Accounting for overheads Flashcards
(13 cards)
What is overhead absorption rate?
The rate at which overheads are allocated to cost objects, based on a chosen cost driver
What are the two ways of calculating an overhead absorption rate (OAR)?
1) simple approach: blanket rate for passing on all overheads across an organization
2) Detailed approach: allocating or apportioning overheads to specific products, departments or cost centers.
What is the calc for overhead rate?
total overheads/labour or machine hours
Blanket rate calc?
total estimated overheads/absorption base
Overhead absorption rate calc
cost center overheads/absorption base
How can costs be classified?
Nature - materials, wages utilities etc.
Function - administration, production, sales etc.
What is cost assignment
Working out the indirect and direct costs per unit and adding them together.
*figuring how much one product costs to produce overall
What is a traditional costing system
Allocates indirect costs to cost objects using broad measures like machine hours or labor hours
+easy to apply
- May not reflect the true cost drivers or a cause-and-effect relationship, leading to
distorted product costs
Direct costing system -
Only apply costs to an object that directly contribute
What is absorption costing?
The process of recovering overheads by assigning them to cost objects using a systematic approach
Why are actual overhead rates not normally used?
As actual annual overheads are available at the end of the accounting period but info is often required more frequently.
And using actual monthly/quarterly rates could be misleading as overhead values tend to fluctuate.
What is under recovery or over recovery of overheads?
If actual overhead costs is different from those used to estimate the overhead rates then the value could be under estimated or over estimated.
