costs it is easier to control
- control costs
= compare actual v planned costs
= take corrective action - aid planning: use last to predict future costs
- stock valuation: finished goods, work in progress, how much its going to cost to finish
- set selling porches: set prices on cost plus basis, profit maximisation
- ascertain the relative probability of products: to infer decision making in situations of scarcity
how are you going to use limited resources to make the most profit
what are some key definitions?
- cost unit
- cost centre
- indirect costs
- direct costs
- production department
- service department
what is a cost unit?
a unit of production (PRODUCT) to which costs can be replaced
nature of this depends on the company
e.g. cars in an automobile plant
bread in a bakers
conveyancing on a property
what is a cost centre?
separately identifiable sections (or places) of an enterprise to which costs can be relate
(departments in a business)
why do we need to define cost centres that incur these costs rather than cost units
due to overheads (indirect costs) that cant be linked directly to the product
such as heat, power and bills, therefore can be linked to cost centres
what is the opposite of a indirect cost?
direct cost
what are direct costs?
can be charged directly to cost units
direct link required
e.g. engine and car
what is a production department?
the cost centres (departments) responsible for PRODUCING cost units
e.g. dept that MAKE products (manufacturing or GENERATE FEES (services) - don’t produce anything
what is a service department?
provide SUPPORT SERVICES to production departments
service dpt have no product to sell therefore cannot recover their costs
e.g. security, maintenance, quality control
what are the stages for accounting for overheads?
1) allocate direct costs to cost units
2) apportion indirect costs to cost centres
3) take the costs that you have taken to service departments and then recharge them to the production departments
4) absorption of production department costs into cost units
how do you do cost allocation?
- easy to identify due to their direct link to cost units
what do you do if your overheads and labour are less than what was predetermined?
you will have over absorbed = charged too much to clients which increases your profits
over head absorption rate is based on profit
what is the over head absorption rate?
how much N HOUR ITS COSTS for over heads
