Week 7 - Job Order Costing Accounting and Overhead Allocation and Apportionment I Flashcards
How does the CIMA define overhead costs?
Expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit
What are some examples of overheads?
Indirect materials, indirect labour and indirect expenses - variable or fixed
What are the two types of cost centre in a manufacturing company?
- production cost centres - directly involved in producing products
- service cost centres - servicing the production cost centres e.g canteens
If it is obvious where an expense belongs, it is….
allocated
What do we do with expenses if they cannot be allocated
They are apportioned - divided upon a fair and logical basis so each cost centre gets an appropriate share
What is stage 1?
Overheads are assigned to departments or cost centres
What is stage 2?
Costs accumulated in cost centres are then assigned to products
What is the method of apportionment for rent of a building?
Floor area
What is the method of apportionment for lighting?
kW hours or floor area
What is the method of apportionment for power for machines?
kW hours
What is the method of apportionment for production supervisor’s salary?
Number of employees
What is the method of apportionment for canteen costs?
Number of employees
What is the method of apportionment for depreciation of machinery?
Net book value of fixed assets
What do we do with costs that have been apportioned to service cost centres?
They need to be re-apportioned to production cost centres
What happens to total overhead costs of each production cost-centre?
They are absorbed within products by means of absorption rates as they pass through the cost centres
What information do we need to charge out costs to units after they have been allocated/apportioned to departments/jobs?
- overhead cost for the period
- productive capacity (labour hours/machines hours) available in that period
Total overhead costs must be charged to all units produced in proportion to…
The amount of productive capacity (labour hours/machine hours) used up in the making of each unit
What is a predetermined rate?
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
What is the predetermined rate calculation?
Rate = estimated overhead costs for period / estimated productive capacity for period
What are the bases for selecting absorption rates (aka cost drivers)?
- machine hours
- direct labour hours
- direct wages
- direct materials
- prime costs
- number of units
What would the predetermined rate formula be if the absorption rate was direct labour hour rate?
estimated overheads for the year / estimated direct labour hours for the year = rate per hour
