Accounting for Overheads Flashcards
(13 cards)
Why do we need product cost information?
-Control costs
-Aid planning
-Inventory valuation
-Set selling prices
Define cost unit?
A unit of production (product) to which costs can be related.
Define cost centre?
Seperately identifiable sections (or places) of an enterprise to which costs can be related
Define indirect costs
Cannot be charged directly to cost units
Define direct costs
Can be charged directly to cost units
What are production departments?
Those cost centres, which are responsible for producing cost units, generating income and covering their costs
What are service departments?
Provide support services to production departments but have no products to sell and cannot recover their costs
Steps for accounting with overheads?
- Allocate direct costs to cost units
- Apportion indirect costs to cost centers
- Reapportion service department costs to production departments
- Absorpotion of production department costs into cost units
Formula for overhead absorption rate
Total production department overheads / Absorption base
What is over-absorption?
Occurs when more overhead costs are allocated to production or services than were actually incurred
What is underabsorption?
When the amount of overheads absorbed into the cost of products or services is less than the actual overheads incurred
What happens when underabsorption occurs?
Indirect costs not covered, affecting profit negatively
What happens when overabsorption occurs?
Indirect costs will be more than covered the excess will positively affect profit levels
