Week 7 - Job Order Costing Accounting and Overhead Allocation and Apportionment I

Question 1

How does the CIMA define overhead costs?

Answer 1

Expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit

Question 2

What are some examples of overheads?

Answer 2

Indirect materials, indirect labour and indirect expenses - variable or fixed

Question 3

What are the two types of cost centre in a manufacturing company?

Answer 3

• production cost centres - directly involved in producing products
• service cost centres - servicing the production cost centres e.g canteens

Question 4

If it is obvious where an expense belongs, it is….

Answer 4

allocated

Question 5

What do we do with expenses if they cannot be allocated

Answer 5

They are apportioned - divided upon a fair and logical basis so each cost centre gets an appropriate share

Question 6

What is stage 1?

Answer 6

Overheads are assigned to departments or cost centres

Question 7

What is stage 2?

Answer 7

Costs accumulated in cost centres are then assigned to products

Question 8

What is the method of apportionment for rent of a building?

Answer 8

Floor area

Question 9

What is the method of apportionment for lighting?

Answer 9

kW hours or floor area

Question 10

What is the method of apportionment for power for machines?

Answer 10

kW hours

Question 11

What is the method of apportionment for production supervisor’s salary?

Answer 11

Number of employees

Question 12

What is the method of apportionment for canteen costs?

Answer 12

Number of employees

Question 13

What is the method of apportionment for depreciation of machinery?

Answer 13

Net book value of fixed assets

Question 14

What do we do with costs that have been apportioned to service cost centres?

Answer 14

They need to be re-apportioned to production cost centres

Question 15

What happens to total overhead costs of each production cost-centre?

Answer 15

They are absorbed within products by means of absorption rates as they pass through the cost centres

Question 16

What information do we need to charge out costs to units after they have been allocated/apportioned to departments/jobs?

Answer 16

• overhead cost for the period
• productive capacity (labour hours/machines hours) available in that period

Question 17

Total overhead costs must be charged to all units produced in proportion to…

Answer 17

The amount of productive capacity (labour hours/machine hours) used up in the making of each unit

Question 18

What is a predetermined rate?

Answer 18

A set rate which, when applied to cost units passing through the cost centre, will absorb or ‘pick up’ all the overheads attributable to that cost centre

Question 19

What is the predetermined rate calculation?

Answer 19

Rate = estimated overhead costs for period / estimated productive capacity for period

Question 20

What are the bases for selecting absorption rates (aka cost drivers)?

Answer 20

• machine hours
• direct labour hours
• direct wages
• direct materials
• prime costs
• number of units

Question 21

What would the predetermined rate formula be if the absorption rate was direct labour hour rate?

Answer 21

estimated overheads for the year / estimated direct labour hours for the year = rate per hour