Session 4 - Overheads and Expenses Flashcards
What are overheads?
Indirect materials
Indirect Labour
Indirect expenses
What is allocation of overheads?
Allocation of overheads is the charging to a paticular responsibility centre of overheads that are incurred enitrely by that centre
What is apportionment of overheads?
Apportionment of overheads is the sharing of overheads over a number of responsibility centres to which they relate. Each centre is charged with a proportion of the overhead cost.
What is over absorption?
Over absorption is when obsorbed overheads exceed actual overheads
What is under absorption?
Under absoprtion is where actual overheads exceed obsorbed overheads
what is the double entry for transfer production overheads to production?
Debit Production
Credit Production overheads
what is the double entry for over absorbed overheads?
Debit production overheads
Credit P&L
What is double entry for under absorbed overheads?
Debit P&L
Credit production overheads
What is the overhead absorption rate?
Budgeted production level/budgeted activity level
Why do businesses use a predetermined OAR?
Gives a way of accounting for overheads before business actually know what they are. Can incorperate overheads into pricing of products. Waiting till the end of the period will delay invoicing etc.
What are the advantages of absorption costing?
Inventory valuation using absoprtion costing complies with IAS2
Absorption costing takes fixed costs into account
What does under absoprtion mean to the business
Under absorption is a cost to the business and therefore reduces profitability. Might be because selling price has been too low or output is less than expected.
What does Over absoprtion mean to the business
Profits will be higher than planned as the business has predicted more overheads than actual overheads. However due to this sales might’ve been lost due to price being too high.
What makes the difference between profit figures when using marginal and absorption?
Caused by the closing inventory figures - In marignal costing the full amount of fixed overheads is charged, whereas absoprtion costing only part of the fixed production overheads are charged.
