Week 1: Overhead allocation Flashcards
What is financial accounting?
Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators.
What is managerial accounting?
Managerial accounting is concerned with providing information to managers within an organisation so that they can formulate plans, control operations and make decisions.
What are direct costs?
direct costs are Costs that can be easily and conveniently traced to a unit of product or other cost object.
Examples: direct material and direct labor
What are indirect costs?
Indirect costs are Costs that cannot be easily and conveniently traced to a unit of product or other cost object.
They are assigned to cost objects on the basis of cost allocations.
Example: manufacturing overhead
what are Direct Materials?
Direct materials are raw materials that become an integral part of the product and that can be conveniently traced directly to it.
Example: A radio installed in a car
What are Direct labor costs?
Direct labor costs are those labor costs that can be easily traced to individual units of product.
Example: Wages paid to car assembly workers
what is Manufacturing Overhead?
Manufacturing overhead includes all manufacturing costs except direct material and direct labor. These costs cannot be readily traced to finished products.
Includes indirect materials that cannot be easily or conveniently traced to specific units of product.
Ex: Lubricants & Cleaning Supplies
Includes indirect labor costs that cannot be easily or conveniently traced to specific units of product.
Ex: Maintenance Workers & Supervisory staff
What are some examples of manafcaturing overhead?
Examples of other manufacturing overhead:
Depreciation of manufacturing equipment
Utility costs
Property taxes
Insurance premiums incurred to operate a manufacturing facility
What are prime costs?
Prime costs are the direct costs of producing a product, including the cost of materials and labor
What are conversion costs?
Conversion costs are the expenses incurred to transform raw materials into a finished product.
Direct labor: The cost of labor directly involved in the production process
Manufacturing overhead: The cost of running the manufacturing plant, such as electricity
What are selling costs?
Selling Costs are Costs necessary to secure the order and deliver the product.
What are Administrative Costs?
All executive, organisational, and clerical costs.
Administrative costs can be either direct or indirect costs.
What are Product costs ?
Product costs are those that are identified with products and included in the stock (inventory valuation).
What are Period costs ?
Period costs are not specifically related to the product and not included in the inventory valuation.
What is cost allocation?
Cost allocation is the process of assigning costs to cost objects that involve the use of surrogate rather than direct measures.
what are Cause-and-effect allocations?
Cause-and-effect allocations
are where allocation bases are significant determinants of costs.
what is Arbitrary allocation?
Arbitrary allocation is Where a cost allocation base is used that is not a significant determinant of its cost.
what is the purpose of Overhead Allocation (Absorption)?
Overhead Allocation (Absorption) is Essential for decision-making and planning.
Helps establish total product costs in advance of accounting periods.
Why are budgeted overhead rates used not actual rates?
Actual overhead rates are not used because of:
delay in product costs if actual annual rates are used;
fluctuating overhead rates that will occur if actual monthly rates are used.
An estimated normal product cost based on average long-run activity is required rather than an actual product cost.
Use estimates of overhead costs and activity over a long-run period (typically one year) to compute overhead rates.
What are the steps for calculating blanket rates?
Step 1: Identify total overhead costs for the business.
Step 2: Choose a basis for absorption (labour hours, machine hours, etc.).
Step 3: Calculate OAR:
“Budgeted Overhead” /”Budgeted Activity Level (Allocation Base)”
Step 4: Determine overhead absorbed per product: Multiply OAR (step 3) by the actual activity used in production by specific product.
operating vs service departments?
An operating department carries out the central purpose of the organisation.
while a Service departments do not directly engage in operating activities. They provide services or assistance to the operating departments.
Examples of service `departments include:
Cafeteria
Internal Audit Department
Human Resources Department
Accounting Department
What are Reciprocal Services?
When service departments providre services to each other
What are the three Allocation Approaches for service departments?
Three approaches for the allocation of service department costs to other departments:
Direct method
Step-down method
Reciprocal method
